Friday's analyst upgrades and downgrades

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

The "glass is half empty" for Stantec Inc. (STN-T, STN-N) after weaker-than-expected fourth-quarter 2015 results, said Raymond James analyst Ben Cherniavksy.

He downgraded his rating for the stock to "market perform" from "outperform."

On Thursday, the Edmonton-based company reported earnings per share of 27 cents, below Mr. Cherniavsky's 43-cent forecast and the consensus projection of 44 cents. It was also a 13-cent decline from the same quarter in 2014.

"Three of Stantec' s last five quarters have been material 'misses,' with the resource sector the main culprit in each," he said. "We expect this drag to continue in 2016. With an annual organic growth target of 2 per cent, Stantec expects second-half 2016 strength in other practices to more than offset the resource weakness. Notably, 2015 fell well short of the same 2-per-cent growth target that was affirmed as late as August (organic revenue fell 6 per cent). Accordingly, we are more cautious this time around. Once bitten, twice shy!"

He added: "Our main macro concern is that the weakness in energy spreads to other segments of Stantec's markets. Indeed, most construction leading indicators that we follow have either rolled over lately or flattened out … This is true, for example, of the non-residential spending data for both Canada and the U.S. Likewise for the ABI [Architecture Billings Index] and ISM [Institute for Supply Management] indices south of the border. The same can be said of the housing market in Canada, especially Alberta and Saskatchewan (with risks mounting in other regions). The U.S. housing market is on firmer ground, but recent data suggest momentum is slowing there too (our U.S. housing team recently lowered their macro forecasts and described 2016 as 'the 6th inning' of the cycle)."

Mr. Cherniavsky lowered his 2016 EPS projection to $1.80 from $2.10.  He introduced his 2017 projection at $2.10.

He also lowered his target price for the stock to $30.50 from $36.50. The analyst average target price is $33.25, according to Bloomberg.

"Stantec still boasts a strong balance sheet, diversified platform, and proven long-term track record," he said. "However, with the 'misses' piling up, the stock already trading at a premium multiple, and the end markets lacking good visibility, we feel it is more prudent to view the glass as now being half empty, rather than half full."

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Canadian Imperial Bank of Commerce (CM-T, CM-N) delivered "another good quarter," according to BMO Nesbitt Burns analyst Sohrab Movahedi.

On Thursday, CIBC reported first-quarter 2016 adjusted cash earnings per share of $2.42, ahead of the analyst's forecast of $2.35. He pointed to strength in the bank's retail business for the earnings beat.

The bank also increased its dividend by 3 cents to $1.18 for the quarter ending April 30. It's the sixth consecutive quarter in which it has made an increase.

"Retail business banking (RBB) delivered $686-million in earnings (up 12 per cent year over year) on the back of continued robust volume growth and positive operating leverage partially offset by 5 basis points lower net interest margin (NIM). Wealth contributed $122-million (down 8 per cent y/y) in part due to the previously announced agreement to sell the interest in American Century Investments (which, once completed, will add about 50 basis points to common equity tier 1 or CE1 ratio) but also reflective of the weaker market conditions. Capital markets had earnings of $248-million (down 7 per cent from last year) with better-than-feared trading revenue (noteworthy contribution from FX trading). We view the bank's decision to increase collective allowances by $69-million as prudent in the current unsettled macro environment; provision for credit losses (PCL) ratio including this collective was 35 basis points. The total bank operating leverage was 1.9 per cent but is unlikely to repeat at these levels given the bank's well-communicated technology investment plans in 2016."

Mr. Movahedi lowered his 2016 and 2017 cash operating EPS projections to $9.45 and $9.80 from $9.60 and $10.05, respectively, to account for lost earnings from the sale of American Century Investments.

He maintained an "outperform" rating while lowering his target price for the stock to $102 from $105. The analyst average target is $96.90.

"We view the steady increase in dividends as an indication of management's confidence in the earnings potential and outlook of the bank," he said.

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Loan losses dulled a "solid" quarter for Toronto-Dominion Bank (TD-T, TD-N), said CIBC World Markets analyst Robert Sedran.

On Thursday, the bank reported first-quarter 2016 earnings per share of $1.18, in line with Mr. Sedran's projection but 2 cents lower than the consensus.

"Credit quality was always going to be one of the takeaways of the quarter for all banks, and this one was no different," he said. "Partly owing to an addition to the collective allowance and partly owing to other assorted items we discuss inside, loan losses were up 26 per cent from what we thought was an elevated level last quarter and 77 per cent from the same quarter last year. Time to panic? No, not in our view, though it is clear that all banks are on the wrong side of the credit cycle at this time. Much of the growth in loan losses can be ascribed to business growth and strategic partners (and the lumpy addition to the collective allowance is unlikely to return in Q2).

"As for the rest of the results, they were more encouraging. Revenues came in ahead of our estimates (fee-based revenues and net interest income specifically), operating leverage was strongly positive (with an asterisk considering the huge restructuring charges booked last year), and volume growth was good (and excellent in the United States). Based on the composition of the results, we likely would have left estimates more or less unchanged. As we have done elsewhere, however, we are bending our loan loss assumptions higher. As such, our estimates are modestly lower."

Mr. Sedran maintained his 2016 EPS projection of $4.80 but lowered his 2017 estimate by 6 cents to $5.01.

Maintaining a "sector outperformer" rating, he raised his target price to $57 from $56. The analyst average is $56.45.

"With good performance in the Canadian [personal and commercial] banking business, solid underlying trends (if underwhelming earnings growth) in the United States, key pillars of our investment thesis are supported by these results," he said.

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BMO Nesbitt Burns analyst Brian Quast initiated coverage of Richmont Mines Inc. (RIC-T, RIC-N) with an "outperform rating."

Mr. Quast said the key asset for the Rouyn-Noranda, Que.-based company is its Island Gold Mine near Wawa, Ont., noting it comprises 88 per cent, or $5.45, of his estimated $6.18 per share net present value (NPV).

"A recent (Oct. 2015) preliminary economic assessment (PEA) on the Island Gold Deeps gives a mine life of seven years at 800 tonnes per day (tpd) and 8.7 grams per tonne (gpt) as a base case," the analyst said. "Our model follows this PEA quite closely, despite the possibilities for enhanced throughput (up to 1,200 tpd) and a high likelihood of resource expansion both laterally and at depth. Some ounces in the upper portions of the mine are also included in our model, yielding a mine life of 10 years. Key upcoming catalysts include an updated PEA later in the year, which will utilize the drilling over the past few months to examine expansion possibilities. An additional exploration update in late Q2/16 should set the stage for any updated PEA."

He set a price target of $7.50 for the stock. The analyst consensus price target is $7.16, according to Thomson Reuters.

"Between exploration and delineation of the Island Deeps zone and tailwinds provided by the depreciating Canadian dollar, the company appears well positioned for the future," he said.

Mr. Quast initiated coverage of Newmarket Gold Inc. (NMI-T) with a "market perform" rating.

"Newmarket, in its current form, is a very young company, having not yet traded for a year," he said. "As with other underground miners in this initiation group (Klondex Mines Ltd. and Richmont Mines Inc.), future valuation hinges upon exploration success, especially at Fosterville [mine in Victoria, Australia], where the focus will be on the Eagle zone. Key upcoming catalysts include exploration results throughout the year at all three assets. While exploration has been the biggest driver of share price performance by far, the weakening Australian dollar has also been a boon to the company."

He set a price target of $2 for the stock. The consensus is $2.40.

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Calfrac Well Services Ltd. (CFW-T) has "important levers at its disposal to endure a protracted downturn" in the energy market, said Raymond James analyst Andrew Bradford.

Noting Calfrac "looks like a survivor" analytically, he upgraded his rating for the stock to "market perform" from "underperform."

"CFW shares have underperformed the group by a fairly wide margin over the last week and year-to-date," said Mr. Bradford. "And as it becomes increasingly clear that the cycle will dive deeper and perhaps last longer than initially anticipated, the stock has become increasingly buffeted by the potential impacts of a few discrete potential events. These include whether or not it can restructure its debt, including perhaps substituting some form of secured instrument in lieu of some portion of its unsecured bonds; whether or not it will exercise the equity cure provision in its new debt agreements; whether or not it will need to raise additional funds to finance a second equity cure; ... will it consider selling idle assets; and will pricing accelerate to the upside if and when oil prices and fracturing demand recovers? Mind, these influencing factors are layered on top of all the standard equity investment risks and considerations, which most investors tend to find tricky enough to navigate on their own.

"We can acknowledge that the above avenues potentially accessible by Calfrac give rise to optionality in the equity, even if it is unquantifiable. We also acknowledge that management has demonstrated considerable creativity with its lending group and has been equally resolute at cutting its costs."

Mr. Braford said Calfrac is "cutting costs as much as anybody" in reaction to price declines and rig count drops, placing pressure on earnings in the first quarter. He is projected an earnings before interest, taxes, depreciation and amortization (EBITDA) loss of $3-million after previously estimating a gain of $2-million for the quarter.

Accordingly, he also lowered his full-year EBITDA estimate to $22-million from $31-million. His 2016 earnings per share projection remains a loss of $1.29.

He maintained a price target of $1. The consensus is $2.26.

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Raymond James analyst Kurt Molnar downgraded Boulder Energy Ltd. (BXO-T) to "market perform" from "outperform" after it revealed an agreement to take the company private.

On Wednesday, Boulder announced it has agreed to be acquired by ARC Financial Corp. in a deal worth $268-million.

"To be frank, we think this is a very appealing asset in the Canadian basin when it comes to light oil opportunities with the potential for superior real returns on invested capital even at modest oil prices, so we would emotionally like to say that shareholders should think twice before tendering. But with that emotional response noted, we also highlight that the cash bid is precisely in-line with our sum of parts valuation for a bid coming in the current oil price context. In that context, and assuming there are no surprises in year-end reporting, then we would expect this transaction to successfully close. We are therefore recommending that investors tender to the offer."

He maintained a target price of $2.60 per share, a cent more than ARC's proposed offer. The analyst consensus is $3.16.

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In other analyst actions:

American Water Works Co Inc (AWK-N) was downgraded to "neutral" from "buy" at Janney Montgomery by equity analyst Michael Gaugler. The 12-month target price is $66 (U.S.) per share.

Baidu Inc (BIDU-Q) was raised to "buy" from "hold" at Summit Research by equity analyst Henry Guo. The 12-month target price is $195 (U.S.) per share. It was raised to "hold" from "underperform" at Daiwa Securities by equity analyst John Choi with a target price of $160 per share.

Colgate-Palmolive Co (CL-N) was downgraded to "neutral" from "buy" at Sterne Agee CRT by equity analyst April Scee.

Clorox Co (CLX-N) was downgraded to "neutral" from "buy" at Sterne Agee CRT by equity analyst April Scee.

EMCOR Group Inc (EME-N) was downgraded to "neutral" from "buy" at DA Davidson by equity analyst John Rogers. The 12-month target price is $50 (U.S.) per share.

Goldcorp Inc (GG-N) was downgraded to "hold" from "buy" at TD Securities by equity analyst Greg Barnes. The 12-month target price is $15.50 (U.S.) per share.

Honda Motor Co Ltd (HMC-N) was raised to "buy" from "hold" at Jefferies by equity analyst Takaki Nakanishi. The target price is $33.04 (U.S.) per share.

Health Net Inc (HNT-N) was downgraded to "neutral" from "buy" at Sterne Agee CRT by equity analyst Brian Wright.

Kraft Heinz Co (KHC-Q) was raised to "overweight" from "neutral" at JPMorgan by equity analyst Ken Goldman. The target price is $85 (U.S.) per share.

Coca-Cola Co (KO-N) was downgraded to "neutral" from "buy" at Sterne Agee CRT by equity analyst April Scee.

Northland Power Inc (NPI-T) was raised to "strong buy" from "buy" at Industrial Alliance by equity analyst Jeremy Rosenfield. The 12-month target price is $22 (Canadian) per share.

PepsiCo Inc (PEP-N) was downgraded to "neutral" from "buy" at Sterne Agee CRT by equity analyst April Scee.

Spirit Airlines Inc (SAVE-Q) was raised to "outperform" from "market perform" at Raymond James by equity analyst Savanthi Syth. The 12-month target price is $60 (U.S.) per share.

Trican Well Service Ltd (TCW-T) was downgraded to "market perform" from "outperform" at FirstEnergy Capital by equity analyst Ian Gillies. The 12-month target price is $1.75 (Canadian) per share.

Westar Energy Inc (WR-N) was downgraded to "market perform" from "outperform" at Wells Fargo by equity analyst Sarah Akers.

With files from Bloomberg News