Inside the Market's roundup of some of today's key analyst actions
Prior to the release of its fourth-quarter 2015 financial results, "the writing was on the wall" for Finning International Inc. (FTT-T), according to Raymond James analyst Ben Cherniavsky.
And, in the wake of weaker-than-expected earnings, Mr. Cherniavsky downgraded his rating for the stock to "market perform" from "outperform."
"We should have seen it coming!" he said. "As we warned a few weeks ago in our Feb. 9 sector comment .... all bellwether indicators and channel checks were screaming that market conditions were deteriorating rapidly for our universe of machinery stocks, especially those with heavy exposure to Western Canada. [Thursday], Finning provided more substance to these concerns, reporting a stunning loss of $1.82 per share for 4Q15. This included a $42-million write-down for inventories, which speak directly to the 'over-stocked' state of the industry that has concerned us for a long time. It also includes a 31-per-cent decline in rental revenues in Canada, which echoes the strains that United Rentals recently reported in the region. And it includes a $338-million asset impairment for the Bucyrus franchise acquired four years ago, which fundamentally revises a key component of our investment thesis on Finning – namely, that the stock was attractively priced based on a long-standing measure of book value.
"In retrospect, we should have downgraded our rating on Finning in our last report (or never have upgraded it last summer), rather than simply warning about these risks. But we accept this mistake and move forward with a revised view that the shares, although still arguably limited in downside by book value, will likely remain range bound for our official 6-12 month forecast horizon. Thus, we are reverting back to a [market perform] rating."
Finning reported adjusted earnings per share of 23 cents, lower than both Mr. Cherniavsky's 34-cent projection and the consensus of 35 cents. It was also a 22-cent drop from the 2014 result from the same period. Total revenue met forecasts, however the result was a 16-per-cent drop year over year. The analyst said it reflected "reduced demand for new equipment in all market segments due to a challenging economic environment."
Mr. Cherniavsky also reduced his price target for the stock to $19 from $23. The analyst average price target is $19.11, according to Bloomberg.
Canaccord Genuity analyst Mark Rothschild said he remains "cautious" toward REITs with significant exposure to Alberta.
However, he believes the unit price for Boardwalk Real Estate Investment Trust (BEI.UN-T) are oversold. Accordingly, he upgraded his rating to "buy" from "hold."
On Thursday, Boardwalk reported fourth-quarter funds from operations per diluted until of 86 cents, in line with consensus projections and up two cents from the same period in 2014. Same-property net operating income decline by 0.1 per cent with expenses increasing 0.7 per cent.
"Boardwalk REIT laid out a bullish forecast which suggests that the REIT will face almost no negative impact from softening fundamentals in Alberta," said Mr. Rothschild. "While we believe that this may prove too optimistic, rental apartments have generally been quite stable in Canada. A number of items were presented in the press release to drive FFO per unit growth. In particular, management is pursuing acquisitions more aggressively, accelerating development projects, raising the distribution, and increasing its allocation of capital to its existing unit buyback program."
Touting "steady" results with an "optimistic" outlook from management, Mr. Rothschild raised his target price to $47.50 from $45. The analyst average is $58.15.
Shares of Primero Mining Corp. (P-T, PPP-N) are oversold, according to Desjardins Securities analyst Michael Parkin, who also believes the company's reserve update in March should be "positive."
Accordingly, Mr. Parkin upgraded his rating for the Toronto-based company to "buy" from "sell."
On Thursday, Primero reported fourth-quarter earnings that were deemed to be "relatively neutral" by the analyst. Adjusted earnings per share of nil beat the consensus forecast of a loss of 1 cent (U.S.) and Mr. Parkin's projection of a 2-cent loss. Cash flow per share of 13 cents topped the consensus by a penny and was in line with the analyst's estimate.
It also reported a net loss of $98.3-million, which included a $104-million impairment charge and of which $82-million related to its Black Fox complex in northern Ontario.
"This was partially driven by the decision to defer development of the Grey Fox project as it is uneconomic at current metal prices," said Mr. Parkin. "We note that the reasoning for the downgrade at Black Fox is somewhat confusing given the gold price in Canadian dollars is higher today than it has ever been over the past two years, and given the bulk of Black Fox's opex is Canadian dollar–denominated, the downgrade should be in respect to the Canadian dollar gold price more than the U.S. dollar gold price."
He added: "We have tweaked some assumptions for Black Fox, which has resulted in a lower discounted cash flow (DCF) value for the asset, based on management's more conservative approach to the asset base, but this was more than offset by a more positive outlook for San Dimas. From the 4Q15 conference call and discussions with management, we expect the reserve update to be positive for San Dimas and have moved to factor in some reserve upside for this asset, which overall resulted in our target price rising ... We expect the tax situation relating to the flagship mine, San Dimas, to remain an overhang on the stock until it is resolved; depending on the path taken, this could be resolved in months or years, but we should gain some insight into the government's objective in the coming months. Our current net asset value (NAV) valuation reflects what we believe is a worstcase scenario for Primero, and we recognize the company could potentially have better options available to it, but at this time we view the clarity of the situation as very poor. Regardless of this tax situation, we believe the shares are oversold and present a buying opportunity."
Mr. Parkin noted that fourth-quarter operating results and 2016 guidance had previously been reported in late January. However, Primero shares were "still underperforming," falling 3.9 per cent while the S&P Global Gold Index was rising 5.5 per cent. He raised his target price to $2.75 from $2.30. The analyst average is $3.77.
Following the release of the fourth-quarter financial results for OceanaGold Corp. (OGC-T), Raymond James analyst Chris Thompson downgraded his rating for the stock to "market perform" from "outperform."
Calling it "purely a valuation call," Mr. Thompson noted the stock's gain of almost 50 per cent in the year to date and an almost 100-per-cent rise since he initiated coverage of the stock in early October of 2015. The junior gold miner sector has risen 20 per cent and 14 per cent, respectively, during the same periods.
The company reported quarterly cash flow per share of 9 cents, meeting Mr. Thompson's projection but 4 cents below the consensus estimate. Earnings per share of 4 cents was in line with both the analyst and consensus forecast.
"Clearly, the market has rewarded OGC's ability to tailor its balance sheet (helped by a re-structured $250-million line of credit), maintain an attractive EBITDA margin (50 per cent in 4Q15) to fully fund growth initiatives (Haile)," he said. "We note OGC's plan to aggressively test the exploration upside offered by its N Zealand mines, Haile project, complemented by a recent $12.6-million investment in Gold Standard Ventures (GSV-X)."
Mr. Thompson maintained a target price of $3.70 for the stock.
"Overall, our view on OGC remains constructive; that being OGC's rank as a fully-funded organic growth company with a strong balance sheet and low cost structure," he said. "We note a planned site visit to Haile and an investor day in early March as events that will allow for a review of our operating assumptions for Haile and the company as a whole. We also note the potential for value-enhancing news flow from Haile (development updates/strategy), Macraes (exploration), and Waihi (exploration/optimization) in the near-term."
Elsewhere, Haywood Securities analyst Geordie Mark downgraded the stock to "hold" from "buy" with an unchanged $4 target.
National Bank analyst Raj Ray also lowered his rating, to "sector perform" from "outperform," while raising his target to $3.85 from $3.65
"Returning to an old favourite," BMO Nesbitt Burns analyst Dan Salmon upgraded his rating for MDC Partners Inc. (MDCA-Q, MDZ.A-T) to "outperform" from "market perform" despite an ongoing investigation from the U.S. Securities and Exchange Commission.
Last April, MDC disclosed the investigation into founder Miles Nadal's expenses as well as its accounting practices and third-party trading of its securities.
"Over the course of 2015 and again on [Thursday] night's earnings call, MDCA has consistently addressed the issues raised by the SEC subpoena as best it could in our opinion (CEO change, internal committee, revealing recent correspondence with the SEC, etc.) and at this stage we find the improving strength of the business (including a new, major unnamed consumer packaging goods client won in 1Q16) too compelling," said Mr. Salmon. "Moreover, over the course of 2016 and 2017 MDCA will again go through a cycle of paying down its deferred acquisition costs (which was always expected, but improves optics nevertheless) and have the opportunity to re-finance its debt starting this April. Put simply, the risk/reward has grown too compelling for one of our favorite businesses."
MDC reported fourth-quarter organic revenue of 7.2 per cent , narrowly missing Mr. Salmon's 7.6 per cent estimate. Adjusted earnings before interest, taxes, depreciation and amortization of $65.6-million beat the analyst's $62.8-million projection and the $65.2-million consensus.
Mr. Salmon raised his target for the stock to $22 from $20. The analyst average is $25.56.
"This reflects both higher estimates and a return to a peer-level multiple in light of recent positive comments that are relevant to the SEC investigation (e.g. on its call, MDC revealed that an independent third party reviewed goodwill accounting and found it to be compliant with GAAP)," said Mr. Salmon. "If the SEC investigation is ended, we would expect to return to applying a 20-25-per-cent premium to the peer group, as we did prior to this issue surfacing last spring."
Valeant Pharmaceuticals International Inc.'s shares fell 6 percent Friday after an analyst at Wells Fargo initiated coverage of the stock with an underperform rating, citing "unanswered questions" about the company's accounting methods and strategic direction.
"The Valeant board and management have made decisions that may have put Valeant at significant business and reputational risk," David Maris said in a research note. "While it is often noted that Valeant's management team has created a huge amount of value, our perspective is different: Valeant has lost approximately $60 billion of market value from its peak, yet its current market value is approximately $30 billion."
The shares declined 6.9 per cent to $87.60 at 11:16 a.m. in New York, after earlier falling as much as 7.9 per cent. Maris gave a target price of $65 to $68 for the shares, the low end of which is about 26 percent lower than Valeant's current price.
A Valeant spokeswoman was not immediately available to comment.
Maris raised a number of questions about the company's accounting, saying that receivables growth has outstripped sales growth over the past several years.
The company is expected to release fourth-quarter earnings soon, though hasn't announced a date. Valeant shares have plummeted since their $262.52 August peak on concerns about its now-severed ties to the mail-order pharmacy Philidor Rx Services, high levels of debt used to make acquisitions, and most recently the status of Chief Executive Officer Mike Pearson, who is on medical leave.
"Our concerns stem from a number of factors, including opaqueness related to accounting issues, what we see as balance sheet risks," and how the company has responded to Philidor and other matters, Maris said.
Maris said the company's business model -- relying on low- cost debt to do deals, cutting costs at newly acquired companies, and raising drug prices -- is under scrutiny and that its growth may be impeded as a result.
Valeant currently has 16 buy ratings, 8 holds and 2 sells, according to data compiled by Bloomberg, with target prices on the stock of $88 to $213.
In other analyst actions:
Applied Materials Inc (AMAT-Q) was raised to "buy" from "hold" at Needham & Co. by equity analyst Y Edwin Mok. The 12-month target price is $22 (U.S.) per share.
Ballard Power Systems Inc (BLDP-Q) was rated new "market perform" at FBR Capital Markets by equity analyst Carter Driscoll. The 12-month target price is $1.50 (U.S.) per share.
Dream Office Real Estate Investment Trust (D.UN-T) was raised to "action list buy" from "buy" at TD Securities by equity analyst Sam Damiani. The 12-month target price is $23 (Canadian) per share.
Equinix Inc (EQIX-Q) was raised to "outperform" from "market perform" at Cowen by equity analyst Colby Synesael. The 12-month target price is $300 (U.S.) per share.
Fluor Corp (FLR-N) was downgraded to "market perform" from "outperform" at FBR Capital Markets by equity analyst Alex Rygiel. The 12-month target price is $46 (U.S.) per share.
Gear Energy Ltd (GXE-T) was downgraded to "sector perform" from "sector outperform" at Peters & Co by equity analyst Dale Lewko. The 12-month target price is 50 cents (Canadian) per share.
Perrigo Co PLC (PRGO-N) was downgraded to "neutral" from "buy" at B. Riley by equity analyst Linda Bolton Weiser. The 12-month target price is $146 (U.S.) per share. It was rated a new "outperform" at Wells Fargo by equity analyst David Maris.
Spirit AeroSystems Holdings Inc (SPR-N) was downgraded to "neutral" from "buy" at UBS by equity analyst David Strauss. The 12-month target price is $48 (U.S.) per share.
Syntel Inc (SYNT-Q) was downgraded to "market perform" from "outperform" at Wells Fargo by equity analyst Edward Caso.
Trinity Industries Inc (TRN-N) was downgraded to "underweight" from "buy" at BB&T Capital by equity analyst Thomas Albrecht.
Valeant Pharmaceuticals International Inc (VRX-N) was rated new "underperform" at Wells Fargo by equity analyst David Maris.
With files from Bloomberg News