Friday’s analyst upgrades and downgrades

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

In reaction to Credit Suisse's recent revisions to its commodity price outlook, analyst Jason Frew raised his rating for Husky Energy Inc. (HSE-T) to "outperform" from "neutral."

"We now expect dividend reinstatement in 2018 versus 2019 previously," said Mr. Frew. "A decision on dividend reinstatement could be made as early as Q1 in our view. We expect earnings to turn more positive in 2018 such that an initial quarterly dividend of 7.5 cents could be supported. Given our outlook for rising earnings and improving FCF through 2020-plus, we now see potential for annual dividend growth of 10 per cent with an earnings payout less-than 50 per cent. We still value HSE at a meaningful 30 per cent discount to peers but now see upside of 30-per-cent absolute, 5-per-cent relative."

Mr. Frew raised his target price for Husky shares to $21 from $17. The average target on the Street is currently $18.21, according to Bloomberg data.

"The company has a very strong balance sheet that has already enabled acceleration with the purchase of the Wisconsin refiner," he said. "We like the company's balanced portfolio and inventory of capital projects with good returns in the current environment. The path to a lower corporate break-even is now clearer based on capital allocation plans over the next five years. The management team has been bolstered with recent strong hires, in our view. Finally, we see less commodity risk in HSE given high levels of integration in North America and growing fixed price gas contracts in Asia."

The move came after the firm raised its 2018 forecast for Brent to $60 (U.S.) per barrel from $53 (a 13-per-cent increase) and its WTI forecast to $56 per barrel from $51 (an 11-per-cent jump).

"We argue that the crude price rise in 4Q 2017 was driven by geopolitics as much as an improvement in fundamentals, but the strong commitment by OPEC in Vienna recently suggests that we are heading towards a normalized OECD inventory level around 3Q 2018," said Mr. Frew. "Concurrently, we raise our 2019 outlook for Brent and WTI by 4 per cent and 5 per cent, respectively."

At the same time, the firm dropped its NYMEX forecast for 2018 to $3.10 (U.S.) per one million British Thermal Units (MMBtu) from $3.50 (an 11-per-cent decline) and its 2019 estimate to $3 from $3.25 (8 per cent).

"We see the market as relatively balanced with pick-up in demand (led by LNG exports) met by robust production growth," the analyst said. "Our minor upside bias to 2018 is driven by seasonal storage at the second lowest level since '08."

With the changing forecasts, the firm tweaked its target prices for companies in its coverage universe. Those changes included:

- Suncor Energy Inc. (SU-T/SU-N, "outperform") to $51 from $48. The average is $49.47.

- Canadian Natural Resources Ltd. (CNQ-T/CNQ-N, "outperform") to $54 from $48. The average is $51.02.

- Imperial Oil Ltd. (IMO-T, "outperform") to $45 from $43. The average is $40.84.

- Tourmaline Oil Corp. (TOU-T, "outperform") to $29 from $32.50. The average is $31.31.

- Vermilion Energy Inc. (VET-T/VET-N, "neutral") to $47 from $45. The average is $51.65.

"Among the Canadian majors and oily large caps we prefer SU," Mr. rew said. "Beyond the ramp-up of major projects, we now see additional potential for margin growth over the next five years from a suite of technology-oriented projects. Among E&Ps, we still like ECA and ERF for significant liquids/oil growth within cash flow and solid execution. We also prefer condensate rich producers in the Montney play, such as VII and NVA. Given VII's surface challenges, which we view as transitory, the shares have de-rated to a discounted strip valuation on a NAV, multiple, and equity implied NYMEX basis, which we believe represents a compelling entry point."

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Bombardier Inc. (BBD.B-T) continues to display "solid" momentum toward reaching its 2020 objectives, said Raymond James analyst Steve Hansen following its Investor Day in New York on Thursday.

"While management issued 2018 guidance that fell below our prior forecast, the directional trend remains solid, in our view, with sustained revenue growth and margin expansion expected from all four key business segments," said Mr. Hansen. "Most importantly, management reiterated its goal of reaching FCF break-even by yearend, a critical milestone that will mark a shift away from BBD's extended investment cycle toward one of growth and profitability (and eventually deleveraging)."

"With 2017 expected to close on a strong footing, management seems increasingly confident in its longer-term 2020 objectives, calling for revenue to grow by $4.0-billion (7-per-cent compound annual growth rate) and earnings to more than double over the same period. Broadly speaking, these targets are in-line with management's original 2015 plan, although they did trim their outlook for BBA revenue given flat recent market conditions."

Mr. Hansen stressed that execution remains "critical" for Bombardier, noting management spent significant time during the event highlighting segment-specific objectives.

They included: "1) closing its recently signed Airbus partnership (likely by 2H18); 2) flawlessly executing its CSeries ramp-up; 3) delivering the Global 7000 (EIS) to market by 2H18; 4) continuing to build-out BBA's after-market business; 5) pursuing additional growth opportunities in Aerostructures; 6) converting its robust Transportation backlog; and, 7) continuing to drive procurement/cost synergies across the organization. Given the momentum and track record achieved thus far, we remain optimistic in this outlook."

In reaction to the event, Mr. Hansen raised his 2017 earnings per share projection by a penny to 3 cents, despite lowering his revenue expectation slightly to $16.341-billion from $16.461-billion. His 2018 estimates fell to 7 cents and $17.259-billion, respectively, from 11 cents and $18.748-billion.

He maintained an "outperform" rating and target price for Bombardier shares of $3.75. The average target price on the Street is currently $3.40, according to Bloomberg data.

Elsewhere, Credit Suisse analyst Robert Spingarn lowered his 2018 and 2019 EPS estimates to 2 cents and 12 cents, respectively, from 6 cents and 14 cents after attending the event.

Mr. Spingarn, who kept an "outperform" rating and $4 target, said: "We remain confident that the company can hit its FCF targets in 2020 ($750-million to $1-billion inflow), enhanced by the Airbus CSeries deal and the continuing successful execution of the five-year turnaround plan. Nearer term, the company is still poised for cash break-even in 2018, as many structural cash overhangs diminish in H2, including Global 7000 investment, working capital builds, and restructuring costs. Despite looking a bit light on 2018 deliveries and pricing relative to consensus, the company forecasts revenue growth of $1-billion (up 5.5 per cent year over year). Margins ex. BCA are already at an 8-per-cent run-rate in 2017, and are expected to improve across segments through 2020 as cost-out efforts take hold and BCA turns profitable as CSeries reaches full production. We also believe in the long-term promise of the program, and remain confident that the company can control half of its identified market (approximately 6,000 jets) over the long term and likely enhance this opportunity with a larger variant at some point. We think 2018 will be an important year to build CSeries order momentum, especially to gain investor confidence in the program."

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Though he characterized Mullen Group Ltd.'s (MTL-T) 2018 outlook as "conservative," Industrial Alliance Securities analyst Elias Foscolos said its larger-than-anticipated dividend increase reflects underlying confidence in its business.

On Wednesday, the Okotoks, Alta.-based company, which provides long haul and local transportation services, released its 2018 business plan and budget, which Mr. Foscolos said featured a "mixed" short-term outlook with "positive" fundamentals for the longer term.

Mullen is projecting 2018 revenue of $1.37-billion, with 67 per cent (or approximately $800-million) coming from its trucking and logistics segment with the remainder stemming from its oilfield services unit. Its EBITDA is estimated to be $190-200-million.

"The lack of overall margin growth is driven by a change in MTL's revenue mix which has more lower-margin T&L revenue," said Mr. Foscolos. "Capex for 2018 is pegged at $40M and the dividend has been increased by 67 per cent to 60 cents per year. MTL also projected free cash flow (before dividends) of $110M for 2018.

"We think the Outlook is conservative. First, a key assumption made by MTL is that the OFS segment will experience no growth in 2018. We believe that is a conservative stance as major pipeline and infrastructure projects are excluded from the assumptions. Second, there are no acquisitions built into MTL's forecast, notably the T&L segment. In our view, the $1.2-billion revenue estimate is beatable."

Mr. Foscolos said the dividend hike (of 24 cents per year) equates to a 2-per-cent increase in total projected return, which he said "somewhat softens" the lower-than-expected EBITDA.

"What is key is MTL's free cash flow of $110-million, which implies the dividend could have been increased much more," he said.

Based on the update, Mr. Foscolos lowered his 2018 EBITDA projection to $203-million from $224-million. His earnings per share estimate fell to 70 cents from 84 cents.

He kept a "strong buy" rating for the stock, dropping his target to $18.50 from $19. The analyst average target is $17.19.

Meanwhile, BMO Nesbitt Burns analyst Michael Mazar maintained a "market perform" rating and $19 target.

Mr. Mazar said: "We are reiterating our Market Perform rating but continue to believe MTL represents an attractive option for yield-oriented investors. Mullen Group announced its 2018 business plan, including initial revenue and EBITDA guidance along with a 67-per-cent increase to its dividend. Overall, the company expects modest year-over-year growth in both its T/L and OFS segments. The company is also guiding to $190-200-million in OIBDA next year, and we have modestly revised our estimates to reflect the updated guidance."

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Transat A.T. Inc.'s (TRZ-T) "solid" fourth-quarter financial results prompted Desjardins Securities analyst Benoit Poirier to raise his target for its stock despite a lower-than-anticipated outlook for the first half of 2018.

On Thursday, the company reported adjusted earnings per share for the quarter of $1.29, exceeding the projections of both Mr. Poirier (95 cents) and the Street ($1.05). Revenue of $699-million also exceeded expectations ($677-million and $663-million).

"The stronger year-over-year revenue performance stemmed mainly from strong overall passenger traffic, which increased 8.7 per cent year over year," the analyst said.

Though he called its outlook for the winter season "optimistic," it fell short of his expectations.

"As of today, TRZ's capacity is 8 per cent higher versus last year (versus 5 per cent for the total industry). To date, 50 per cent of that capacity has been sold, bookings are up 9.2 per cent and load factor is similar to that last year. In addition, the Canadian dollar more than offset rising fuel costs, which resulted in higher margins (up 2.0 per cent year over year; we expected 3.7 per cent in 1H18). For the transatlantic market (low season in winter), TRZ's capacity is up 20 per cent year over year."

"Management is forecasting strong demand this winter despite fierce hurricane season this year. The hurricane season was very active this year, with Harvey in Texas and Irma in the Caribbean Sea and the Gulf of Mexico. Management said the EBITDA impact of those tropical storms in 4Q FY17 was $2–3-million due to the repatriation operations realized during the quarter. While Cuba was the most damaged region among TRZ's destinations, the region is now ready for the high season. Nevertheless, management expects press coverage in the region during the hurricane season to negatively impact traffic (10 per cent of TRZ's total capacity). Overall, we believe that management will be able to leverage its diversified network and relocate its customers to other regions. In fact, TRZ's capacity growth of 8% was higher than the industry (6 per cent), and management sees strong demand for sun destinations during 1H FY18."

Though he lowered his 2018 EPS estimate to 52 cents from $1.15 to reflect recent asset sales, he raised his target to $20 from $15, keeping a "buy" rating. The average target is $13.66.

"The strong performance achieved by the tour operating business continues to reinforce our confidence in the name, especially with potential upside from Canadian dollar appreciation and the downside protection provided by the $450-million cash surplus, including Jonview," said Mr. Poirier. "We continue to like the name in light of the strong upside potential to our target price (100 per cent)."

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It is time to buy Cardiome Pharma Corp. (CRME-Q, COM-T), according to Mackie Research analyst André Uddin.

He upgraded the Vancouver-based pharmaceuticals company to "speculative buy" from "hold," citing recent share price depreciation, valuation and recent discussions with management.

"We believe Xydalba (an antibiotic to treat a skin infection called ABSSSI) and Trevyent (a pulmonary arterial hypertension (PAH) drug-device combo) should be CRME's key growth drivers," said Mr. Uddin. "The company is currently rolling out Xydalba throughout Europe. We assume CRME would launch Trevyent in 2020. To be conservative, we have trimmed our total revenue estimates from 2018 to 2020.  Without assuming additional product acquisitions, our new estimates of CRME's total revenues suggest a CAGR [compound annual growth rate] of 40 per cent from 2017 to 2020."

Mr. Uddin hiked his target of $2.80 from $2.20. The average is $5.91.

"CRME is down 54 per cent since we downgraded it at $3.12 on Oct. 12, 2016, the stock is also down 47 per cent year-to-date," said  Mr. Uddin. "Our overall stock calls on CRME have generated a 248-per-cent return. We believe investors should take advantage of this tax loss selling."

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RBC Dominion Securities analyst Ross MacMillan downgraded Oracle Corp. (ORCL-N) to "sector perform" from "outperform" with a target of $51 (U.S.), down from $53. The average on the Street is $56.82.

Mr. MacMillan said: "After cutting cloud estimates two weeks ago (note and survey here) we are trimming cloud numbers again. License/ support is performing better but we expect license declines to increase given the maturity of the database product cycle and comps. We don't see an argument for a higher multiple for a better license/ lower cloud revenue mix, even though the near-term impact to earnings is neutral to positive and some may argue that bring your own license model could drive higher PaaS/ IaaS consumption over time. Competitive threats to the technology/ database business remain intense and we struggle to see a fundamental catalyst outside of a material acquisition or a buy-back on repatriation of overseas cash."

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Newcastle Gold Ltd. (NCA-T) was cut to "market perform" from "outperform" by BMO Nesbitt Burns analyst Andrew Kaip. His target is now 80 cents, down from $1.25. The average is $1.44.

"Following the announced agreement whereby NewCastle Gold, Trek Mining (TREK-X), and Anfield Gold (ANF-T) are to combine their businesses to form Equinox Gold, we are downgrading shares of NCA to Market Perform and reducing our target price to an implied valuation of $0.80," said Mr. Kaip.

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In other analyst actions:

Axiom Capital analyst Gordon L Johnson downgraded Canadian Solar Inc. (CSIQ-Q) to "hold" from "buy" and dropped his target to $17 (U.S.) from $26. The average is $21.16.

Stifel analyst Jim Duffy upgraded Under Armour Inc. (UAA-N) to "buy" from "hold," increasing his target to $17 (U.S.) from $12. The average is $12.79.

Argus Research Corp analyst John Staszak upgraded Skechers USA Inc. (SKX-N) to "buy" from "hold" with a target of $44 (U.S.), which is higher than the $39.33 consensus.

Canaccord Genuity analyst Camilo Lyon upgraded Foot Locker Inc. (FL-N) to "buy" from "hold" and hiked his target to $64 (U.S.) from $42. The average is $46.13.