Inside the Market's roundup of some of today's key analyst actions
Though his thesis for the stock remains intact, Mr. Downey lowered his rating to "outperform" from "top pick" based on recent share price appreciation.
On Thursday, the Toronto-based global alternative asset manager reported fourth-quarter operating funds from operations (OFFO) of 65 cents per share, an increase of 11 cents year over year and ahead of Mr. Downey's projection of 51 cents as well as the consensus estimate of 49 cents.
"At a high level, Q4/16 OFFO on invested capital of $504-million was up sharply (25 per cent) over Q4/15's $402-million," said Mr. Downey. "Thematically the sizable year-over-year increase was a function of strong results in Property (including a $30-million fee receipt), Private Equity (including a $47-million distribution from an investment), OSB [oriented strand board] earnings, and Financial Assets (investment income and gains stemming from robust capital markets in late 2016). FFO from Renewable Power declined year over-year while Infrastructure OFFO improved moderately."
"Over and above [fee-related earnings, which rose 4 per cent year over year], BAM generated $149-million (approximately 15 cents per share) of realized carried interest in Q4/16. Over the past five years, carried interest realizations have been infrequent (the most recent of note dates back to Q4/13). We assign a $13-billion valuation to the asset manager, and we are very comfortable with this. But, not infrequently, we are challenged on this by investors. We believe any increase in the frequency of realized carry (even if the amounts are only moderate) could provide a confidence boost to the way investors view and value the asset management business."
Mr. Downey called 2016 "a very successful year" for Brookfield, citing "strong" fee-bearing capital growth of 16 per cent to $110-billion) and "improved" cash flow yield on invested capital.
"Overall we remain highly constructive on BAM's business model and what we see as the company's significant competitive advantages," he said.
Based on the results, Mr. Downey increased his 2017 OFFO per share by 10 cents (or 5 per cent) to $2.19. His 2018 projection rose 16 cents (7 per cent) to $2.42.
He raised his target price for the stock to $41 (U.S.) from $40. The analyst consensus price target is $40.78, according to Thomson Reuters.
"BAM's common shares have performed smartly to date in 2017, as they have risen in price by 11 per cent (S&P/TSX Composite Index up 2 per cent; S&P 500 Index up 3 per cent)," the analyst said. "We believe the gap between the share price and Intrinsic Value per share has narrowed considerably over the past three months (from an 8 per cent to 10 per cent discount), and even more so over the past twelve (from what was a 15-17-per-cent discount). As such, we believe the relative return outlook for the shares, versus our broader coverage universe of companies remains compelling, but is now more congruent with an Outperform rating, versus Top Pick formerly."
Elsewhere, Canaccord Genuity analyst Mark Rothshild raised his target $42 from $40 with a "buy" rating (unchanged).
"Brookfield Asset Management owns an exceptionally high quality portfolio and a growing stream of management fees," said Mr. Rothschild. "While there have been increased concerns surrounding the global economy, BAM's highquality assets should produce stable cash flows through economic cycles. In addition, the company has substantial liquidity to continue to acquire large portfolios. In the near term, NAV growth should be largely driven by growing management fees. Longer term we expect cash flow growth from the various businesses to drive NAV higher. Our target price increases to $42.00 which equates to a 10-per-cent premium to our updated estimate of NAV and reflects BAM's ability to grow the value of its business through fundraising and increased management fees. Combined with the increased annualized dividend of 56 cents per share, our target price equates to a 12-month forecast total return of 16 per cent."
Citing modest upside to his increased target price and its valuation "in context of past trading range and relative valuation to peers at current/historical levels," he downgraded his rating for the Toronto-based company to "sector perform" from "outperform."
"Since the December lows, Alamos' shares have risen 45 per cent outpacing the broader Gold Miners Index (GDX) and bullion which have risen 24 per cent and 7 per cent over the same period," said Mr.Rollins. "While its shares initially struggled after the equity raise was announced, its shares have since rebounded."
"We find Alamos' shares to be fairly valued on long-term NAV [net asset value] and shorter-term sustaining free cash flow at spot prices. The relative valuation is further supported by the company's trading metrics on our forecast commodity prices and consensus forward cash flow."
On Thursday, Alamos announced that it closed its previously announced bought deal offering at a price of $7.95 (U.S.) per common share for gross proceeds of $250-million. It intends to use the proceeds, along with existing cash, to repay all of its outstanding $315-million senior secured 7.75-per-cent high yield notes maturing 2020.
"Alamos' balance sheet is in strong standing following the recent $250-million equity deal which post deployment of proceeds … will leave the company debt free with $175-million in cash at the end of Q2/17," said Mr. Rollins. "The strong balance sheet and expectation for improving sustaining free cash flow places Alamos in a solid position to carry-out an aggressive drill program at Mulatos and advance its pipeline of organic growth opportunities."
Mr. Rolllins raised his target price for the stock to $9 from $8.50, citing "dilutive impact of equity raise has been offset by inclusion of future cash flow from Kirazli/ Agi Dagi and higher target adjusted cash flow multiple (15 times versus 14 times) reflecting stronger growth given recent permitting success in Turkey."
The analyst average price target is currently $9.79, according to Bloomberg.
"While we remain constructive on the company's underlying fundamentals/long-term prospects, we believe shares are fairly valued and would look for a more attractive entry point," he said.
Elsewhere, Desjardins Securities analyst Michael Parkin raised his target for TSX-listed Alamos stock to $13.25 from $11.50 with a "buy" rating (unchanged).
"We remain bullish on the name and believe the stock could outperform the peer group thanks to a number of near-term catalysts," he said.
BMO Nesbitt Burns analyst Brian Quast bumped his target to $14 from $12.50 while leaving his "outperform" rating.
"We raise our price target to $14 as the strengthening of the balance sheet allows for more flexibility on quality development pipeline," he said. "BMO estimates a $500-million cash balance at the end of Q1/17, which after the paydown of senior notes still carries a healthy cash through the remainder of 2017E to finance AGI's extensive development pipeline."
A recent pullback in price for MEG Energy Corp. (MEG-T) provides a good entry for "quality" oil leverage, said Raymond James analyst Chris Cox.
He upgraded his rating for the stock to "outperform" from "market perform."
"As one of the most levered names in our coverage universe to rising oil prices, MEG looks to be in a considerably stronger position today than earlier in the downturn," said Mr. Cox. "With the previously announced refinancing plan now complete, and with sanctioning of eMSAGP-related growth, we believe MEG is now fully funded to noticeably increase production, while concurrently generating modest free cash flow in 2018-plus at the current strip. Furthermore, while the leverage profile remains elevated, we believe additional considerations brought about by the refinancing plan could prove to be supportive of additional measures to improve the balance sheet, such as the company's highlighted potential sale of their interest in the Access Pipeline. Finally, with the shares having done a roundtrip since the OPEC announcement on Nov. 30, we now see the current share price as a much better entry point for a quality, levered play on oil with a significantly improved outlook."
On Thursday, the Calgary-based oil sands company reported fourth-quarter results which met expectations. The company had previously provided detail guidance with its refinancing plan on Jan. 11.
Quarterly cash flow of 17 cents per share met Mr. Cox's projection and beat the consensus by 4 cents. Production of 81,800 barrels per day was in line with both the analyst (82,000 bbl/d) and the Street (83,400 bbl/d).
"While heavy oil differentials have been remarkably resilient throughout the oil price downturn, a growing concern of ours is the prospect for a re-emergence of volatility as oil sands volumes continue to grow into 2017," he said. "Specifically, we see the prospect for heavy oil volumes to exceed notional capacity for heavy oil pipelines by mid- 2017; with more than 1 million bbl/d of capacity in western Canada to move oil by rail now in place, we don't see a return to the sizeable differentials observed in the 2012/13 timeframe, however, we expect some widening of the differential will still likely be required in order to incentivize those movements. Among heavy oil producers, we see MEG as relatively better positioned, with the company holding considerable firm capacity on the Flanagan South pipeline, providing a conduit to more attractive heavy oil markets along the Gulf Coast. Notably, MEG's availability on this pipeline increases to 100,000 bbl/d in the latter part of this decade."
Mr. Cox did lower his target price for the stock to $8 from $8.50. Consensus is $8.79.
Desjardins Securities analyst Justin Bouchard maintained a "hold" rating and $10 target for the stock.
He said: "MEG offers significant torque to an oil price recovery over the medium term, but given the considerable uncertainty around the timing and extent of a further recovery in oil prices, the risk of further shareholder dilution persists (our 2017 estimate of MEG's debt per flowing barrel is $53,000; in our view, this is simply too high in a sub-$65 (U.S.) per barrel WTI environment). We maintain our hold rating at this time, noting that we see better risk-adjusted investment opportunities elsewhere in the space."
Intel Corp. (INTC-Q) is "caught between a rock and a hard place as business transition and diversification continues," said Canaccord Genuity analyst Matthew Ramsay.
After attending the tech giant's investor day meeting in Santa Clara, Calif., on Thursday, Mr. Bouchard admitted it's hard to not be impressed by its 2016 results. He feels the company's new management group is "set to deliver on the promise of diversification from a PC-centric company."
"However, we left feeling Intel is caught between the proverbial rock and a hard place," he said. "Should management invest heavily into competitive new markets for growth that may prove margin-dilutive or focus to protect its traditional high-margin PC and data center franchises and reap the cash flow benefits while facing the risks of an increasingly capital intensive future? In the end, we agree with management's long-term decision to invest for growth; however, turning a battleship like Intel takes time and we believe other stocks we cover will generate more attractive returns during this period of prolonged transition, especially exiting a year with 'peak' PC margins and into a period of DCG [Data Center Group] margin compression and increased capital investment. We concede Intel shares generate a strong yield and remain inexpensive, but we believe shares could remain range bound as margins stagnate and until investors see proof of new investments in 10/7 nanometer, automotive, IoT [Internet of Thing] and memory are capable of generating strong returns within a reasonable time horizon."
Based on those concerns, Mr. Ramsay downgraded his rating for the stock to "hold" from "buy."
"Management presented a full TAM [total addressable market] for Intel in the $220-billion range by 2021, including new adjacent areas within DCG and the broader mobile, IoT and memory markets," he said. "Within that context, Intel's $60-billion revenue is only one-third penetrated. However, we believe Intel already dominates most of the highest margin portions of this TAM. Displacing new market incumbents will take investment and we view returns in many cases uncertain in margin magnitude or timing."
Mr. Ramsay said he's "encouraged" by Intel's decision to reduce its long-term growth estimates for DCG to 10 to 12 per cent from "ambitious midteens," but he noted: "Given a still-declining enterprise server market & gradually increasing competition from alternative CPU & accelerator vendors, we do not think investors will view new guidance as a layup. Further, with DCG margin outlook lowered more dramatically than we had expected by 500 basis points at the midpoint (40-45 per cent versus 45-50 [er cent with non-CPU growth and increased corporate allocations), mix shift benefits of DCG growth have moderated."
Based on the company's expectation for a decline in gross margins over the next 3 years, Mr. Ramsay also reduced his projections. Accordingly, his 2018 non-GAAP earnings per share estimate fell to $2.90 (U.S.) from $2.94.
He also reduced his target price for the stock to $38 (U.S.) from $43. Consensus is $41.15.
"Given management guidance for 3-year revenue growth in low-single digits and only slightly faster operating margin and non-GAAP EPS (and therefore dividend) growth, our new $38 price target values Intel shares at 13 times our 2018 earnings estimate despite the compelling 3-per-cent dividend yield," he said.
Enerplus Corp. (ERF-T, ERF-N) currently provides an "attractive" entry point for investors, said BMO Nesbitt Burns analyst Ray Kwan.
Citing its valuation, he upgraded the stock to "outperform" from "market perform."
"Enerplus trades at attractive valuation metrics with a 2017 EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization] multiple of 6.5 times versus peers at 9.0 times, based on strip pricing," he said. "This multiple falls further to 5.0 times in 2018 assuming the company realizes its growth targets. As the company executes on its growth plans, we believe the shares could experience multiple expansion. Its balance sheet is also strong due to management's recent A&D abilities. The company has a D/CF [debt to cash flow] ratio of 1.0 times and 0.8 times, in 2017 and 2018, respectively, ranking top decile in the peer group."
Mr. Kwan expects the Calgary-based energy producer to be able to extract "significant" value from its Fort Berthold assets in North Dakota, "driven by the company's growing liquids production." He's forecasting corporate liquids growth of 20 per cent between 2017 and 2018 and 2016-2017 exit-to-exit liquids growth of 13 per cent.
"Ultimately, this should improve Enerplus' netbacks and the company's cash flow generating ability," he said.
He also stressed the improving fundamentals for its Marcellus shale gas interests in Pennsylvania and feels the market is not currently giving the company "credit" for those assets.
"Enerplus plans to spend $60-million in the Marcellus this year, for drilling and bringing six net wells on stream," he said. "We believe the company's optimization of completions, combined with the potential for further tightening in the Marcellus basis differential, helps set up the asset's transition from cash flow neutral to free cash flow positive."
Mr. Kwan kept his target price of $15 for the stock. Consensus is $15.18.
"Enerplus has a high-quality asset base, and we think the company is well-positioned to deliver liquids growth from its Fort Berthold North Dakota assets," he said.
The fourth-quarter results for Great-West Lifeco Inc. (GWO-T) did not change Desjardins Securities analyst Doug Young's views on the stock.
On Thursday, Great-West reported core earnings per share of 69 cents, meeting Mr. Young's projection and a penny above the consensus estimate.
"There are a number of positives: core EPS was in line (up 4 per cent year over year); the dividend was increased 6 per cent (although we expected an 8-per-cent increase); management actions and assumption changes stabilized vs past quarters; it remains very comfortably capitalized, with an MCCSR [M inimum Continuing Capital and Surplus Requirements] of 236 per cent (pro forma a recent debt maturity), debt-to-cap of 28 per cent and $1.1-billion of holdco cash; and we applaud management's decision to reduce Putnam's expenses by $65-million (U.S.)," said the analyst. "That said, Putnam recorded a $3-million (Canadian) core net loss despite already absorbing $10-million (U.S.) of expense reductions during 4Q16 (of the $16.3-million U.S. per quarter it targets). Putnam had $1.5-billion (U.S.) of net outflows (split $1.0-billion in retail and $0.5-billion institutional), although this was not a big surprise. Expenses remain elevated, especially in Canada, a trend we believe will continue as GWO invests in its business. Expected profits declined 4 per cent year over year (although the year-over-year comps start getting easier in 2017)."
Mr. Young raised his 2017 core EPS projection to $2.85 from $2.83 based on the results.
With a "hold" rating (unchanged), his target for the stock rose to $37 from $35. Consensus is $36.67.
"GWO has strong Canadian insurance and U.S. pension franchises, and capital flexibility," he said. "That said, we do not expect a material turnaround at Putnam near-term, we expect expenses to remain elevated and the depreciation of the UK pound remains a headwind (20 per cent of earnings are from the UK)."
Twitter Inc. (TWTR-N) has been downgraded by at least seven firms since reporting disappointing fourth-quarter results on Thursday.
Shares of the social media company dropped 12 per cent on the day.
Those changes included:
- Citi analyst Mark May lowered his rating to "sell" from "neutral" and his target to $13 (U.S.) from $18. The analyst average is $14.68.
"We were bracing for disappointing results and outlook given the recent trend in user growth, the heightened headcount turnover during 2016, the seemingly slow pace of innovation, and TWTR’s premium monetization relative to FB on a time-spent basis," he said. "However, the 4Q16 results and 1Q17 outlook were even worse than we expected. O&O Ad Revenue per MAU [monthly active user] growth turned negative for the first time (down 4 per cent year over year, and we estimate that management’s 1Q17 guidance implies a meaningful worsening to start the new year (down 20 per cent year over year in 1Q17). Management cited competition as a key contributor, though we believe a slow rate of innovation within its consumer-facing and ad products also played a role. Management’s wide Q1 guidance range highlights uncertainty and at the high-end implies a 6-per-cent year-over-year revenue decline (the first decline ever in total revenue; we forecast a 13-per-cent decline, as well as a 43-per-cent year-over-year decline in adjusted EBITDA). Even when giving TWTR credit for a return to (modest) revenue growth and adjusted EBITDA margin expansion (to 35 per cent in Year 10), our DCF [discounted cash flow] model implies a fundamental fair value of $11 per share. We arrive at a $13 price target by factoring in a 50-per-cent probability that Twitter is taken out at a 35-per-cent M&A premium. Given that this implies 21-per-cent downside, we are changing our rating."
- Raymond James analyst Aaron Kessler moving the stock to “underperform” from “market perform” without a specified target. Citing an increasingly challenged advertising market from Facebook and Snapchat, Mr. Kessler believes revenue growth will be “increasingly challenging.”
- UBS analyst Eric Sheridan cut the stock to “sell” from “neutral” and dropped his target to $12 (U.S.) from $18. Mr. Sheridan said Twitter will face a rising struggle for user time and suggest the company needs to reposition itself around a small product base.
- Atlantic Equities analyst James Cordwell dropped the stock to “underweight” from “neutral” with a target of $13, down from $16.
- Loop Capital Markets analyst Blake Harper moved his stock to "sell" from "hold" with a $10 target, down from $16.
In other analyst actions:
Precision Drilling Corp. (PD-T) was raised to "market perform" from "underperform" by Raymond James analyst Andrew Bradford. He raised his target to $8.25 from $6.50. The average is $9.34.
Pine Cliff Energy Ltd. (PNE-T) was rated new "buy" at Cormark Securities by analyst Amir Arif with a $1.35 target. The average is $1.45.
Prudential Financial Inc. (PRU-T) was downgraded to "neutral" from "overweight" by Atlantic Equities analyst John Heagerty with an unchanged target of $110 (U.S.). The average is $111.47.
Starbucks Corp. (SBUX-Q) was downgraded to "hold" from "buy" at Argus by analyst John Staszak without a specified target. The average is $64.35. (U.S.).