Friday’s analyst upgrades and downgrades

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

Expecting retail challenges to linger,  BMO Nesbitt Burns analyst Stephen MacLeod downgraded Gildan Activewear Inc. (GIL-T, GIL-N) to "market perform" from "outperform."

"While we continue to believe that Gildan is well positioned to achieve incremental growth in Printwear as well as retail shelf space gains in Branded Apparel, we came away from Q3/17 with the view that persistent retail industry headwinds (lower traffic trends, retailer destocking) will overshadow Gildan's other pockets of growth, reducing earnings visibility at least in the near term and leading to the shares being range-bound," said Mr. MacLeod.

On Thursday, the Montreal-based apparel marker reported quarterly earnings per share of 53 cents (U.S.), exceeding the projections of both the analyst (50 cents) and the Street (51 cents). Sales increased 4 per cent year over year to $716-million, below the consensus estimate of $750-million, while adjusted EBITDA of $168-million beat the consensus by $5-million.

"The EPS outperformance versus our estimate in the quarter was largely due to a lower-than-expected tax rate and Printwear EBIT being above expectations," said Mr. MacLeod. "Retail challenges led to a 7-percent Branded Apparel sales decline and below-forecast Branded Apparel EBIT. Most notably, socks sales were weak (approximately $500-million annual sales), particularly in the department stores and national chains, and management indicated on the call that the whole category remains challenged. This was partially offset by bright spots in underwear (11 per cent market share in September) and activewear.

"While 2017 guidance was increased (EPS of $1.70-1.72, EBITDA of $580-590 million), this was largely due to the stronger-than-expected Q3; our Q4/17 estimate declines to 30 cents from 32 cents on more modest Branded Apparel sales expectations. For the full year, Branded Apparel sales growth is expected to be low single digits versus high single digits previously, in light of a weaker-than-expected retail environment.

With the results, Mr. MacLeod raised his 2017 EPS estimate by a penny to $1.71 to sit in line with guidance. He lowered his 2018 projection to $1.88 from $1.90.

"Notwithstanding the challenging retail environment, we did see some notional positives in Q3: American Apparel launched a direct-to-consumer e-commerce site, and performance appears to be tracking nicely; Printwear performance was strong in Q3, with growth in Fashion Basics and Performance; finally, FCF trends remains solid (greater-than $450-million)," he said. "However, we expect retail headwinds to weigh on earnings growth."

Mr. MacLeod did lower his target price for the stock to $38.44 (Canadian) from $42.33. The average is $42.50, according to Bloomberg data.

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In reaction to better-than-anticipated quarterly results, CIBC World Markets analyst Todd Coupland upgraded his rating for Kinaxis Inc. (KXS-T).

"We recommend buying Kinaxis shares again," said Mr. Coupland, moving the Toronto-based company to "outperform" from "neutral."

On Thursday, Kinaxis reported third-quarter earnings per share of 31 cents, exceeding the Street's 24-cent expectation. Revenue of $33.5-million and EBITDA of $10.8-million also beat the consensus projections ($33-million and $9.1-million).

"Our investment thesis has been updated to reflect the recovering revenue growth," said Mr. Coupland. "Our thesis is based on these three points including:

"1. Accelerating revenue has returned. Subscription revenue growth rose to 24 per cent from 21 per cent last quarter. This compares to 26 per cent in the prior 11 quarters.

"2. EBITDA margins are expected to be 29 per cent in 2017. Improved mix has led to slightly higher margins (up 2 per cent).

"3. Valuation is attractive and below growth rate and peers. Ex cash per share, KXS trades at 26 times  2018 cash flow. A subset of highergrowth SaaS peers trade at 33 times 2018 cash flow."

Mr. Coupland hiked his target for the stock to $90 from $82. The average is $84.17.

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WSP Global Inc. (WSP-T) was removed from Raymond James' "Canadian Analyst Current Favourites" list by Frederic Bastien.

"Alhough we expect WSP's diversified business, healthy balance sheet, strong technical know-how and entrepreneurial DNA to fuel aboveaverage returns for shareholders over the long term, we are removing the stock from Raymond James' list of Analyst Current Favourites," he said. "This is a good news story as the share price has gained 15 per cent since we added WSP to the list on Aug. 15 (the TSX is up 5 per cent)."

Mr. Bastien maintained an "outperform" rating and $60 target for WSP shares. The analyst average target is $56.73.

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"Almost everything [is] going right for once" with Resolute Forest Products Inc. (RFP-T), according to CIBC World Markets analyst Hamir Patel.

Accordingly, he upgraded the Montreal-based company to "outperform" from "neutral."

"We had previously upgraded Resolute to neutral (from underperformer) on June 4 but held off getting more constructive at the time given cost pressures and limited visibility on paper prices," said Mr. Patel. "With pricing momentum in all segments (except tissue), and meaningful cost improvement becoming apparent (following recent restructuring and operational changes), we raise our EBITDA estimates for 2018 and 2019 by 22 per cent and 15 per cent, respectively. We are now 15 per cent higher than consensus for both years. We do not believe our revised 2018/19 estimates are particularly aggressive and note they are still 10 per cent/6 per cent lower than what we expect Resolute to generate this year."

On Tuesday, Resolute reported third-quarter earnings per share of 19 cents, exceeding Mr. Patel's projection of a 5- cent loss and the consensus of a 9-cent gain. Adjusted EBITDA of $104-million, after lumber duties of $14-million, also topped the analyst's forecast ($67-million) and the Street ($75-million).

"Our SOTP [sum-of-the-parts] multiples are generally 1.0 times or more lower than peers," he said. "At the same time, our segment EBITDA forecast in 2018 (our valuation year) for pulp is $31-million lower than the run rate in Q3/17, and our Wood Products forecast for next year is $63-million lower than the annualized rate from the third quarter. While Tissue performance to date (entirely Atlas) has been disastrous, we see no reason why Resolute's new NTT machine at Calhoun cannot achieve our trend EBITDA ($45-million) forecast for the segment as this conservative number is well below the $55-$65-million per year Clearwater has guided for its planned NTT at Shelby. Although the tissue market is facing increased competitive headwinds, the recent addition of Patrice Minguez to run the tissue business is reassuring given his strong track record building Cellynne."

Mr. Patel raised his target for the stock to $10 from $6.75 based on "significantly" higher estimates going forward. The average target is $6.25

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Unsure when "challenging" current conditions will subside, Raymond James analyst David Quezada downgraded Tree Island Steel Ltd. (TSL-T) to "market perform" from "outperform."

"While we believe shares of Tree Island largely reflect ongoing headwinds to the business (rising raw materials costs and heavy competition for the company's products) we are downgrading the stock to Market Perform based on the EBITDA losses realized this quarter and lack of clarity on when this situation will reverse," said Mr. Quezada.

On Thursday after market close, the Vancouver-based company reported a third-quarter EBITDA loss of $1.5-million, below the analyst's projection of a $2.7-million profit and the Street's expectation of a $3.1-million. It was a drop from $5.4-million a year ago, despite revenues rising a "modest" 3 per cent to $55.6-million.

"However, gross profit was down considerably, coming in at $2.3-million for 3Q17 versus $9.6-million in 3Q16 reflecting persistent compression between TSL's selling prices and raw material costs," said Mr. Quezada. "While TSL has been able to implement some price hikes to customers, these have not kept pace with rising raw material costs. We expect to see material pressure on the stock consistent with these results."

"As has been the case in recent quarters, Tree Island's 3Q17 results faced continued headwinds in the form of rising steel prices which the company had been unable to fully pass through to customers due to competition in its end markets. This challenging environment has persisted longer than we expected and we are yet to see evidence of a turnaround on the horizon. That said, while more protracted than usual, we regard this as a normal part of the company's steel cost/pricing cycle as opposed to a structural issue with the business. Further, we believe TSL's current management team is well equipped to weather these market conditions and highlight significant underlying value at the company's land holdings in Richmond, B.C. and Etiwanda, Calif."

Mr. Quezada lowered his target for the stock by a loonie to $3. The analyst average target is $3.75.

Elsewhere, PI Financial analyst Devin Schilling maintained a "buy" rating with a lower target of $3.25 (from $5).

Mr. Schilling said: "Results were below both consensus estimates and our estimates. A continuation of industry-wide pressures on margins due to higher raw material input costs and aggressive pricing by competitors has resulted in a difficult operating environment."

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Admitting his "top pick" rating for Newell Brands Inc. (NWL-N) was a "painfully bad call," RBC Dominion Securities analyst Nik Modi lowered his rating for the New Jersey-based Sharpie pen maker to "outperform."

On Thursday, Newell reported third-quarter decline in sales of 7 per cent, noting: "for the first time in many years, market growth at back-to-school was weak resulting in minimal September replenishment orders and significant inventory destocking."

Mr. Modi said: "We admit that we were so focused on Newell's business model (leading share positions competing against fragmented, less resourced competitors) that we lost sight of the magnitude of the headwinds facing the retail environment and how that deterioration could impact the company's financial delivery. Despite an encouraging economic backdrop, this evolving retail landscape and uneven execution limits our conviction in NWL's ability to grow above up 2 per cent over the next decade."

In response to the results, he lowered his fiscal 2017 and 2018 earnings per share estimates to $2.80 and $2.98, respectively, from $3.00 and $3.39.

"Our thesis regarding NWL's ability to reinvest savings in capabilities that enable the company to gain share from less resourced competitors remains intact. NWL gained 65 basis points of U.S. share in the quarter and reported POS [point of sale] 3.5 per cent," said Mr. Modi. "The company also remains ahead of the curve on e-commerce and cheap on a P/E basis.

He dropped his target for the stock to $35 (U.S.) from $60. The average is $43.40.

"After stressing our model to account for the secular challenges in the retail space and uneven execution at the company, we arrive at a reduced price target of $35 (15 per cent implied upside)," said Mr. Modi. "We think this return profile does not warrant a Top Pick rating and we therefore downgrade NW."

Elsewhere, JP Morgan analyst Andrea Teixeira lowered her rating to "neutral" from "overweight" with a $39 target, down from $56.

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Citing improving user engagement and its ability to deliver strong adjusted EBITDA growth, Argus analyst James Kelleher upgraded Twitter Inc. (TWTR-N) to "buy" from "hold."

Mr. Kelleher expects the social media company to exhibit a return to revenue growth in 2018, raising his earnings per share projection to 50 cents (U.S.) from 35 cents.

Though he acknowledged the challenges it faces and recommends it for "highly risk tolerant investors," he maintained a price target of $25 (U.S.). The analyst average target is $18.29.

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In other analyst actions:

Rosenblatt Securities analyst Jun Zhang upgraded Apple Inc. (AAPL-Q) to "buy" from "neutral" with a target price of $180 (U.S.), rising from $150. The average target on the Street is currently $188.88.

National Bank Financial analyst Jaeme Gloyn upgraded Genworth MI Canada Inc. (MIC-T) to "outperform" from "sector perform" with a $46 target, up from $40. The average is $43.17.  Cormark's Jeff Fenwick also upgraded Genworth, moving his rating to "buy" from "market perform" with a target of $45 (from $39).

Mr. Fenwick downgraded Fairfax Financial Holdings Ltd. (FFH-T) to "market perform" from "buy" with a target of $750, rising from $735. The average is $728.71.

Laurentian Bank Securities analyst Marc Charbin downgraded goeasy Ltd. (GSY-T) to "hold" from "buy" and cut his target to $35 from $40. The average is $41.17.

Cormark analyst Gavin Fairweather dropped DIRTT Environmental Solutions Ltd. (DRT-T) to "market perform" from "buy" with a target of $6.50, falling from $7.25. The average target is $8.28.

Mackie Research Capital Corp. analyst Nikhil Thadani downgraded Espial Group Inc. (ESP-T) to "speculative buy" from "buy" with a target of $2.40, falling a loonie. The consensus is $3.04.

J.P. Morgan analyst Douglas Anmuth downgraded Pandora Media Inc. (P-N) to "neutral" from "overweight" and dropped his target to $9 from $14. The average is $9.83.

The stock was also lowered to "hold" from "buy" by Stifel's Scott Devitt with an $8 target (from $12).

D.A. Davidson & Co analyst Linda Bolton Weiser upgraded Mattel Inc. (MAT-Q) to "neutral" from "underperform" with a $12 (U.S.) target. The average is $16.05.

Raymond James analyst Michael J Baker upgraded Aetna Inc. (AET-N) to "outperform" from "market perform" with a $200 (U.S.) target. The average target is currently $183.06.