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Friday’s analyst upgrades and downgrades

The new bombardier aircraft CSseries is shown in Mirabel, Quebec as it is due to take off for the first time on September 16, 2013.

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

Though CAE Inc. (CAE-T, CAE-N) had a "solid" second quarter, its share price has caught up to its improved performance, according to RBC Dominion Securities analyst Steve Arthur.

Accordingly, he downgraded his rating for the stock to "sector perform" from "outperform."

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"CAE posted another solid quarter, continuing a recent trend and reflecting its dominant market position, recurring business model, and solid execution," said Mr. Arthur. "We forecast continued revenue/margin improvement, and on these assumptions we still see the shares trading near record multiples and ahead of peers."

On Thursday, CAE reported earnings per share, adjusted for one-time items, of 21 cents, in line with Mr. Arthur's estimates. Revenue of $636-million fell below his projection ($665-million) and the consensus expectation ($660-million). Operating profit of $54.2-million also missed expectations ($61-million and $60-million, respectively).

"CAE has executed well over the past several quarters, leveraging its strong business model and market leadership position," said Mr. Arthur." Our downgrade is not a reflection of the business fundamentals (which are solid), but of a share price now up [approximately] 30 per cent year to date and approaching what we see as fair value. We continue to view CAE as a solid holding, but given a 3-per-cent implied return (including dividends) to our $20 one-year price target, we reduce our rating … Looking further out, we continue to see scenarios into the mid-$20s as the business builds."

Mr. Arthur raised his target price for the stock by a loonie to $20. The analyst consensus price target is $18.91, according to Thomson Reuters.

Elsewhere, Desjardins Securities analyst Benoit Poirier raised his target to $22 from $21 with an unchanged "buy" rating.

He said: "CAE reported decent 2Q results, as solid margins offset soft revenues. CAE also reiterated its positive outlook for FY17, with revenue and operating income growth across all sectors. Overall, we maintain our positive stance on CAE in light of the record backlog and the potential for margin improvement and cash-deployment opportunities. We also like CAE for its leading position in a market supported by strong industry fundamentals, which should drive further multiple expansion."

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BMO Nesbitt Burns analyst Peter Sklar downgraded Cara Operations Ltd. (CARA-T), expressing concern over "soft" comps.

Calling its third-quarter results, released Wednesday after market close, "negative," Mr. Sklar moved his rating to "market perform" from "outperform."

"In Q3/16, system-wide SRS [same restaurant sales] growth declined 2.3 per cent year over year, notably below our forecast for a decline of 0.3 per cent. Management continued to attribute the negative SRS trend to softness in Western Canada and also indicated that in Q3/16, a scale-back of print coupons in anticipation of a Canada Post strike negatively impacted traffic, and promotions during the quarter were less compelling than year-ago."

He added: "The number of franchised restaurants benefitting from contractual royalty rates below 5.0 per cent totalled 99 at the end of Q3/16, up from 92 at the end of Q2/16. Management noted that the ongoing softness in Western Canada may require continued franchisee assistance, which could slow any improvements in Franchise segment EBITDA 'over the short term.' However, the number of franchised restaurants receiving temporary assistance totalled 58 at the end of Q3/16, down from 68 at the end of Q2/16."

Though he said the integration of the St-Hubert chain remains on track and the roll-out of Swiss Chalet products through its grocery channel appear set for the middle of 2017, Mr. Sklar emphasized it was the second consecutive quarter of SRS growth declines.

"We are concerned that certain Cara banners are consistently underperforming, particularly given that Tim Hortons Canada reported 1.7-per-cent SRS growth in Q3/16 and Boston Pizza reported SRS decline of 0.5 per cent in Q3/16," he said. "Of further note, Boston Pizza has more exposure to Western Canada than Cara. In addition, Boston Pizza previously indicated that strength in Ontario has helped mitigate a large part of the softness in Alberta, which should have been a tailwind for Cara as well given that its geographic exposure is heavily weighted to Ontario."

He lowered his target for the stock to $28 from $34. The analyst consensus is $33.19.

"We consider SRS to be perhaps the most critical indicator of stock performance in the restaurant sector, as it is a measure of the long-term financial health of the franchise network," he said.

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In the wake of a recent pullback in price, Raymond James analyst Ken Avalos upgraded Sienna Senior Living Inc. (SIA-T), citing "strong" organic and external growth.

On Wednesday, the Markham, Ont.-based company reported third-quarter funds from operations of 35 cents per share, up 14 per cent from a year ago and 3 cents ahead of both Mr. Avalos's projection and the consensus. Same-property net operating income rose 2.6 per cent.

"It was another solid quarter of impressive occupancy gains leading to strong organic growth. The RH portfolio is now stabilized so our expectation is that SPNOI will fall to more normalized levels in 2017 (3 per cent to 5 per cent)," said Mr. Avalos. "The Baltic acquisition is a nice additional source of growth and we expect more to come. With the recent pullback in shares, we recommend investors accumulate shares."

Mr. Avalos kept a target price of $17 per share. The analyst consensus is $17.81.

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"Sienna currently trades at a slight discount to net asset value (2 per cent) and 10.9 times and 10.6 times our 2016 and 2017 AFFO [adjusted funds from operations] estimates, compared to the Canadian healthcare index that trades at a 7-per-cent premium and 15.9 times and 15.2 times," he said. "The implied cap rate also appears attractive to us at 7.3-per-cent blended. We are upgrading Sienna to an outperform rating and our $17.00 target price is based on units trading at 11.5x our 2017 AFFO estimate, a discount to the peer set due to higher exposure to slower growth LTC [long-term care] homes."

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Exchange Income Corp.'s (EIF-T) "solid" third-quarter beat is a reminder that diversification matters and pays, said Raymond James analyst Steve Hansen.

He raised his rating for the stock to "outperform" from "market perform," citing the results as well as its "attractive future growth prospects, and our broader recognition of the firm's increasingly consistent performance/execution — a track record that warrants a bump in multiple, in our view."

On Wednesday, the Winnipeg-based company reported consolidated earnings before interest, taxes, depreciation and amortization of $60-million, up 11 per cent year over year and ahead of the projections of both the Street ($58.4-million) and Mr. Hansen ($57.5-million). He attributed the beat to a stronger-than-expected performance from its Aviation and Aerospace segment.

"Free cash flow increased 9 per cent year over year to $45.9-million, keeping EIF's payout ratio at a healthy 54 per cent (versus 46 per cent last year)," the analyst said. "Based upon these metrics and management's underlying confidence in its diversified business model, the company announced another dividend increase (up 4.5 per cent, $2.10 annualized), marking its 12th increase over the past 12 years (and 4th increase over the past 24 months)—an enviable track record that speaks for itself, in our view."

Mr. Hansen said the company's post-quarter $10.0-million acquisition of Florida-based Team J.A.S., a parts and maintenance repair services company, may appear small, however it is "highly strategic."

He said: "We see this transaction as highly strategic in that it: 1) brings new platform expertise into Regional One, thus enhancing its value proposition, and likely adding additional growth opportunities (including related turboprop platforms such as the Dash-8); and 2) it will allow Provincial Aerospace to internalize parts procurement for its own fleet of Twin Otters, building on EIF's drive to seek out strategic 'integration benefits' across its diversified platform."

The analyst increased his 2017 and 2018 earnings per share projections to $2.42 and $2.67, respectively, from $2.20 and $2.67.

He also raised his target price for the stock to $43 from $38. The analyst consensus is $39.55.

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Raymond James analyst Andrew Bradford upgraded Canadian Energy Services and Technology Corp. (CEU-T) following a "resounding" third-quarter beat.

Also referring to "excellent prospectivity for U.S. market share growth," he moved his rating to "strong buy" from "market perform."

On Thursday, the Calgary-based company reported earnings before interest, taxes, depreciation and amortization of $17-million, ahead of both the consensus projection of $10-million and Mr. Bradford's "more pessimistic" estimate of $8-million.

"What strikes us about CEU through a recovery is that it has multiple sources of upside potential beyond the usual rising field activity and pricing improvements that all service companies benefit from," said Mr. Bradford. "For instance, (a) its disproportionately high exposure in the Permian should drive a measure of higher-than-average growth as Permian growth outpaces the other basins, (b) its deep penetration with key producers could drive market share growth within the Permian, accentuating its overall market share growth, (c) a return to positive margins for fracking companies could open the door wider for its frack chemicals business in the U.S., and (d) the potential for novel products and technologies to attract new business and enable deeper penetration with its existing customers – products like high brine polymers that enable slickwater fracturing with produced or flowback water, and MMH fluid systems that facilitate improved well control without near wellbore damage.

"We expect the market's reaction will be swift and upward [Friday] morning – perhaps more than 10 per cent. We'd still suggest buying at those prices."

In reaction to the results, Mr. Bradford raised his 2017 and 2018 EBITDA projections to $133-million and $189-million, respectively, from $106-million and $163-million.

"Our higher EBITDA estimates arise from a number of factors, including noticeable growth in its Canadian specialty chemicals business, a modestly larger contribution from the Catalyst acquisition than we were expecting, higher market shares in both Canada and the U.S., and good prospectivity for growing market share in the U.S. via the Permian," he said.

He raised his target for the stock to $7.50 from $6.20. The analyst consensus price target is $5.84.

"Overall, it seems as though CEU has passed through the breakeven thresholds on all of its major product lines," he said. "This is a function of a lower cost structure combined with higher sales volumes. Any pricing improvement – which we fully expect will arrive – will push these margins up noticeably quicker."

Elsewhere, Canaccord Genuity analyst John Bereznicki raised his target to $8 from $6.25 with a "buy" rating (unchanged).

He said: "CES' Q3/16 results highlight the multiple levers CES has at its disposal to generate EBITDA growth in a protracted recovery, even in the absence of meaningful pricing power. We also have increased conviction in CES' ability to bolster its strong Permian presence by extracting longer-term growth from Catalyst."

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Thursday's sell-off of AGT Food and Ingredients Inc. (AGT-T) shares was "unjustified," according to Raymond James analyst Steve Hansen.

In the wake of a 5.39-per-cent decline in price, Mr. Hansen said investors are failing to account for the company's "attractive" growth opportunities and the "commensurate" operating and free cash flow leverage he sees as it "capitalizes on its global platform."

Accordingly, he upgraded his rating for the stock to "strong buy" from "outperform."

On Wednesday, the Regina-based company reported third-quarter adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $27.4-million, an increase of 18.1 per cent year over year. The result was in line with the Street's projection ($27.6-million) though below Mr. Hansen's estimate ($28.5-million). He blamed weaker-than-expected pulse and grain processing (PGP) volumes for the miss.

"Pulse & Grain Processing (PGP) adj. EBITDA increased 6.0 per cent year over year to $18.3-million, benefitting from a 21.3-per-cent increase in unit margins (EBITDA/metric tonnes), offset by a steep 36.7-per-cent year-over-year drop in invoiced volumes," said Mr. Hansen. "While unit margins reportedly benefitted from attractive government contracts sold out of Turkey, invoiced volumes suffered due to the late Canadian harvest. As a result, management noted that 75,000 mts of product, or the equivalent of $50-million in sales, was still in inventory/transit at quarter-end—pointing toward a very strong 4Q16E."

Mr. Hansen maintained a target price for the stock of $46. The analyst consensus price target is $44.29.

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Citing a rise in his carry value for its stake in Keane Group, Raymond James analyst Andrew Bradford raised his rating for Trican Well Service Ltd. (TCW-T).

"We think Trican shares have differential upside potential and we're consequently bumping our rating up to outperform [from 'market perform']," he said.

On Wednesday, Trican reported third-quarter EBITDA of a loss of $6.8-million, versus a consensus projection of $7-million and Mr. Bradford's "unnecessarily pessimistic" estimate of negative $15-million. He cited cost controls as the main variable for the difference.

"Trican generated $291 in revenue per active horsepower – roughly in the middle of the pack among its Canadian peers," said Mr. Bradford. "As has been widely noted, weather delays were an issue – Trican estimates the impact was as much as 13 per cent to 19 per cent to its top line, though the work has been carried-over to 4Q. Pricing exiting 3Q was similar to 1Q – up about 9 per cent sequentially, with more improvements already noted in 4Q."

He added: "Within Trican are two key financial assets. The first is its equity interest in Keane Group – the privately-funded acquirer of Trican's U.S. oilfield business. The second is just over 558,000 shares of National Oilwell Varco. The value of the NOV shares is fairly well defined – about $25-million or 12.5-cents per share in today's market. Trican's economic carry in Keane is less well-defined. We can see that the accountants marked-up the fair value of its equity to $90.2-million ($80.9-million 3 months ago). We have been attributing $100-million to Trican's Keane equity to this point (52 cents per share), however, it's not out of the question to envision it being worth multiples of this value. With the purchase of Trican's U.S. horsepower, Keane runs about 1 million horsepower in the U.S., plus offers a range of services from wireline to cementing and coiled tubing, though we strongly suspect the bulk of the economic contribution comes from the fracturing assets."

Mr. Bradford raised his target price for the stock to $4 from $3.60. The analyst consensus is $3.82.

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In other analyst actions:

BMO Nesbitt Burns analyst Michael Mazar downgraded PHX Energy Services Corp. (PHX-T) to "market perform" from "market outperform" and dropped his target to $4.50 from $5. The analyst average is $5.08, according to Bloomberg. Mr. Mazar said: "PHX shares are up over 60 per cent year to date. A good chunk of the strong performance has been hype associated with the commercialization of Stream. However, now the hard work of executing and building a profitable business begins and will likely be more difficult than is currently reflected in PHX's valuation. We also believe that more challenging competitive dynamics in the core directional business are not adequately discounted in to the share price."

The stock was also lowered to "hold" from "speculative buy" by GMP FirstEnergy analyst Ian Gillies. He dropped his target to $4.50 from $5. The average is $5.08.

Bombardier Inc. (BBD.B-T) was raised to "market perform" from "reduce" by Cormark Securities analyst David Tyerman. His 12-month target price rose to $1.90 from $1.85. The analyst average is $2.29.

Boardwalk Real Estate Investment Trust (BEI.UN-T) was lowered to "hold" from "buy" by analyst Jonathan Kelcher at TD Securities. His target fell to $50 from $58, compared to the average of $50.66.

Crescent Point Energy Corp. (CPG-T) was raised to "buy" from "neutral" by Dundee Securities analyst Brian Kristjansen. He lowered his target by a loonie to $25. The average is $23.88.

Plaza Retail REIT (PLZ.UN-T) was cut to "sector perform" from "sector outperform" by CIBC World Markets analyst Alex Avery with a target of $5.25 (unchanged). The average is $5.25.

Enercare Inc. (ECI-T) was downgraded to "hold" from "buy" by TD Securities analyst Damir Gunja with a target of $20, down from $21. The average is $21.

Northland Power Inc. (NPI-T) was raised to "buy" from "hold" by TD Securities analyst Sean Steuart with a target of $25 (unchanged). The analyst average is $25.75.

Pizza Pizza Royalty Corp. (PZA-T) was raised to "buy" from "hold" by TD Securities analyst Derek Lessard. His target increased to $18.50 from $14.50. He is currently the lone analyst covering the stock.

Essential Energy Services Ltd. (ESN-T) was raised to "buy" from "market perform" at Cormark Securities by analyst Jason Zhang. His target price is 80 cents per share (unchanged), while the average is 88 cents.

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