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A Royal Bank of Canada logo is seen on Bay Street in the heart of the financial district in Toronto, January 22, 2015. Royal Bank of Canada seeks to capture as much as 4.5 per cent of the $40-billion (U.S.) pool of U.S. investment-banking fees within three years.© Mark Blinch / Reuters

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

RBC Dominion Securities analyst Darko Mihelic increased his financial expectations "modestly" for Toronto-Dominion Bank (TD-T, TD-N) following the release of its second-quarter financial results, applauding its cost control but suggesting lower provisions for credit losses will normalize higher.

On Thursday, TD reported cash earnings per share for the quarter of $1.34, "well ahead" of Mr. Michelic's projection of $1.21 as well as the consensus on the Street of $1.25. He pointed to lower PCLs and better efficiency as causes for the beat, noting all business segments topped his expectations.

"PCLs of $500-million were much better than our estimate of $599-million this quarter," the analyst said. "PCLs in the U.S. P&C business declined significantly on a sequential basis, due to seasonal PCL trends as well as lower commercial PCLs. Oil and gas recoveries of negative $7-million versus recoveries of negative $19-million last quarter and losses of $49-million in Q2/16, helped PCLs in the wholesale segment this quarter."

He added: "We expect credit to normalize and are forecasting modestly higher provisions for credit losses of 39 basis points (bps) in 2017 and 43 bps in 2018, versus 41 bps in 2016."

With the results, Mr. Mihelic's core EPS estimate for 2017 rose to $5.43 from $5.17, while his 2018 estimate moved to $5.65 from $5.51.

"The increase to our estimates reflects higher revenues as a result of higher loan balances than our forecast this quarter as well as better efficiency improvement," he said. "We continue to value TD using a target multiple of 12.0 times on our 2018 core EPS estimate and add approximately $2 per share to reflect our estimate of excess capital in one year's time."

Mr. Mihelic's target for TD stock is now $70, up from $68, with a "sector perform" rating (unchanged). The analyst consensus is $70.61, according to data from Thomson Reuters.

"We value TD at a median-like multiple to peers -- while we continue to see a more favourable growth outlook in its North American retail businesses, we see higher risk due to recent allegations surrounding sales practices in Canada," he said.

Elsewhere, CIBC World Markets analyst Robert Sedran maintained his "neutral" rating and $74 target.

"With the contribution from P&C Banking in Canada and the United States somewhere around 75 per cent of total bank earnings, these two businesses are our first stop when results come out. This quarter, both did well," said Mr. Sedran. "In Canada, loan losses declined and helped offset mildly negative operating leverage to deliver an improved earnings growth rate. Meanwhile in the United States, huge operating leverage (perhaps off a forgiving year-ago comparable, but 7.5% is still an impressive feat), lower loan losses and decent volume led to an 18 per cent year-over-year growth rate. That these two segments show this improved performance is encouraging, especially considering the underperformance in the shares so far this year."

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Royal Bank of Canada's (RY-T, RY-N) second-quarter financial results were "Made in Canada," according to Desjardins Securities analyst Doug Young.

On Thursday, the bank reported cash earnings per share of $1.89, exceeding Mr. Young's projection of $1.83 and the consensus estimate of $1.81. In explaining the result, he pointed to higher-than-expected earnings from its Canadian personal and commercial business as well as wealth management, insurance and capital markets beat.

"On a consolidated basis, PCLs were essentially in line with our expectations and strong capital markets earnings added 2 cents — the point is that this was a good clean beat relative to our expectations," he said. "Cash EPS increased 7 per cent year over year (adjusting last year for some unusual items), and this includes $60-million of higher severance and legal costs versus 2Q FY16 (equates to 3 cents and 2 points of year-over-year EPS growth, by our estimate)."

Jumping 6 per cent year over year, the bank's domestic P&C earnings were $1.316-billion, versus the analyst's estimate of $1.296-billion and the consensus of $1.306-billion, driven largely by lower non-interest expenses (NIX). Its NIX ratio was 42.1 per cent versus Mr. Young's expectation of 43.0 per cent.

Based on the results, Mr. Young made minor tweaks to his financial forecast for the bank, raising his full-year fiscal 2017 EPS forecast by 3 cents to $7.35 and his 2018 estimate by 5 cents to $7.75.

"We see further leverage with City National, RY has scale — which we believe will allow it to better manage costs versus peers in what could be a slower-growth environment, and it has been effectively managing capital (eg. recent stock buybacks), in our view."

With an unchanged "buy" rating, Mr. Young increased his target price for the stock by a loonie to $104. The analyst consensus price target is $100.61.

Meanwhile, Credit Suisse analyst Nick Stogdill also raised his target by a dollar to $103 with an "outperform" rating.

"RY's diversified businesses continue to exhibit good momentum and positions the bank to deliver higher EPS growth versus its peers," he said.

CIBC World Markets analyst Robert Sedran did not adjust his "outperformer' rating and $106 target.

Mr. Sedran said: "A core part of our investment thesis for this bank – and core support for its premium multiple – is that its strength is drawn from many different businesses. We believe the results this quarter highlight that diversity well, with each segment exceeding expectations. Canadian Banking saw positive operating leverage, decent volumes and good earnings growth. Investor and Treasury Services and Capital Markets both posted double-digit year-over-year earnings growth and Wealth Management (helped by City National growth, but also, you know, wealth management) was very good. Not every segment will point in the same direction every quarter, but the strength that comes from this business mix is a key differentiating factor. In the same way, there were many small changes to our estimates that add up to an increase in our earnings estimates, albeit a modest one."

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Though he likes Héroux-Devtek Inc.'s (HRX-T) long-term prospects, strategic "repositioning" and free cash flow profile, Raymond James analyst Ben Cherniavsky said it lacks near-term catalysts and expects flat earnings per share this year.

"More importantly, we believe that valuation continues to limit the near-term upside with the stock currently reflecting our 'full cycle' fiscal 2021 earnings scenario," he said.

On Thursday, the Longueuil, Que.-based aerospace company reported fourth-quarter 2017 revenue ($121-million), gross profit margins (17.2 per cent) and expenses ($8.5-million) that all met Mr. Cherniavksy's projections. They lead to earnings before interest and taxes of $12.3-million, again matching his estimates and representing a drop of 8 per cent from the same period a year ago.

"The decline in operating profits was mainly a function of moderate softness in the defence segment, f/x [foreign exchange] headwinds, and higher under-absorption costs for the early stages of the 777 program," the analyst said. "While EBIT [earnings before interest and taxes' was down year over year, and in-line with our forecasts, EPS of 25 cents held steady with F4Q16 and beat our estimate by three cents, but this was strictly due to a lower than expected tax rate of 11 per cent (versus 22 per cent last year).

"There is an important footnote to our description of Heroux's F4Q17 results as being very much in-line with our forecasts over the past 12 months [as] forecasts have been lowered considerably for this stock. Specifically, one year ago when Heroux closed the books on F2016, our F2017 and F2018 EPS estimates were 85 cents and 98 cents, respectively — the former being 15 per cent above where full-year results actually landed, and the latter being 34 per cent above our current projection for next year … Hence, while the stock price has corrected materially since then (down 15 per cent versus a 10-per-cent rise for the TSX), the valuation has not become sufficiently more attractive to warrant an upgrade to our rating or change in our underlying investment thesis."

With a "market perform" rating, his target rose to $13.25 from $13. Consensus is $14.05.

"The culprits mainly responsible for the downward revisions to our forecasts over the past 12 months — namely, the reduction in 777 build rates and the lost bid with the USAF for a Performance Based Logistics contract — are now arguably priced-into this stock; meanwhile, free cash flow remains strong and is poised to grow, which should limit the downside for shareholders," said Mr. Cherniavsky. "Nevertheless, with limited growth in the near term and some lingering macro risks to consider (we are getting very late in the aerospace cycle; global airline capacity still looks excessive to us; and protectionism in the U.S. is on the rise), we see no rush to buy this stock today at its current price."

Meanwhile, Desjardins Securities analyst Benoit Poirier maintained a $15 target and "hold" rating.

Mr. Poirier said: "We expect the shares to trade sideways in the coming months, pending additional visibility on revenue growth and an expected margin recovery in FY19, as well as the strength of the commercial aerospace industry. Although the company's strong balance sheet and solid FCF [free cash flow] provide room for M&A, the sector's high deal valuation reduces the potential for immediately accretive transactions, in our view. That said, we still believe HRX has the key pieces in place organically to become a $20-plus stock by FY21, and we continue to see upside in the long term as fundamentals remain intact."

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Shopify Inc.'s (SHOP-N, SHOP-T) recent financing enhances its flexibility, according to Industrial Alliance Securities analyst Blair Abernethy.

On Wednesday, the Ottawa-based software maker announced the completion of a previously announced offering of Class A subordinate voting shares at a price of $91 (U.S.) per share, which Mr. Abernethy said adds $488-million to its "war chest." He now projects Shopify has $880-million on its balance sheet.

"We see this financing as providing Shopify with greatly increased flexibility to pursue its expanding range of growth opportunities both organically and, potentially, through acquisitions," he said. "In terms of acquisitions, we believe Shopify could accelerate its product roadmap through the acquisition of emerging technologies, particularly in the artificial intelligence (AI) space. We also see opportunities for Shopify to broaden its offering through the acquisition of growth platforms in adjacent markets, such as accounting software (for example, private companies such as Wave or Freshbooks with millions of small business users could be of interest), marketing automation solutions, and logistics for small businesses."

With changes to his financial model for the company, Mr. Abernethy "marginally" raised his 2018 revenue estimate to $871-million (from $862-million) based on "slightly higher" customer adds. His EBITDA [earnings before interest, taxes, depreciation and amortization] forecast dropped to $38.2-million from $42.9-million due to an adjustment to his gross margin outlook.

"We expect Shopify to continue to heavily invest in the business, including a rapid pace of hiring, an expanded partner program, new offices, and additional investment in Shopify Plus," he said. "The company recently noted that it will continue to significantly invest in the business for 2017 in order to maintain a high top-line growth rate. We expect this pace of increased spending to slightly abate in 2018 as the company gains further scale, however, we continue to expect Shopify to focus on rapid growth."

Keeping a "buy" rating for Shopify stock, he raised his target to $100 (U.S.) from $87. Consensus is $90.58.

"Shopify remains in rapid growth mode and has only recently turned EBITDA positive. Management is still targeting positive adjusted operating earnings by late 2017," said Mr. Abernethy. "Longer term, we believe that the company's EBITDA margins could be north of 20 per cent, however, we see the company focusing more on growth in the next few years. We are introducing our 2019 estimates and rolling our valuation forward to a blended 2018/2019 valuation. We compare Shopify to other high growth SaaS/e-commerce companies, which are trading in the 7-9 times enterprise value/sales range, while most are growing at a much slower pace than Shopify. … Our new 12-month target price equates to 9 times EV [enterprise value] /Sales on 2018E and 8.3 times EV/Sales on a blended 2018/2019. Our DCF [discounted cash flow] assumes the company approaches 1 million merchant subscriptions and just over 20-per-cent operating margins.

"Shopify has built a rapidly expanding platform that addresses the omni-channel e-commerce needs of early stage enterprises and can accommodate them as they grow. We believe upside remains for investors as the rapid addition of customers, transaction volumes, and a broadening partner ecosystem are building a base for future profitability."

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BMO Nesbitt Burns analyst Andrew Kaip upgraded MAG Silver Corp. (MAG-T) in order to "take advantage" of recent share price weakness.

Raising the stock to "outperform" from "market perform," Mr. Kaip expects the development plans for the Juanicipio joint-venture project in Mexico to be adjusted in the near future.  MAG owns a 46-per-cent stake in the JV with Fresnillo plc.

"FRES has begun the permitting process, which would include a higher start-up throughput rate of 4,000 tons per day (previously 2,650 tpd) and the sinking of an internal shaft (or winze)," he said. "When the permit approval is received in Q2/17E these modifications should incrementally increase project capital costs and delay first production to the first half of 2019.

"MAG is expected to release an updated Juanicipio technical report in Q2/17 that will include design modifications …  and incorporate recent deep drilling results that will add to the current M&I resource (100 per cent) of 248Moz silver and 1.4Moz gold. Concurrent with the technical update we expect the FRES Board to provide a go ahead construction decision on this revised mine plan. Exploration upside still exists as the JV approved another 20,000m exploration program for 2017E. We believe a majority of this drill program will help to increase confidence in the near term mine life production and the remaining will be used to test regional targets within the JV property to confirm the continuation of other mineralized veins identified on the adjacent FRES property."

He maintained a $20 target for the stock. Consensus is $25.83.

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