Inside the Market's roundup of some of today's key analyst actions
A management change at Viacom Inc. (VIAB-Q) now appears inevitable, said RBC Dominion Securities analyst Steven Cahall.
In reaction to the potential change, which he saw as an "overhang" for the stock, Mr. Cahall upgraded his rating for the U.S. entertainment content company to "sector perform" from "underperform," while noting "earnings risk and strategic unknowns constrain the probability of a bull-case turnaround."
"When we initiated coverage on Viacom with an underperform rating, we felt that strategic and earnings risks existed, and embattled management was unlikely to change due to the controlling interest of National Amusements (NAI)," said Mr. Cahall. "A lot has changed on the management front, and [Thursday] night NAI moved to oust five Viacom board members including Philippe Dauman, which we believe paves the way for his eventual removal. Coming change to Viacom's management removes a major overhang, so we're increasing our target P/E [price-to-earnings] multiple from 6.6x (times) to 8.8x 2016/17 estimates."
The analyst said the company's future leaders face numerous challenges immediately, including depressed ratings, the possibility of affiliate fee growth guidance being at risk and the need for cash to delever.
"And over the longer term, Viacom still faces the possibility of being left behind as media content goes to direct to consumer, so we believe a discount to peers is warranted, for now," he said. "While Viacom may get a pass on weak results for the next few quarters, we don't think it can break out from current levels until a credible turnaround story is in place."
Mr. Cahall added: "The stock has now run to price in better management, but we see limited opportunities to unlock value in the near term. A Paramount stake sale is already in the price and we don't think there are many potential buyers for the whole company or other assets. The longer-term case is perhaps more compelling but will require new management, shuttering of non-core networks, and more creative risk to improve content relevancy. Such a case may appeal to deep value investors, but we see no need to rush in."
Based on his new target P/E multiple, Mr. Cahall's target price for the stock rose to $45 (U.S.) from $34. The analyst consensus price target is $46.93, according to Thomson Reuters.
"The final possibility for Viacom is a recombination with CBS, and investors are likely in favour of Les Moonves getting his hands on the Viacom assets," he said. "News of a recombo would make us more constructive on Viacom, but we have yet to see any evidence that this is in the NAI strategy. Until recently, we think CBS shunned any comparison to a "sister company," so we'll be watching for any evidence that this has changed. Until such time, we consider it a low-probability event, so our price target supports a sector perform rating."
RBC Dominion Securities analyst Amit Daryanani lowered his price target for Apple Inc. (AAPL-Q) after "modestly" adjusting his iPhone forecasts.
Mr. Daryanani extended his replacement cycle extension assumptions to 31 months from 28 months through the iPhone 7 cycle. He added a higher mix of contributions from the iPhone SE, which led to a lower average selling point (ASP) assumption. As well, he expressed "broader conservatism" around the iPhone 7 cycle.
"Fundamentally, we think the stock is attractively valued and gross margins should recover over the next 1–2 quarters and provide much needed tailwind to EPS," the analyst said. "While we continue to think iPhone success and growth should be judged on a two-year cadence (versus one year), the iPhone 7/7s cycle could be different from history — iPhone 7s could be a more attractive and higher-growth product than iPhone 7. Finally, we note that our model doesn't assume 'iPhone 7 pro' — the high-end premium iPhone model that could be launched later this year. While a 'pro' may not alter unit expectations, it could help to drive ASP's higher versus our model."
Mr. Daryanani added: "We are publishing our iPhone installed base model, which suggests to us that the current active installed base is around 470 million iPhones, with an average replacement cycle of 28 months. Furthermore, we note that replacement cycles have been getting extended rather consistently across the board, which in a flattish smartphone market could create revenue headwinds. For the 2016 calendar year, we assume that 210 million iPhones will be shipped, implying units decline of 9 per cent year over year and that the replacement cycle will be 29 months (versus 27 in CY15), and, furthermore, we think the replacement cycle will extend to 31 months through the 2017 calendar year (iPhone 7 cycle)."
He lowered his fourth-quarter 2016 revenue and earnings per share forecasts to $47.7-billion (U.S.) and $1.86, respectively, from $50.9-billion and $1.99. The consensus is $47-billion and $1.66. His full-year estimates now stand at $215-billion and $8.47 versus the Street at $219-billion and $8.46.
Maintaining his "outperform" rating for the stock, he lowered his target to $115 from $120. Consensus is $124.93.
"We continue to believe AAPL is poised for a near-term rally but within the range of $90–115," he said.
"We believe AAPL's current stock price creates an attractive entry point for investors to benefit from AAPL's ability to sustain revenue and EPS growth through FY16. We believe multiple catalysts remain as the company benefits from: (1) iPhone 6 ramps; (2) iPad refresh cycle; (3) potential iTV launch or other major product lines; and (4) improvements in capital allocation policy. We believe the fundamental reality remains that AAPL's valuation is materially sub-par to what we anticipate is its long-term revenue and EPS potential."
Credit Suisse analyst Kevin Choquette lowered his forecasts for Canadian Western Bank (CWB-T) in response to its common equity raise.
On Thursday, the bank announced a raise of $125-million, with the expectation of issuing 5.87 million common shares at a price of $24.50 each. Citing strong demand, it was later increased to $150-million. The funds are to be used to strengthen its capital position and fund future growth.
Prior to the $25-million increase, Mr. Choquette lowered his 2016 and 2017 earnings per share forecasts to $2.26 and $2.47, respectively, from $2.30 and $2.65.
Maintaining his "underperform" rating, he dropped his target by a loonie to $27. The analyst average is $25.57, according to Bloomberg.
BMO Nesbitt Burns analyst John Kim initiated coverage of Monogram Residential Trust Inc. (MORE-N) with an "outperform" rating.
Mr. Kim said the Texas-based integrated self-managed real estate investment trust has "by far" the youngest portfolio in the multifamily sector, with an average age of 5.9 years compared to 20.9 for its peers. That results in a lower maintenance capex (of 4.3 per cent of annual rent). It also has the highest premium to market rents at 27 per cent versus 15 per cent.
"MORE trades at a 27-per-cent discount to our forward NAV [net asset value] estimate, the steepest among its peers, despite its attractive growth," he said. "We believe this is primarily attributable to its size, leverage and development exposure. The latter two go hand-in-hand, in our view.
"As MORE completes and stabilizes its $600-million pipeline, we estimate its net debt / EBITDA declines to 7.5x from 9.8x currently, with equity raisings likely to reduce leverage further. New supply is an increasing risk in some of MORE's markets (Miami, San Francisco, District of Columbia), and we estimate its new-jobs-to-supply ratio at a below-average 5.1x. However, MORE has a strong track record of development; averaging 7.1-per-cent stabilized yields since its listing as a public REIT, and two pension fund JV relationships that mitigate funding risks."
Mr. Kim projects funds from operations per share growth of 8.1 per cent in 2016 and 18.1 per cent in 2017, citing completion and stabilization of its development pipeline.
He set a $12.50 target. Consensus is $11.33.
"We believe MORE's platform will benefit from positive apartment fundamentals and a premium portfolio in its markets," he said.
In other analyst actions:
Smith & Wesson Holding Corp. (SWHC-Q) was upgraded to "outperform" from "market perform" by Cowen analyst Cai Von Rumohr with a target of $28 (U.S.), down from $29. It was also raised to "buy" from "hold" by Craig-Hallum analyst Steven Dyer with a target of $28 (from $26). The average is $29.
Philip Morris International Inc. (PM-N) was upgraded to "overweight" from "neutral" by JPMorgan analyst Celine Pannuti with a target of $112 (U.S.), rising from $98. The average is $103.75.
Phillips 66 (PSK-N) was cut to "equalweight" from "overweight" by Morgan Stanley analyst J. Evan Calio with a target of $90 (U.S.), down from $105. The average is $89.77.
ONEOK Inc. (OKE-N) was downgraded to "hold" from "buy" by Argus Research analyst Stephen Biggar with a $34 (U.S.) target (unchanged). The average is $39.46.
Oppenheimer analyst Glenn Greene initiated coverage of PayPal Holdings Inc. (PYPL-Q) with an "outperform" rating and $43 (U.S.) target. The average is $44.19.