Inside the Market's roundup of some of today's key analyst actions. This file will be updated often during the trading day so check back for new details.
Canadian lifecos will once again outperform the banks in 2016, according to Desjardins Securities analyst Doug Young in a preview of the year ahead.
"We believe the lifecos can show more robust core EPS growth and stable return on equities, have more U.S. exposure and are less at risk to regulatory capital rule changes, and we believe the valuation premium accorded the lifecos is warranted right now," he said. "While Canadian bank valuations are interesting, we do not view the sector as being particularly cheap given the pending headwinds in 2016."
In the research note, Mr. Young upgraded his rating for Bank of Nova Scotia (BNS-T) to "buy" from "hold" while maintaining a $68 target price for the stock. The analyst consensus price target, according to Thomson Reuters, is $66.31.
"First, the stock has underperformed larger-cap Canadian bank peers for two years in a row — down 0.2 per cent in 2014 (versus an increase of 9.3 per cent for the bank index) and down 15.6 per cent in 2015 (versus a decline of 8.5 per cent) — and we believe it could play catch-up in 2016," the analyst said. "Second, its international operations are starting to turn the corner and could benefit in 2016 from past acquisitions, eg. of Citigroup's retail/commercial banking operations in Peru, Panama and Costa Rica, as well as cost-saving initiatives. Third, its valuation is compelling, in our view, at 9.3 times our 2016 EPS estimate (versus a historical average of 10.7x). We still have our concerns with its Caribbean exposure, and we note that it also has operations in Peru, Mexico, Colombia and Chile, countries partially reliant on energy and various commodity markets and where GDP growth expectations have been revised lower. We believe this is already baked into expectations."
Mr. Young also lowered his target price for several banks. His changes were:
- Canadian Imperial Bank of Commerce (CM-T, buy) to $108 from $111. Consensus is $102.38
- National Bank of Canada (NA-T, hold) to $45 from $47. Consensus is $49.69.
- Royal Bank of Canada (RY-T, buy) to $85 from $86. Consensus is $82.94.
- Toronto-Dominion Bank (TD-T, hold) to $58 from $59. Consensus is $59.
- Canadian Western Bank (CWB-T, hold) to $26 from $28. Consensus is $26.30.
"The Canadian banks are trading below longer-term average historical price-to-earnings and price-to-book value multiples; however, we believe current multiples are warranted given near-term concerns," he said. "Furthermore, these multiples are likely to remain depressed over the near term. We believe credit losses will turn higher through FY16 and FY17, and while we believe the banks can manage through the headwind, bank stocks tend to underperform in periods when provision for credit losses increase.
"However, bank stocks look compelling on a dividend yield basis, especially when compared with the yield investors can get on Canadian government two-year or five-year bonds."
The analyst also tweaked his price targets for three asset managers. They were:
- CI Fianancial Corp. (CIX-T, buy) to $37 from $38. Consensus is $35.86
- IGM Financial Inc. (IGM-T, buy) to $42 from $43. Consensus is $42.76.
- Gluskin Sheff + Associates Inc. (GS-T, hold) to $24.50 from $25.50. Consensus is $26.44.
Mr. Young said he expects banks and livecos to continue to gain market share on independent asset managers, saying:
"From 2007–14, the Big 6 Canadian banks' retail assets under management market share increased 5 percentage points (ppts) to 42 per cent, while the three larger-cap independents' market share fell 8 ppts to 21 per cent. As of November 2015, deposit-takers (all Canadian banks) in aggregate represent 47 per cent of mutual fund assets versus 39 per cent for independent asset managers and 5 per cent for lifecos. Banks and lifecos will continue taking market share, in our view. For the year to date to November 2015, these two groups have grown assets faster than independent asset managers – 4.9 per cent and 5.3 per cent of beginning assets for banks and lifecos, respectively, versus 2.6 per cent for independents … Over the medium to long term, we foresee the banks controlling 55-60 per cent of mutual fund assets due to the banks' size, brand, increased product breadth and strong distribution networks. In addition, lifecos' market share could increase to 10-15 per cent as this group leverages internal asset management and distribution capabilities."
In a 2016 precious metals outlook, CIBC World Markets analysts said they are maintaining "a balanced approach in assessing the outlook for gold and silver in 2016" with a strengthening U.S. dollar as a backdrop.
They said they expect the second half of the year "to be a more constructive environment for precious metals."
The group lowered its 2016 gold price forecast to $1,100 per ounce from $1,150. For 2017, their projection fell to $1,150/oz. from $1,200, which is their long-term gold price assumption starting in 2018.
"In supporting the $1,200/oz. long-term gold price assumption, CIBC highlights the lack of exploration spending, the lack of success with new discoveries, and the declining quality of some of the older assets as reasons for a projected decline in mine supply," said the report.
CIBC upgraded Silver Wheaton Corp. (SLW-T, SLW-N) to "sector outperformer" from "sector performer." Their target price did not change at $16.50, compared to a consensus of $20.75
They said: "Even with the worst-case scenario priced in for the Canada Revenue Agency (CRA) tax audit, Silver Wheaton continues to trade at a 40-per-cent discount to Franco-Nevada. The risk/reward profile now favours Silver Wheaton shares, especially as the company enters 2016 with the potential of generating [approximately] $400-million in free cash flow (before any voluntary debt repayments)."
For Teranga, their target fell to 60 cents from 70 cents. Consensus is $1.06.
They said: "Teranga Gold cannot find consistency in its operating results as shown by poor results in Q3/2015. As a result, the company has been unable to build on its cash balance, and has experienced a weakening of its balance sheet despite a small private placement last year. Uncertainty of timing over payments owing to the Senegalese government also complicates the story."
For Alacer, their target dropped to $3 from $3.50. Consensus is $3.68.
They said: "Alacer is set to begin development of its higher-risk Copler sulphide project. In light of the current gold price environment, and the lack of other near-term options available to Alacer to maintain production at current levels, Alacer shares may not be able to outperform the broader index in the next 12- to 18-month period."
For Royal Gold, their target fell to $49 from $60. Consensus is $59.65.
They said: "Uncertainty over the financial stability of Thompson Creek, which operates the Mt. Milligan mine that comprises 30 per cent of Royal Gold's net asset value (NAV), continues to weigh on the story. As well, the issues facing Rubicon and the restructure of the Golden Star royalty streams resulting from the decline in the gold price create negative sentiments."
The 2016 capital budget and production guidance for Crescent Point Energy Corp. (CPG-T) met the expectations of BMO Nesbitt Burns analyst Randy Ollenberger.
On Thursday, the oil and gas exploration, development and production company said it plans to spend between $950-million and $1.3-billion, which may be adjusted in reaction to commodity prices in the coming months. It also announced average annual production guidance of 165,000 to 172,000 barrels of oil equivalent per day. Both were in line with Mr. Ollenberger's projections.
"Crescent Point continues to show capital discipline and top-tier capital efficiencies," he said. "We expect the company to manage its cost structure and navigate the difficult oil price environment given its purchasing power, solid balance sheet and hedging program. The company's current dividend appears sustainable; however, we would not rule out a further reduction in order to protect the balance sheet and if oil prices remain depressed."
Mr. Ollenberger lowered his cash flow per share estimates for 2016 and 2017 to $2.93 and $3.15 from $3.01 and $3.27, respectively. He said the changes reflect "higher oil price differentials, partially offset by lower-than-expected royalties and G&A expenses."
Maintaining his "outperform" rating, he lowered his price target for the stock to $19 from $21. The analyst average target is $22.73, according to Bloomberg.
BMO Nesbitt Burns analyst Peter Sklar emphasized the lingering uncertainty surrounding Quebec's drug reform remains a weight on stock of Jean Coutu Group PJC Inc (PJC.A-T).
Before the market opened on Thursday, the company reported third-quarter 2016 diluted earnings of 31 cents per share, in line with Mr. Sklar's projection and a cent better than both the consensus estimate and the result from the 2015 fiscal year.
"We find the outlook for Jean Coutu to be highly unpredictable as the Quebec government's intentions on drug reform and strategy to reduce generic drug costs continue to remain unclear," the analyst said. "Under recently published draft regulations relating to Bill 28, Quebec has proposed a structure that would increase professional allowances paid by generic drug manufacturers to pharmacies (by removing the cap), with the intent that the increased revenue stream to pharmacies would compensate them for a recent initiative to lower generic drug payments by the government through 'periodic withdrawal' payments on reimbursement to pharmacies. However, recently tabled Bill 81 proposes a tender system to lower generic drug costs whereby generic drug manufacturers would submit bids to supply product and in turn would be awarded exclusivity. Under this scenario, professional allowances could be eliminated as generic drug manufacturers would essentially have a monopoly on certain generic molecules and would not be motivated to pay any allowances.
"We believe concerns on drug reform will weigh on the stock's multiple until further visibility can be obtained on the potential pharmacy regulation changes."
Maintaining his "market perform" rating, he lowered his price target by a loonie to $19. Consensus is $19.65.
In other analyst actions:
Alcoa Inc (AA-N) was raised to "outperform" from "neutral" at Macquarie by equity analyst Aldo Mazzaferro. The 12-month target price is $13 (U.S.) per share.
Barrick Gold Corp (ABX-N) was raised to "buy" from "neutral" at Sterne Agee CRT by equity analyst Michael Dudas. The target price is $12 (U.S.) per share.
Aetna Inc (AET-N) was downgraded to "hold" from "buy" at Jefferies by equity analyst David Windley. The target price is $122 (U.S.) per share.
Birchcliff Energy Ltd (BIR-T) was downgraded to "neutral" from "outperform" at Macquarie by equity analyst Brian Bagnell. The 12-month target price is $4.75 (Canadian) per share.
Boulder Energy Ltd (BXO-T) was downgraded to "neutral" from "outperform" at Macquarie by equity analyst Brian Bagnell. The 12-month target price is $1.50 (Canadian) per share.
Cigna Corp (CI-N) was raised to "buy" from "hold" at Jefferies by equity analyst David Windley. The target price is $184 (U.S.) per share.
Canadian Natural Resources Ltd (CNQ-T) was downgraded to "neutral" from "outperform" at Macquarie by equity analyst Chris Feltin. The 12-month target price is $35 (Canadian) per share.
Barracuda Networks Inc (CUDA-N) was downgraded to "market perform" from "outperform" at William Blair by equity analyst Jason Ader. It was also downgraded to "market perform" from "market outperform" at JMP Securities by equity analyst Erik Suppiger.
Distinct Infrastructure Group Inc (DUG-X) was rated new "buy" at Mackie Research Capital by equity analyst Russell Stanley. The 12-month target price is 20 cents (Canadian) per share.
Enerplus Corp (ERF-T) was downgraded to "neutral" from "outperform" at Macquarie by equity analyst Chris Feltin. The 12-month target price is $6 (Canadian) per share.
Freeport-McMoRan Inc (FCX-N) was downgraded to "neutral" from "outperform" at Macquarie by equity analyst Aldo Mazzaferro. The 12-month target price is $6 (U.S.) per share.
Great Canadian Gaming Corp (GC-T) was raised to "action list buy" from "buy" at TD Securities by equity analyst Damir Gunja. The 12-month target price is $24 (Canadian) per share.
Huntington Ingalls Industries Inc (HII-N) was raised to "outperform" from "market perform" at Cowen by equity analyst Gautam Khanna. The 12-month target price is $150 (U.S.) per share.
Helmerich & Payne Inc (HP-N) was downgraded to "underperform" from "neutral" at Macquarie by equity analyst Walt Chancellor. The 12-month target price is $40 (U.S.) per share.
Keysight Technologies Inc (KEYS-N) was downgraded to "neutral" from "outperform" at Robert Baird by equity analyst Richard Eastman. The target price is $29 (U.S.) per share.
Mosaic Co (MOS-N) was downgraded to "market perform" from "outperform" at BMO Capital Markets by equity analyst Joel Jackson. The target price is $32 (U.S.) per share.
Rubicon Minerals Corp (RMX-T) was raised to "hold" from "sell" at Desjardins Securities by equity analyst Michael Parkin. The 12-month target price is 16 cents (Canadian) per share.
Spectrum Brands Holdings Inc (SPB-N) was raised to "buy" from "hold" at Jefferies by equity analyst Kevin Grundy. The 12-month target price is $134 (U.S.) per share.
United Technologies Corp (UTX-N) was downgraded to "market perform" from "outperform" at Bernstein by equity analyst Douglas Harned. The target price is $104 (U.S.) per share.
WestRock Co (WRK-N) was downgraded to "equal weight" from "overweight" at Barclays by equity analyst Scott Gaffner. The target price is $50 (U.S.) per share.
With files from Bloomberg News