Friday's analyst upgrades and downgrades

Share

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

Though he said Canadian Natural Resources Ltd. (CNQ-T) is "taking risk off the table" with its revised 2016 guidance, Desjardins Securities analyst Justin Bouchard said the stock is currently trading at a "fair value" level.

Accordingly, he downgraded his rating to "hold" from "buy."

In a 2016 update released alongside its fourth-quarter results, the company set its capital expenditure budget at $3.5-$3.9-billion, down $1-billion from its preliminary guidance set in November.

"The lower capex spend is highlighted by lower sustaining capital at the thermal heavy oil projects (CSS and SAGD operations) and by lower spending in the conventional portfolio," said Mr. Bouchard. "As a result of lower spending in the conventional North American portfolio, CNQ's production guidance for 2016 is set at 809-868-million barrels of oil equivalent per day, the midpoint of which is 2 per cent lower than actual production in 2015. Meanwhile, our 2016 production estimate falls to 835 million boe/d (from 840 million boe/d).

"In 2017 and 2018, predicated on a scenario of a slower recovery in oil prices ($45 (U.S.)/barrels  WTI in 2017 and 2018), CNQ has guided to a level of capex spend that will keep production roughly flat through to the end of 2018 ... The Phase 2b and Phase 3 expansions of Horizon will continue to add production, implying declining conventional production within the North American oil and gas portfolio. Management stated that paying down debt is the first priority for any excess CFO after 'sustaining' capex and the dividend."

Under the assumption conventional production may decline through the end of 2018, Mr. Bouchard said the CNQ's balance sheets "look stretched in a 'low for longer' oil price environment," particularly given the "large" project costs involved in its Horizon project through the next two years.

"From our perspective, there were five major levers CNQ could pull to balance sources and uses of cash — cutting the sacrosanct dividend, raising equity, cutting capex, selling assets or increasing debt levels," the analyst said. "On yesterday's conference call, the company was adamant that cutting the dividend and raising equity were simply not in the cards. The company recently sold a significant portion of its royalty assets — so that leaves capex and debt. In a perfect world, CNQ would have preferred to leverage the balance sheet and ride out the storm but, in a plausible scenario where oil prices stay lower for longer, debt levels would have simply grown too quickly. As a result, the only remaining lever — cutting capex — is required."

He added: "The details of CNQ's updated 2016 budget and guidance are unequivocally positive. Most importantly, the reduction in 2016 guidance for capex and opex (in addition to the substantial amount of income tax recovery over the year) increases our cash flow per share (CFPS) estimates, and reduces the imbalance between CNQ's cash inflows and outflows. Based on our price deck ($35 (U.S.)/bbl WTI), we now estimate the cash imbalance stands at a fairly manageable $1.3-billion for 2016, based on estimates for cash flow from operating activities (CFO) at $3.5-billion less capex at $3.8-billion, and dividend payments of $1.0-billion. That reduces the need to issue equity, cut the dividend or run up significant debt."

Noting the stock is currently at a "fair value" level, he raised his price target to $35 from $32. The analyst average is $35.82, according to Bloomberg.

"We note that using a mid-cycle multiple, we estimate that our $35 target implies $65 (U.S.)/bbl WTI," said Mr. Bouchard. "And, in order to justify a C$40 share price (which is only a 22-per-cent return from current levels), the oil price (or expectation of oil price) needs to double from current levels to $70/bbl WTI. As a result, we are moving to a Hold rating."

Elsewhere, J.P. Morgan analyst Phil Gresh upgraded the stock to "overweight" from "neutral" and raised his target to $40 from $28.

=====

Desjardins Securities analyst Michael Markidis said he sees limited upside potential for Granite Real Estate Investment Trust (GRT.UN-T) until a permanent chief executive officer is appointed and progress is made on the "substantial" number of leases expiring in 2017.

He downgraded his rating to "hold" from "buy."

On Wednesday, the REIT released fourth-quarter results that met expectations, including funds from operations per unit of 84 cents which were in line with Mr. Markidis's projections. However, the release of the results of a strategic review brought a negative reaction.

"A host of alternatives were evaluated throughout the nearly 10-month period, including transformational acquisitions, payment of a special dividend, launching a substantial issuer bid and asset sales," the analyst said. "Ultimately, GRT entered into exclusive negotiations with a private equity fund for the entire business. Although due diligence was nearing completion, the potential deal was abandoned due to dislocation in the credit markets, which negatively impacted the prospective buyer's ability to finance the transaction. On the back of the news, the stock sold off by more than 6 per cent [Thursday] on higher-than-average volume."

He added: "Over the past 4-plus years, GRT has expanded its asset base, optimized its capital structure (slightly higher leverage, lower-cost debt at an extended term and growth in distributions) and reduced its concentration with Magna (to 79 per cent from 97 per cent). Going forward, the board of trustees has elected to continue on the same course, employing a patient and opportunistic approach to acquisitions and development. From a capital allocation perspective, Europe and the US remain a focus. Interestingly, management has noted that opportunities in Canada may begin to surface. This represents a [steep] change from past commentary, which cited the acquisition environment in Canada as being too expensive."

Mr. Markidis said "locking down" cash flow for 2017 is a key priority going forward, noting management is focused on 4.6 million square feet of leases expiring in 2017. He also expects the sale of non-core assets to continue, though he noted the company's balance sheet has "tremendous firepower" and the potential for acquisitions could provide upside potential.

He lowered his 12-month target price to $41 from $44. The average is $41.70.

"To be clear, we had not placed a high degree of probability on an en-bloc sale of the company," he said. "Moreover, we believe the strategic process undertaken by management and the board was fair to unitholders. The stock screens attractively on a valuation basis (2016 adjusted funds from operation multiple of 11 times, enterprise value/EBITDA multiple of 11.5x), particularly when considering GRT's low financial leverage. With this being said, we are moving to a hold rating from buy previously. We believe upside potential is limited until investors gain greater clarity with respect to permanent leadership of the company and/or additional progress on the special-purpose leases expiring in 2017 is made."

=====

There is "plenty of value" in the stock of Guardian Capital Group Ltd. (GCG.A-T), according to Canaccord Genuity analyst Scott Chan.

He upgraded his rating for the diversified financial services company to "buy" from "hold."

On Feb. 24, Guardian reported quarterly adjusted earnings per share of 28 cents, meeting Mr. Chan's expectations. He noted the result excluded the company's net gains from securities of $9.7-million, reflecting the sale of 204,000 shares of Bank of Montreal in the fourth quarter. Net quarterly revenue of $34.4-million topped his projection on $32.5-million and represented an increase of 9.1 per cent year over year.

"As of Q4/15, Guardian reported assets under management (AUM) of $24.3-million, down 3 per cent year over year (an increase of 1 per cent quarter over quarter)," the analyst said. "The AUM decrease was mainly due to flattish market performance (i.e. weighed down by high Canadian equity exposure) and annual net outflows of $775-million. The net outflows mainly reflected net redemptions from GCG's domestic sub-advisory mandates slightly offset by net inflows into their non-domestic strategies. On the positive side, Guardian's Systematic Global Equity strategy AUM increased 38 per cent year over year to $3.3-billion. The annual net redemptions were a reversal from the prior three years, when the firm had average net sales of greater than $1.5-billion per year. Despite recent redemption trend, the relative performance of funds are good versus their respective benchmarks. We are more constructive on net flows in 2016 due to: (1) continued growth in Systematic Global Equity; (2) recent optimism around Canadian equities; (3) new product launches and platforms (i.e. Traditional Global Equity and EM); and (4) conversion of assets under administration (AUA) to AUM (i.e. Guardian AUM had $453-million from AUA in 2015 versus $398-million in prior year, up 14 per cent year over year."

Mr. Chan raised his target price for the stock to $20 from $18. The analyst average price target is $20.50, according to Bloomberg.

"The new implied return of 17.8 per cent supports our buy rating," he said. "Guardian is characterized as a deep value stock, with its corporate investments (majority in BMO shares) accounting for [almost] 100 per cent of its current market cap. At this level, investors are essentially getting Guardian's wealth management business for free. 2015 was a good year for Guardian (operating earnings up 13 per cent year over year), despite headwinds from its large Canadian equity exposure (greater than 50 per cent of AUM) and net operating losses ($3.5-million versus $1.5-million in 2014) from early-stage growth platforms (U.K. and real estate). We are optimistic on Canadian equities and Guardian reverting to positive net sales this year. In addition, we are supportive of the firm continuing to dispose BMO shares to support growth and seed new product launches."

=====

Torc Oil & Gas Ltd. (TOG-T) ended 2015 on a "high note," said BMO Nesbitt Burns analyst Ray Kwan.

On  Thursday, the Calgary-based energy company reported fourth-quarter cash flow per share of 21 cents, ahead of Mr. Kwan's projection of 18 cents and the 19-cent consensus. Torc averaged 18,108 barrels of oil equivalent per day, also beating the forecasts of both Mr. Kwan (17,890 boe/d) and the consensus (17,881 boe/d).

Mr. Kwan called the results "positive," adding: "We also think the company's 2015 drill-bit capital efficiencies will be seen as a positive and should rank better than the oil-weighted peer group average."

He maintained his "outperform" rating for the stock while raising his target price to $8 from $6.50. The average is $7.82.

"TORC is well positioned to thrive through this commodity downturn and outperform in a recovery scenario, in our view," the analyst said. "In addition, we believe TORC is one of the few producers capable of benefiting from any M&A opportunities, given the company's differentiated access to capital via the Canadian Pension Plan (CPP). TORC remains one of our top picks in the space."

=====

Raymond James analyst Kurt Molnar said there were no surprised in the full-year operating and financial results for Peyto Exploration and Development Corp. (PEY-T).

"The Company continues to drive a focus towards reducing both cash and capital costs despite the fact that it is already probably the lowest-cost business model in the industry," he said. "In fact, we think most investors have been surprised that further cost efficiencies were possible given how low-cost-base the business model already was."

Mr. Molnar added: "The only real 'news' in the year-end context was a reduction in 2016 spending guidance from a range of $600-$650-million to a range of $500-$550-million, where some of the reduction is reflecting more capital efficiency gains and some of the reduction was driven by lower returns on capital coming from lower natural gas prices. In light of the lower capital spending, we reduced our production forecast by less than 1 per cent (1,000 barrels of oil equivalent per day), while the reserve growth moderates very modestly at the same time. The low cost base of the business model allows it to tolerate the weak gas prices and still generate relatively strong returns on invested capital, even during this timeframe of trough gas prices."

The analyst did lower his 2016 earnings per share forecast to $3.52 from $3.62, while his revenues projection fell to $741-million from $769-million.

Maintaining an "outperform" rating for the stock, he lowered his target price to $36.50 from $37.25. The analyst average is $34.22.

=====

In other analyst actions:

Black Diamond Group Ltd (BDI-T) was raised to "buy" from "speculative buy" at Acumen Capital by equity analyst Brian Pow. The 12-month target price is $8.30 (Canadian) per share.

Cal-Maine Foods Inc (CALM-Q) was downgraded to "underweight" from "hold" at BB&T Capital by equity analyst Brett Hundley.

Embraer SA (ERJ-N) was downgraded to "market perform" from "outperform" at Cowen by equity analyst Cai Von Rumohr. The 12-month target price is $29 (U.S.) per share.

Hewlett Packard Enterprise Co (HPE-N) was raised to "outperform" from "market perform" at Bernstein by equity analyst Toni Sacconaghi. The 12-month target price is $19 (U.S.) per share.

H&R Block Inc (HRB-N) was downgraded to "market perform" from "outperform" at BMO Capital Markets by equity analyst Jeffrey Silber. The target price is $32 (U.S.) per share.

JC Penney Co Inc (JCP-N) was raised to "buy" from "hold" at Evercore ISI by equity analyst Omar Saad. The 12-month target price is $15 (U.S.) per share.

Kroger Co (KR-N) was downgraded to "underperform" from "neutral" at Macquarie by equity analyst Robert Summers. The 12-month target price is $27 (U.S.) per share.

Lundin Gold Inc (LUG-T) was rated new "speculative buy" at Cormark Securities by equity analyst Tyron Breytenbach. The 12-month target price is $6.50 (Canadian) per share.

Newalta Corp (NAL-T) was downgraded to "sector perform" from "outperform" at Alta Corp Capital by equity analyst Mark Westby. The 12-month target price is $3 (Canadian) per share.

Nimble Storage Inc (NMBL-N) was downgraded to "neutral" from "overweight" at JPMorgan by equity analyst Rod Hall. The 12-month target price is $8 (U.S.) per share.

Qlik Technologies Inc (QLIK-Q) was rated new "market perform" at BMO Capital Markets by equity analyst Keith Bachman. The target price is $26 (U.S.) per share.

Silver Standard Resources Inc (SSO-T) was rated new "buy" at Cormark Securities by equity analyst Graeme Jennings. The 12-month target price is $11 (Canadian) per share.

Tyson Foods Inc (TSN-N) was downgraded to "hold" from "buy" at BB&T Capital by equity analyst Brett Hundley.

With files from Bloomberg News