Wednesday's analyst upgrades and downgrades

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Inside the Market's roundup of some of today's key analyst actions

After analysis of its $10.2-billion (U.S.) deal for Columbia Pipeline Group Inc. (CPGX-N) and plan to sell its "more cyclical" power assets, Citi analyst Faisel Khan upgraded TransCanada Corp. (TRP-T, TRP-N) to "buy" from "neutral."

"When we downgraded the stock on March 11 after news of the deal started to surface, we were under the impression that TRP was going to keep power given its recent asset purchases (Bruce and Ironwood)," said Mr. Khan. "TRP management is now apparently willing to part with a large portion of its power assets and appears to be cleaning up its portfolio to remove the cyclical nature of these earnings. We originally advocated for a split up of power in 2014 as a means for investors to have exposure to TRP's pipeline assets. Furthermore, we also advocated for a more opportunistic use of its master limited partnership (MLP). With the upcoming sale of power, and a solid entry point into CPGX, we see the potential for a rerating of the stock."

According to Mr. Khan, TransCanada could receive $3.5-billion to $4.5-billion for its U.S. power assets.

"Strategics and sponsors will likely partner to buy portfolio. While Calpine Corp. (CPN-N), Dynergy Inc. (DYN-N),  Talen Energy Corp. (TLN-N) and NRG Energy Inc. (NRG-N) will all be interested in this portfolio, they probably don't want to issue equity at current levels to finance the deal. Private-equity (PE) shops will also have interest but weak high-yield markets will impact their ability to bid competitively. A strategic partnering with a sponsor ... will likely overcome most of the constraints and should be the most competitive."

He added: "We are adjusting our estimates to fully incorporate the purchase of CPGX, the sale of the U.S. merchant power assets, the sale of 49 per cent of the MX assets, the extinguishment of the power purchase agreements, the life extension of Bruce and a long-term financing rate of 4 to 5 per cent. Under these assumptions, we estimate 2018 EPS will be $3.27, which is 12 per cent higher than consensus. Furthermore, we estimate EPS and dividends could grow 10 per cent per annum thereafter for another three to five years."

Mr. Khan raised his price target for the stock to $55 from $50. The analyst consensus price target is $55.73, according to Thomson Reuters.

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Boyd Group Income Fund (BYD.UN-T) offers investors "solid" growth potential at a "reasonable" valuation, said BMO Nesbitt Burns analyst Jonathan Lamers.

He initiated coverage of the Winnipeg-based trust specializing in the ownership and operation of autobody and autoglass repair facilities and related services with an "outperform" rating.

"The Fund has outperformed its sector for many years," said Mr. Lamers. "We believe this is a result of Boyd's successful growth-through-acquisition strategy, market share gains, and recent strength in industry repair volumes. Our thesis is that Boyd will continue to execute on its growth-through-consolidation strategy, and acquired and existing centres will continue to gain market share.

"We believe 15-per-cent annual revenue growth (before foreign exchange translation) is achievable, based on a combination of acquisitions, start-ups of new locations, and a 10-year average same-store sales growth (SSS) of 4 per cent. The SSS outlook is supported by i) market share gains for new centres, as participation increases in insurer direct repair referral programs; ii) market share gains over time for existing centres, as Boyd pursues cycle-time improvement; and iii) pricing inflation, noting industry average repair costs that are passed through to insurers have increased at a 2.7-per-cent annual rate over the past five years. We forecast EBITDA growth of 19 per cent year over year in 2016 and 15 per cent y/y in 2017, including foreign exchange translation effects. Recent increases in U.S. collision claims frequencies and vehicle miles driven suggest industry collision repair volumes could continue to increase, which would provide upside to our forecasts."

He set a price target of $85. Consensus is $80.40.

"Boyd's stock is currently valued at 11.7 times 2016 estimated enterprise value (EV) to EBITDA, at about its two-year mean (11.4 times), a discount to its nearest comparable (Monro Muffler Brake Inc., MNRO-Q, not rated at 13.9 times), and within the range of stocks in the Canadian consumer sector that are pursuing growth-through-acquisition strategies (Alimentation Couche-Trade, ATD.B-T, at 11 times, Saputo Inc, SAP-T, at 13 times, Uni-Select Inc., UNS-T, at 10 times).

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Pembina Pipeline Corp. (PPL-T, PBA-N) is building an "attractive core area" in a region of Western Canada that is generating "some of the most attractive economics in Western Canada, and indeed, North America," said Raymond James analyst Chris Cox.

On March 17, Pembina announced the acquisition of the Kakwa gas processing complex and other related infrastructure from Paramount Resources Ltd. (POU-T) for $556-million in cash and $35-million in other capital commitments.

"The transaction provides a helpful lifeline to a major customer throughout Pembina's network, further derisking the growth profile of the company, which we believe is an underappreciated nuance to this transaction," said Mr. Cox.

"While exact financial metrics were not provided, we estimate that Pembina acquired the assets at 9 times to 10 times run-rate EBITDA, with take-or-pay volumes ramping up into 2019. This is in line with the metrics we have seen from most of Pembina's acquisitions in recent years, while additional upside in the deal comes vis-à-vis licences for the 6-18 gas plant – a new shallow-cut facility in the same general capture area (capable of supporting up to 600 million cubic feet equivalent or MMcf/d)."

Mr. Cox emphasized Pembina is securing a core position in a "sweet spot" of the Montney region, west of the Smoky River.

"This should provide the company with attractive upside potential vis-à-vis the 6-18 gas plant, as producers continue to deploy capital aggressively in this region of the basin," the analyst said. "With considerable capacity now in the region, along with existing pipeline infrastructure and the Smoky River to the west, we believe Pembina is attractively positioned from a competitive standpoint in its ability to secure growing volumes within this area."

With the deal, Mr. Cox raised his 2016 revenue and EBITDA projections to $5.841-billion and $1.202-billion from $5.793-billion and $1.169-billion, respectively. His 2017 estimates rose to $7.608-billion and $1.518-billion from $7.524-billion and $1.460-billion.

He maintained an "outperform" rating for the stock and a $41 target price. The analyst consensus price target is $40.22.

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The market is anticipating "continued" strong results and further acquisitions from Uni-Select Inc. (UNS-T), said BMO Nesbitt Burns analyst Jonathan Lamers.

However, Mr. Lamers said there is "some uncertainty" in the long-term earnings potential for the Quebec-based distributor of automotive parts and paint products. He noted Uni-Select divested its U.S. auto parts division over the past year while appointing both a new chief executive officer and chief financial officer.

He initiated coverage of the stock with a "market perform" rating.

"Uni-Select is pursuing new growth-through-consolidation strategies for both its businesses, U.S. paint and Automotive Canada," the analyst said. "Overall, we find Uni-Select represents an interesting consolidation story in the automotive aftermarket sector, and we believe there could be an opportunity for Uni-Select's stock if the company is successful in integrating small acquisitions, achieving cost synergies, or if the potential contribution from acquisitions is greater than the market is anticipating. In addition, we believe the company could announce one or more larger acquisitions at any time. Uni-Select has reported two quarters since the U.S. Auto Parts assets were sold in June 2015."

He set a target price of $64 for the stock, compared to the consensus of $68.29.

"Uni-Select's valuation (10.0 times 2016 estimated enterprise value/EBITDA) represents a modest discount to larger U.S. auto parts distributors (median: 11.6 times), and to Canadian consumer stocks with more established growth-through-consolidation strategies (11-13 times 2016E EV/EBITDA)," he noted.

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The expected release of the iPhone 7 in the fall could spur growth at Apple Inc. (AAPL-Q), said Cowen and Company analyst Timothy Arcuri

Noting its stock currently trades at a discount of 25 to 30 per cent compared to its sector large-cap peers in the tech sector as well as the S&P 500, he upgraded his rating to "outperform" from "market perform."

Mr. Arcuri said he thinks Apple could adopt OLED (organic light-emitting diode) for its iPhones in 2017, earlier than the Street's expectation of 2018. He said "green shoots of innovation" around OLED could drive a better multiple for the stock and solve "growth concerns."

"While no mystery that the OLED supply chain is gearing up for AAPL, Street still sees broad adoption in '18," said Mr. Arcuri, as quoted by Streetinsider.com. "We now believe AAPL could adopt OLED in '17 for all new flagship iPhones, not just high-end 'niche' models. This potentially equates to 80 to 100-million-plus units with some flexible rigid design likely, migrating to full flexible in '18. While skeptics may see OLED (sourced from Samsung in near/medium-term) as another copycat feature from Samsung, flex OLED gives AAPL a key new degree of freedom on product design, while '17 adoption provides a 'bridge' to a new cycle of innovation that should accelerate in '18 and beyond.'"

He raised his target price for the stock to $135 (U.S.) from $125. Consensus is $135.53.

"Street estimates finally look safe while [year-over-year] comparisons on iPhone units and overall Apple revenue are bottoming," he said.

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Credit Suisse analyst Kevin Choquette upgraded Industrial Alliance Insurance and Financial Services Inc. (IAG-T) to "neutral" from "underperform," citing its "large" valuation discount and "significant" share price underperformance compared to peers.

"IAG valuation on both a price-to-earnings and price-to-book basis have declined significantly below the mean," he said. "IAG is trading at a low P/E of 8.8 times our 2016 estimate and P/B of 1.0 times."

Noting the company's share price has decline 14 per cent year to date versus a 4-per-cent increase by Great-West Lifeco Inc. (GWO-T), he increased his target price to $43 from $41. Consensus is $42.50.

At the same time, Mr. Choquette downgraded Great-West to "underperform" from "neutral" based on its "high" relative valuation and "strong" share price performance "partially aided in our view by its relatively low beta."

"Lifecos have significantly underperformed banks in 2016 and we believe that any rebound in Lifecos will be driven by the higher beta stocks with low beta underperforming," the analyst said. "Also, there is some uncertainty with respect to Brexit that would potentially negatively impact GWO with 42 per cent of its earnings coming from Europe, mainly Ireland and the U.K. Financial uncertainty usually creates negative sentiment."

He maintained a price target of $39, compared to a consensus of $42.50.

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In other analyst actions:

American International Group Inc. (AIG-N) was raised to "buy" from "neutral" at Janney Montgomery by equity analyst Larry Greenberg.

AMC Entertainment Holdings Inc. (AMC-N) was downgraded to "neutral" from "buy" at B. Riley by equity analyst Eric Wold. The 12-month target price is $34.75 (U.S.) per share.

Corus Entertainment Inc. (CJR.B-T) was raised to "action list buy" from "buy" at TD Securities by equity analyst Vince Valentini. The 12-month target price is $16 (Canadian) per share.

Enterprise Group Inc. (E-T) was downgraded to "hold" from "buy" at M Partners by equity analyst Steven Salz. The 12-month target price is 20 cents (Canadian) per share.

Equifax Inc. (EFX-N) was rated new "outperform" at Cowen by equity analyst George Mihalos. The 12-month target price is $126 (U.S.) per share.

EOG Resources Inc. (EOG-N) was rated new "market perform" at Cowen by equity analyst Charles Robertson. The 12-month target price is $74 (U.S.) per share.

Gibson Energy Inc. (GEI-T) was downgraded to "sector perform" from "outperform" at Alta Corp Capital by equity analyst Dirk Lever. The 12-month target price is $20 (Canadian) per share.

Hydro One Ltd. (H-T) was rated new "overweight" at Barclays by equity analyst Ross Fowler. The target price is $26 (Canadian) per share.

Newalta Corp. (NAL-T) was rated new "speculative buy" at Canaccord Genuity by equity analyst Raveel Afzaal. The 12-month target price is $3.40 (Canadian) per share.

Square Inc. (SQ-N) was rated new "buy" at Mizuho Securities USA by equity analyst Neil Doshi. The 12-month target price is $16 (U.S.) per share.

Yelp Inc. (YELP-N) was rated new "neutral" at Mizuho Securities USA by equity analyst Neil Doshi. The 12-month target price is $20 (U.S.) per share.

With files from Bloomberg News