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New all-wheel-drive versions of the Tesla Model S car are lined up for test drives in Hawthorne, California October 9, 2014.LUCY NICHOLSON/Reuters

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

RBC Dominion Securities analyst Joseph Spak lowered his target price for stock of Tesla Motors Inc. (TSLA-Q) after updating his financial model for the company to account for a recent equity raise and a "more tempered" Model 3 ramp.

The California-based automaker offered 6.5 million shares at $215 (U.S.) each for net proceeds of $1.4-billion. The funds will be used to accelerate the production of the Model 3 as well as working capital and general corporate purposes.

"As of March 31, Tesla has $1.4-billion in cash on the balance sheet but this also included $565-million drawn off the ABL [credit agreement] and $350-million was repaid in April," said Mr. Spak. "Pro forma for the equity raise we put cash at $2.45-billion. Modelling WC [working capital] requirements and cash flow for this company at this stage is difficult and while we have no doubt there is some low-hanging fruit, the complexity and steepness of the production ramp is also likely to bring about challenges (and remember TSLA indicated they want to have the ability to produce almost any part on the car)."

Mr. Spak said he is lowering delivery forecast for the much-hyped Model 3 after speaking with industry insiders and reconsidering his previous projections. He moved his delivery forecast for 2017, 2018, 2019 and 2020 to 91,000/180,000/325,000/525,000 from 109,000/315,000/420,000/620,000, respectively.

"We are all for setting aggressive internal and supplier goals, but as an investor, we believe these targets should be moderated," the analyst said. "In reality, installing the new equipment/lines takes time and then even if Tesla has learned from their Model S/X launches, there is a ramp and the scale of Model 3 is significantly larger. In the interim, the TSLA story is about manufacturing, and execution risk is elevated. For the investor with long-term horizons, the ramp is less of a concern. For others, expect a choppy ride with sentiment a large driving factor."

Accordingly, Mr. Spak also lowered his 2017 earnings per share estimate to $1.30 from $2.65 and 2018 to $3.05 from $5.50. His 2020 forecast now sits at $12.15, down from $13.95.

He kept his "sector perform" rating for the stock, but he lowered his target price to $242 (U.S.) from $252. The analyst consensus price target is $265.93, according to Thomson Reuters.

"Our sector perform rating is based on our view that Tesla is a very innovative and disruptive company with strong growth ahead via disrupting large addressable markets," he said. "But it's also a classic story stock that is difficult to value given the investment decision is often qualitative versus quantitative. Thus, near-to-mid-term performance is likely to be determined by expectations and delivering on targets. While we are positive on the long-term opportunity, the stock appears to fairly balance mid-term assumptions with execution risk. To that end, Tesla is essentially learning how to become a manufacturing company on the fly. While we don't have meaningful reason to doubt Tesla can eventually get to their targets, doing so in a timely matter without some growing pains could prove challenging. Failure to hit near-term objectives may not impact the long-term view, but could hold back the stock or provide a more favourable risk/reward entry point."

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Open Text Corp. (OTEX-Q) is "well positioned" to benefit from the current digitization trend, said CIBC World Markets analyst Stephanie Price, touting its new product cycle as a means for driving growth over the next several quarters.

Saying the Waterloo, Ont.-based company was "digital before it was cool," Ms. Price upgraded her rating for the stock to "sector outperformer" from "sector performer."

"With a staffed up corporate development department and Release 16 [enterprise information market or EIM platform] now in the market, we believe the M&A focus increases," she said. "The M&A landscape remains robust and we note one potentially transformational deal (Documentum) and a number of tuck-in opportunities.

"While Open Text has $1.2-billion (U.S.) in available liquidity, we believe the company could spend up to $1.6-billion (three-times leverage) on a transformational deal, without issuing equity. We believe the accretion on the deal depends on a number of factors (the size, mix of business, takeout valuations) and could range from 5 per cent to 14 per cent to our 2017 estimated EPS. We view Open Text as well positioned to compete with PE firms for larger deals, given their ability to integrate acquisitions."

Ms. Price said Open Text is well positioned heading into its seasonally strong fourth quarter. Her revenue and earnings per share projections of $480-million and 95 cents both sit above the consensus estimates ($467-million and 91 cents).

"We see M&A as upside to our forecast (given the uncertainty around timing/size), but expect the company to become more active," she said. "While we continue to have longer-term concerns around the hybrid-cloud strategy, we believe Open Text should see growth in the near term as it benefits from digitization and the current Release 16 product cycle."

Ms. Price raised her price target for the stock to $64 (U.S.) from $55. Consensus is $56.97.

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Best Buy Co. Inc. (BBY-N) posted "solid" first-quarter results despite a tough environment, said RBC Dominion Securities analyst Scot Ciccarelli.

On Tuesday, the U.S. retailer reported earnings before interest and taxes of $242-million (U.S.), a decline of $4-million from the previous year but ahead of the analyst's forecast of $224-million. Earnings per share of 44 cents beat Mr. Ciccarelli's 37-cent estimate and the consensus of 35 cents. The company's guidance was 31-35 cents.

Domestic comparable sales declined 0.1 per cent year over year, topping Mr. Ciccarelli's estimate of a 1.2-per-cent decline and guidance of a 1-per-cent to 2-per-cent decline. Gross margins increase 0.1 per cent year over year to 23 per cent, beating the analyst's forecast by 0.3 per cent.

"Results from Best Buy's international operations also came in ahead of our projections, as the company is now seeing positive results from its decision to consolidate its Canadian operations," the analyst said. "International sales (also includes Mexico) of $614-million (versus. our $563-million forecast) fell 8 per cent year over year versus guidance of a decline of 15 per cent to 20 per cent and EBIT of $3-million topped our projection of a loss of $17-million. Recall that the company actually closed its 66 Future Shop (FS) stores (50 per cent of the FS base) and began converting the remaining 65 into the Best Buy format in 1Q last year. While the disruptions caused by the latter will make year-over-year comparisons difficult for the next several quarters, management's commentary (and sales results, down 1.2 per cent ex-[foreigh exchange]) suggests that customer retention 'has been materially better than expected.'"

Mr. Ciccarelli said the retirement of chief executive officer Sharon McCollam could present an overhang, calling her a "highly respected retail veteran that we believe was a crucial part (along with CEO Hubert Joly) of Best Buy's turnaround efforts over the last 3.5 years."

He added the company's guidance for the second quarter is "backloaded" and "highly" dependent on mobile improvements.

"We have raised our 2Q comp to a decline of 0.2 per cent from a 1.6-per-cent decline, but reduced our EPS estimate to 45 cents from 50 cents," he said. "For the full year, the company reiterated its full-year guidance for flat revenue and non-GAAP operating income, but again noted that this forecast may not be achievable without a strong mobile cycle (i.e., new Apple phone) and improvements to overall industry trends. While management tends to be fairly conservative in its outlook, the back-end concentration of earnings obviously provides risk to the year."

Maintaining his "sector performer" rating, he raised his target price by a dollar to $33. The analyst average is $33.74, according to Bloomberg.

"Best Buy has vastly improved its competitive positioning through price-matching Amazon (and others) and forming in-store vendor partnerships with technology leaders such as Apple, Samsung, Microsoft, and Google," the analyst said. "These changes have resulted in accelerating share gains as the company continues to post significantly better growth than the industry (as measured by NPD). That said, we remain concerned over deteriorating CE trends and a lack of top-line drivers, particularly given expectations for continued ASP compression in 4K TVs. Even though cost controls remain tight and accelerated buybacks may drive incremental EPS growth, Best Buy's valuation is in line with other "comp challenged" retailers and it will likely be increasingly difficult to drive sustained comp improvement (which we think is needed for the stock to rerate higher) in a deteriorating consumer electronics environment."

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Kinaxis Inc. (KXS-T) continues to have a strong sales pipeline, said BMO Nesbitt Burns analyst Thanos Moschopoulos.

He raised his target price for the Ottawa-based provider of cloud-based subscription software for supply chain operations after attending the Gartner Supply Chain Executive conference in Phoenix last week.

"The conference reaffirmed our view that Kinaxis is competitively well positioned in an area that's becoming of growing strategic importance to many large companies," he said. "Industry participants told us that there's a growing recognition that dedicated planning software (such as Kinaxis' RapidResponse platform) is needed to allow companies to make quicker and better decisions, and to better manage the increasing complexity of large, globally outsourced supply chains."

Mr. Moschopoulos said he believes German multinational SAP SE remains Kinaxis's "key" competitor for deals.

"SAP has now fully released its next-generation Integrated Business Planning (IBP) product suite; however, the consensus among the industry participants that we spoke to is that the platform doesn't yet seem to be fully baked," he said. "For example, we spoke to a Fortune 100 company that is currently running SAP's legacy planning platform, APO, and is currently considering Kinaxis rather than migrating to IBP."

The analyst did not change his "outperform" rating for the stock, while he did raise his target price to $55 from $50. Consensus is $56.26.

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Credit Suisse analyst Christian Buss said he's "increasingly cautious" on shares of Michael Kors Holdings Ltd. (KORS-N).

In reviewing a results of a proprietary survey, Mr. Buss cited four reasons for his stance:

  1. Declining out-the-door prices for watches
  2. Watch, handbag and jewelry categories are lagging the company’s other six categories in importance and spending intent. He noted: “We are cautious on KORS given its significant exposure to both the handbag and watch segments.”
  3. An increase in handbag discounting in departments year over year.
  4. The company has the lowest initial pricing for handbags among its luxury peers. Mr. Buss said: “We believe these affordable luxury brands work best when they strike an appropriate balance between the luxury and low end markets. We believe quality and brand status command pricing power, and our data indicates that Coach and Kate Spade have similar strong pricing structures, while Michael Kors falls toward the lower end of the ‘accessible luxury’ brand curve.”

Mr. Buss lowered his 2017 earnings per share projection to $4.32 (U.S.) from $4.67. The consensus is $4.56. He did not change his 2016 estimate of $4.41.

Maintaining his "neutral" rating, he lowered his target price to $49 from $57. Consensus is $58.19.

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In other analyst actions:

Acadian Timber Corp. (ADN-T) was raised to "outperform" from "sector perform" at RBC Capital by equity analyst Paul Quinn. The 12-month target price is $20 (Canadian) per share.

ALLETE Inc. (ALE-N) was raised to "buy" from "hold" at Williams Capital by equity analyst Christopher Ellinghaus. The 12-month target price is $63 (U.S.) per share.

Computer Sciences Corp. (CSC-N) was downgraded to "market perform" from "outperform" at Raymond James by equity analyst Brian Gesuale.

EOG Resources Inc. (EOG-N) was downgraded to "accumulate" from "buy" at KLR Group by equity analyst John Gerdes. The target price is $90 (U.S.) per share.

Eastmain Resources Inc. (ER-T) was rated new "speculative buy" at Paradigm Capital by equity analyst Don Blyth. The 12-month target price is $1 (Canadian) per share.

Monsanto Co. (MON-N) was raised to "buy" from "hold" at Jefferies by equity analyst Laurence Alexander. The 12-month target price is $132 (U.S.) per share.

Mountain Province Diamonds Inc. (MPV-T) was downgraded to "market perform" from "speculative outperform" at BMO Capital Markets by equity analyst Edward Sterck. The target price is $6 (Canadian) per share.

Memorial Resource Development Corp. (MRD-Q) was downgraded to "hold" from "buy" at Johnson Rice by equity analyst Welles Fitzpatrick.

Noble Energy Inc. (NBL-N) was raised to "buy" from "neutral" at Sterne Agee CRT by equity analyst Tim Rezvan. The 12-month target price is $47 (U.S.) per share.

New Gold Inc. (NGD-T) was downgraded to "sell" from "neutral" at Dundee by equity analyst Josh Wolfson. The target price is $4 (Canadian) per share.

Newmarket Gold Inc. (NMI-T) was rated new "outperform" at National Bank by equity analyst Adam Melnyk. The 12-month target price is $4.50 (Canadian) per share.

Pilgrim's Pride Corp. (PPC-N) was downgraded to "hold" from "buy" at BB&T Capital by equity analyst Brett Hundley.

With files from Bloomberg News

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