Friday's analyst upgrades and downgrades

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

Raymond James analyst Ben Cherniavsky said he is not "inclined to 'chase' " stock of CAE Inc. (CAE-T, CAE-N) given its "rich" multiple.

"It was bound to happen sooner or later. [Thursday], CAE (finally!) delivered financial results that elicited a positive reaction from the Street," said Mr. Cherniavksy in the wake of the release of the company's fourth-quarter 2016 results.

CAE, which provides training for the civil aviation, defence and security and health-care markets, reported earnings per share of 27 cents, beating the 25-cent projection of both the analyst and the Street. The stock jumped 3.7 per cent on the news, which Mr. Cherniavsky noted marked "the first time in over two years that the market has not reacted negatively to CAE's quarterly report."

"We believe there were several components of CAE's F4Q16 results that investors liked beyond a simple two-cent EPS beat," he said. "[Year-over-year] revenue growth of 14 per cent was solid and handily exceeded our forecasts. Utilization rates and margins also improved in the civil segment, which has been a long overdue achievement .... And total backlog increased 34 per cent year over year to $3.294-billion."

"We are as pleased as anyone to see CAE finally get some traction with its results. But one quarter doesn't make a trend. Furthermore, we are mindful that [foreign exchange] provided a helpful tailwind to these results (accounting for less than 33 per cent of revenue growth reported in F4Q16). We also note that, despite the progress outlined above, there were still some disappointments for us to consider: (i) free cash flow was (mildly) negative in the quarter; (ii) ROIC [return on invested capital] was flat year over year despite improved civil utilization rates; (iii) Military margins were down both for the quarter and the year; (iv) Military backlog adjusted for acquisitions was flat y/y; and (v) Health care EBIT and EBIT margins declined from F4Q15 and fell short of our forecasts."

Mr. Cherniavsky raised his EPS projection for the 2017 fiscal year to 95 cents from 90 cents. He introduced a 2018 projection of $1.06.

Maintaining his "market perform" rating, he raised his target price to $16.50 from $15. The analyst average is $17.15, according to Bloomberg.

"We aren't looking for things not to like about CAE's performance," the analyst said. "We just want to keep F4Q16's reported progress in the context of some longer-term disappointments and frustrations that have been lingering over this story for a long time ... In short, there is still more progress that needs to be reported before we will be convinced that the stock warrants much more than the rich valuation it already commands."

Elsewhere, BMO Nesbitt Burns analyst Fadi Chamoun downgraded the stock to "market perform" from "outperform" alongside a target drop to $17 from $16.

"We estimate that nearly 60 per cent of CAE's revenues are recurring under long-term contracts/relationships or from sources that are highly predictable with limited cyclical exposure," he said. "We believe that the company continues to have headroom to grow into the existing installed base of civil assets underpinning additional upside in operating margins and ROCE [return on capital employed]. The EPS growth profile of CAE is in the high single digits. The ROIC is likely to be sustainable in the low-double-digit range.

"Using several valuation methods, we justify a valuation around $17.00 for CAE, which equates to 8.0 times forward (i.e., 2018 fiscal year estimated) EBITDA and 17 times P/E. With upside to our valuation of only 6 per cent, we are gently lowering our rating ... but continue to monitor the stock for the next entry opportunity."

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The $13-billion merger of Technip SA and FMC Technologies Inc. (FTI-N) changes the dynamic for the oil-services and equipment industry and increases the possibility of further M&A activity, said RBC Dominion Securities analyst Kurt Hallead.

Noting that potential outweighs other industry headwinds, he upgraded Oceaneering International Inc. (OII-N) to "sector perform" from "underperform."

A key rationale for the move was the fact that shares of Oceaneering International, a Houston-based oilfield provider of engineered services and products to the offshore oil and gas industry, have underperformed the VanEck Vectors Oil Services ETF (OIH-N) by 2 per cent since early February.

Though he said the company's cash flow and balance sheet metrics "look solid," Mr. Hallead said industry headwinds remain "fierce."

"We expect the offshore rig count to decline through 2016, which should keep pressure on ROV [remotely opertating underwater vehicle] utilization and pricing," the analyst said. "On the subsea side, operators continue to be selective with spending, which will likely impact the products and projects segment."

Mr. Hallead raised his target for the stock to $36 (U.S.) from $30. Consensus is $34.98, according to Thomson Reuters.

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The second quarter is shaping up to be the "bottom of the bottom" for North American railroad companies, said Credit Suisse analyst Allison Landry in a research note.

"So far in 2Q16, rail carloads have been tracking below our estimates by 3 per cent on average," she said. "However, our 2Q16 EPS forecasts came down by just 0.5 per cent, as a result of better mix and continued execution on the cost front. We also point out that the volume declines have stabilized (albeit at low levels) over the past 6 weeks."

"The shortfall is almost entirely driven by intermodal – as high retail inventories and excess TL supply/contract rate weakness have finally caught up with what has been an otherwise relative bright spot within rail traffic. Following a 1-per-cent increase in Q1, intermodal volumes are tracking down 7 per cent year over year so far in Q2. In fact, we estimate that weakness in intermodal this quarter has accounted for nearly 80 per cent of the sequential step down in year-over-year volumes relative to 1Q16."

Ms. Landry called volumes "disappointing" but said the quarter is likely a "trough" in earnings in what she sees as a "trough year." She added stocks have kept pace with the weaker volume results.

"While the market initially shrugged off the rails' effective second-quarter guide downs given the impressive cost performance in Q1, the stocks have since been punished," she said. "Indeed, the Class I rail index has sold off 9 per cent from the high at the end of April, underperforming the S&P by 5 per cent. While the stocks could come under further pressure to the extent that consensus numbers come down or year-over-year carload declines worsen from here, we think the market could be under-appreciating the partially-offsetting mix dynamic and continued cost controls. This, along with the notion that rail earnings are at a trough, could lend itself to a potentially attractive entry point. Our favourite names are UNP [Union Pacific Corp.] , CP [Canadian Pacific Railway] and NSC [Norfolk Southern Corp.]."

Ms. Landry made the following target changes to stocks in the sector:

• Canadian National Railway Co. (CNI-N, CNR-T) to $64 (U.S.) from $67 with a “neutral” rating. Consensus is $79.47.
• Canadian Pacific Railway Ltd. (CP-N, CP-T) to $163 from $169 with a “outperform” rating. Consensus is $196.89.
• Kansas City Southern (KSU-N) to $96 from $97 with a “neutral” rating. Consensus is $99.06.

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Despite raising his target price for shares of Wal Mart Stores Inc. (WMT-N), BMO Nesbitt Burns analyst Wayne Hood maintained his "underperform" rating following better-than-expected first-quarter results.

The U.S. retail giant reported earnings per share of 98 cents (U.S.), topping Mr. Hood's 92-cent projection as well as the consensus of 88 cents and guidance of 80-97 cents. He pointed to U.S. same-store sales growth of 1 per cent, ahead of his 0.5-per-cent estimate, on 1.5-per-cent growth in traffic and a 0.5-per-cent decline in average revenue per unit (AUR).

U.S. gross margin rate rose 0.44 per cent "on improved margin rates in grocery, health and wellness, lower shrinkage and transportation costs, partially offset by lower margin rates in general merchandise from markdowns to further align inventory."

In reaction to the results, Mr. Hood raised his second-quarter EPS estimate to $1 from 96 cents. His full-year 2016 and 2017 EPS projections moved to $4.22 and $4.60, respectively.

"The initiatives management has underway in the U.S. to improve customer experience scores and sustain traffic growth are having a positive impact giving us added confidence in our sales forecast," the analyst said. "Further, we see marked improvement in the company's working capital and free cash flow (up $2.2-billion year over year) as stores reduce backroom inventory.

He raised his target price to $60 from $55. The analyst average is $67.96.

In explaining why his rating did not change, Mr. Hood said: "We maintain the underperform rating for the following reasons: 1) the company continues to be challenged in U.S. grocery (56 per cent of sales) where SSS (same-store-sales) were down LSD [low single digits] (60-basis-point headwind from deflation) against last year's flat results and +LSD [positive high-single-digit] growth in 4Q15 despite sequential improvement in execution and additional labour investments; 2) accelerating e-commerce growth (up 7.0 per cent) remains challenging despite spend to support growth; 3) Sam's Club SSS growth remains challenging; and 4) management now looks to accelerate price investments in a deliberate way that could lead to less upside to margin than we have seen over the last two quarters."

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In other analyst actions:

Aflac Inc. (AFL-N) was downgraded to "market perform" from "outperform" at Keefe Bruyette by equity analyst Ryan Krueger. The 12-month target price is $73 (U.S.) per share.

Apollo Investment Corp. (AINV-Q) was downgraded to "hold" from "buy" at BB&T Capital by equity analyst Vernon Plack. It was downgraded to "market perform" from "outperform" at Keefe Bruyette by equity analyst Ryan Lynch with a 12-month target price of $5.75 (U.S.) per share.

Applied Materials Inc. (AMAT-Q) was raised to "buy" from "neutral" at B. Riley by equity analyst Craig Ellis. The 12-month target price is $27 (U.S.) per share.

Avery Dennison Corp. (AVY-N) was downgraded to "neutral" from "overweight" at JPMorgan by equity analyst Jeffrey Zekauskas. The nine-month target price is $78 (U.S.) per share.

Blackbird Energy Inc. (BBI-T) was raised to "buy" from "speculative buy" at Cormark Securities by equity analyst Garett Ursu. The 12-month target price is 35 cents (Canadian) per share.

B/E Aerospace Inc. (BEAV-Q) was downgraded to "neutral" from "overweight" at JPMorgan by equity analyst Seth Seifman. The 12-month target price is $50 (U.S.) per share.

Intercontinental Exchange Inc. (ICE-N) was rated new "buy" at Sterne Agee CRT by equity analyst Jason Weaver. The 12-month target price is $300 (U.S.) per share.

Nasdaq Inc. (NDAQ-Q) was rated new "buy" at Sterne Agee CRT by equity analyst Jason Weaver. The 12-month target price is $76 (U.S.) per share.

With files from Bloomberg News