Inside the Market's roundup of some of today's key analyst actions. This post will be updated with more analyst commentary during the trading day.
Investors looking for Canadian oil and gas producers that are likely to boost their dividends should place their bets on TORC Oil and Gas Ltd. and Surge Energy Inc., said Desjardins Securities analyst Tim Murray.
Producers have benefited from a rally in crude oil prices this summer, and should the higher prices stick around through to the new year, cash flows should be stronger than forecast.
But that doesn't mean all energy firms will hand out more cash to shareholders. Some are likely to use the cash to pay down debt, while the industry in general may be reluctant to bulk up dividends based on just a few quarters of additional cash flow, said Mr. Murray. The West Texas Intermediate crude oil market is also in backwardation right now - where nearby contract months are more expensive than deliveries further out in the future - which signals caution for producers contemplating a hike in dividends since it's hard to reverse such a move.
He thinks dividend increases should only be made by producers that have enjoyed repeated operational successes. The two firms, therefore, are good candidates, given that Surge has already indicated it expects to beat its exit guidance for 2013 of 12,000 barrels of oil equivalent per day and TORC is well positioned to boost or beat its exit guidance, he said.
"In our view, Surge and TORC are the most likely candidates for a dividend bump, as we expect positive revisions to exit production guidance providing incremental free cash flow; we also highlight that both companies maintain strong balance sheets."
He also thinks there's a chance Arsenal Energy Inc. may top up its quarterly dividend, but he argues the company should probably focus on debt reduction instead. Whitecap Resources Inc. recently increased its dividend, but Mr. Murray believes the producer is unlikely to revisit the payout until 2014, as it is still digesting numerous corporate transactions completed this year.
Mr. Murray's three favourite small-cap yield names in energy are TORC, Surge and Whitecap.
TORC currently yields 5.8 per cent, Surge 6.8 per cent, and Whitecap 5.4 per cent.
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Before the end of the year, Canadian Pacific Railway Ltd. must negotiate the renewals of two major intermodal contracts. The Calgary-based railway has a lot at stake in the talks, RBC Dominion Securities analysts say.
The intermodal ship-to-rail business is the largest contributor to CP Rail's $5.7-billion in freight revenues, at 25 per cent, according to the company's 2012 annual report.
"The loss of one of these contracts would, in our view, highlight the risk to revenue growth that has been built into CP's premium multiple, while renewing both would be an endorsement of CP's service improvements," analysts Walter Spracklin and Erin Lytollis wrote in a research report.
Investors have applauded new chief executive officer Hunter Harrison's cost-cutting and streamlining, and driven up CP Rail's share price by almost 30 per cent this year to $130 on the Toronto Stock Exchange.
The RBC analysts say "optimism" built into the share price "leaves little room for error." In addition to the risk of losing contracts with intermodal customers Hapag Lloyd and Orient Overseas Container Line Ltd., CP Rail faces slower growth in demand for moving crude oil by rail.
RBC sees "meaningful downside risk" to the Street and company's earnings targets if it cannot make new gains on its main rival, Canadian National Railway.
Target: Mr. Spracklin and Ms. Lytollis reiterated a $105 share price target with an "underperform." The average analyst target is $135.89, according to Bloomberg data.
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BMO analyst Joel Tiss has raised his profit estimates and share price target for engine maker Cummins Inc., citing recent deals that improve its distribution network and new products.
Shares in the Illinois-based company, which makes diesel and natural gas systems and components for heavy trucks, have risen by 22 per cent this year to $131 (U.S.) on the New York Stock Exchange. Mr. Tiss said in a research note on Wednesday he is raising his per-share profit estimates for 2014 and 2015 to $9.25 and $11.25, respectively.
"Most of the [profit target] increase comes from distribution acquisitions, which is expected to add roughly $0.50 to EPS by 2015. Largely driving the rest of the increase is slightly faster growth from more aggressive new product intros and a slightly lower tax rate," wrote Mr. Tiss, pointing to the company's clean balance sheet, share repurchases and rising sales.
Target: Mr. Tiss raised his share price target to $146 from $135 and maintained an "outperform" rating. The average target is $140.44.
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Non-residential construction markets continue to slowly improve, but it's taking longer than expected, said CIBC World Markets analyst David Galison in downgrading steelmaker Nucor Corp. to a "sector underperformer" rating.
The disappointingly slow pickup in activity - which heightends the risk of lower-than-expected pricing and margins in the near term - has weighed on his 2014 outlook for the stock. "However, we remain optimistic about a more meaningful recovery in non-residential construction in 2015," he said.
Target: Mr. Galison, who previously rated Nucor "sector performer," raised his price target by $1 to $47 (U.S.). The average target is $50.53.
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Credit Suisse analyst Joseph Mastrogiovanni initiated coverage of Sprint Corp. with an "underperform" rating, concerned with worsening subscriber trends and the stock's steep valuation premium to peers.
"While Sprint should achieve significant EBITDA (earnings before interest, taxes, depreciation and amortization) growth over the next two years, we believe this is already reflected in valuation," he said. "Initiatives in 2014 to improve subscriber trends could put pressure on margins, resulting in multiple contraction."
Target: Mr. Mastrogiovanni set a target of $5.50 (U.S.). The average target is $6.77.
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In other analyst actions today:
R.W. Baird downgraded Caterpillar Inc. to "neutral" from "outperform" with a target of $90 (U.S.).
BMO Nesbitt Burns upgraded Oil States International to market perform and raised its target to $110 from $94.
RBC Dominion Securities downgraded Exelon to "sector perform" from "outperform" and cut its price target to $33 from $34.
Barclays upgraded Colgate-Palmolive Co. to "overweight" from "equalweight."
Barclays downgraded Procter & Gamble to "equalweight" from "overweight."
Credit Suisse upgraded Nokia Inc. to "outperform" from "neutral."
Desjardins Securities initiated coverage on B2Gold Corp. with a "buy" rating and target price $3.50.
Barclays started coverage on New Gold Inc.'s U.S.-listed shares with an "equal weight" rating and target price of $8 (U.S.).
National Bank Financial raised its target price on Richelieu Hardware Ltd. to $44 from $40.
National Bank Financial raised its target price on Santonia Energy Inc. to $2.75 from $2.50.
With files from Reuters
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Darcy Keith
Eric Atkins