Friday's analyst upgrades and downgrades

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

The recent pullback in share price for Canopy Growth Corp. (WEED-T) presents investors with an opportunity for attractive returns, according to AltaCorp Capital analyst Keith Carpenter.

Expecting the marijuana producer to benefit from further volume wins with provinces and international expansion, he upgraded his rating for its stock to "speculative buy" from "sector perform."

"The shares of Canopy Growth have declined 15.8 per cent over the past six trading days, resulting in a 32.6-per-cent return to our target price of $42," said Mr. Carpenter. "Our view on the potential value of the shares has not changed while the market has both locked in some recent share price gains and is assessing the release of the StatCan data on Thursday that highlighted illicit dried pricing averaged approximately $7.50 per gram in 2017, and has been declining by an average of 1.7 per cent per annum since a peak price of $12 in 1989. This is in line with our assumption as we believe Canopy will realize an average 2018 dried price of $7.10 at the retail level, a price that we expect to decline to $5.00 per gramg by 2026. We believe the Company will more than offset this price decline through increased volumes and higher value, higher margin product."

Mr. Carpenter said Canopy's expected capacity, which is projected to increase to at least 300,000 kilograms by the end of 2019, should "bode well" for volume discussions with the provincial bodies, who he said "are concerned about an adequate availability of product on their shelves this summer with the advent of the recreational market."

"As such, we believe the focus will be to lock-in volumes from the top producers," the analyst said. "To date, Canopy has signed supply agreements with New Brunswick, Newfoundland and PEI. We expect other announcements to follow in the coming months.

"We expect the international market will begin to grow rapidly in the coming years as an estimated 20+ countries move forward on supplying their markets with medicinal cannabis. Given Canopy's expected capacity and their international partnerships announced to date, we believe the Company to be well-positioned to benefit from the demand growth that we envision over the medium-term."

He maintained a $42 target for Canopy shares. The average target among analysts covering the stock is $26.75, according to Bloomberg dayta.

"We believe Canopy has positioned themselves well regarding their brand. This expectation was augmented significantly with the November announcement that Constellation Brands took an equity interest in the company, and that the two would partner towards eventual products for the edibles market once that becomes legal, currently expected in 2019."

"Canopy is well-positioned to continue to benefit from the ongoing discussions with the various provinces which should provide a solid baseload of demand for the company's products once the recreational market is launched. We believe that will be augmented by further volumes from the international market over the medium-term as numerous countries advance their medicinal cannabis markets, some of which Canopy has positioned themselves well through future production and partnerships. The company is also well-placed amongst its peers when looking at its branding efforts. This effort was punctuated by the recent partnership and investment by Constellation Brands."

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Citing its recent "strong" appreciation in share price and current "elevated" relative valuation, Industrial Alliance Securities analyst Jeremy Rosenfield downgraded his rating for Boralex Inc. (BLX-T).

Though he feels the Kingsey Falls, Que.-based power producer still possesses an "attractive" growth outlook, he moved its stock to "hold" from "buy," believing that potential is currently priced in.

Boralex rose 23 per cent in 2017, versus a 2-per-cent jump for its sector peers. Thus far in 2018, it's rise 3 per cent, compared to a 4-per-cent drop for its peers.

"BLX currently trades at approximately 12 times consensus 2018 EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization] estimates, 11 times consensus 2019 EV/EBITDA, and 13-15 times our 2018 P/FCF [price to free cash flow] estimate, all of which are above the peer group averages (approximately 10 times, 10 times, and 12 times, respectively), and within striking distance of a 10-year historical peak dating back to 2007," he said/

"We believe the company will easily exceed its 2GW capacity target ahead of 2020 based on its current development activity, particularly in France, although this is now likely fully factored into the stock price. Dividend increases should also be expected (we forecast 7-8-per-cent growth in 2018). A major strategic investment should represent an upside catalyst, but we should not ascribe value to this scenario at the current time based on speculation alone; we prefer to remain conservative in our investment approach."

Mr. Rosenfield maintained a target price of $25 for Boralex shares, which is 61 cents above the analyst average.

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Five of the eight analysts on the Street currently covering TSO3 Inc. (TOS-T) downgraded their rating for the Quebec City-based company after it announced Thursday a new agreement with Getinge Infection Control AB to co-market its VP4 low-temperature sterilizers in North America.

Under the revised deal, TSO3 will sell directly in Canada and the United States. It will also repurchase at least 100 sterilizers for $3.3-million, with an initial order of 30 units. Getinge, a Swedish global medical technology company, will continue to sell its inventory in North America and the rest of the world.

"We believe these changes are a significant negative for TSO3 as the potentially reduced focus from its large partner creates uncertainty around the sales ramp and peak penetration for VP4," said Canaccord Genuity analyst Neil Maruoka. "We now forecast increased sales and marketing expenditures for TSO3 as it increases its commercialization and market support infrastructure, which pushes out profitability for the company from 2019 to 2020."

Mr. Maruoka lowered his 2018 revenue forecast for TSO3 to $34-million from $36.0-million, and his 2019 projection to $47.8-million from $62.6-million. His adjusted EBITDA expectations dropped to losses of $3-million and $0.5-million, respectively, from profits of $1.1-million and $9.1-million.

Moving the stock to "speculative buy" from "buy," Mr. Maruoka said: "Given the increased uncertainty, why aren't we downgrading to Hold? Following the most recent quarter, we had lowered our forecasts for the VP4 ramp as cracks were beginning to show in the Getinge partnership. With the stock down 27% following this announcement, we believe that a much slower ramp has already been priced in. Further, we believe an FDA approval of expanded claims on sterilization of duodenoscopes could open a significant opportunity, providing upside to our forecasts, and could be a significant catalyst for the stock by mid-2018."

Mr. Maruoka lowered his target to $2.75 from $4.25. The average is currently $3.4.

Laurentian Bank Securities analyst Nick Agostino, who moved the stock to "hold" from "buy," said the deal highlights the "misfirings" of its 3-year relationship with Getinge.

"While Getinge will remain a partner and potentially others may follow, TOS is becoming more involved in direct sales to accelerate sales efforts, resulting in increased opex, inventory and cash drag," he said." There is a risk that the Getinge agreement may be dissolved, potentially by August 2018, creating distribution uncertainty. At this stage we see two possible scenarios playing out: 1) Getinge begins to gain traction on its sizeable pipeline opportunities between now and August, and is able to retain its coveted exclusivity agreement; 2) Getinge is unable to gain the required traction, in which case, we believe they would be less incentivized by the agreement and may walk away; downside to TOS being the need to hire a full salesforce, and potentially expanded opex well in excess of our revised modeling, negatively impacting EBITDA and working capital. While we continue to see corrective action being taken, we await the right level of traction to become more constructive as visibility is challenged given the potential lack of a formal pipeline."

Mr. Agostino dropped his target for TSO3 shares to $2.25 from $4.50.

Other analysts downgraded the stock were:

- RBC Dominion Securities' Douglas Miehm to "sector perform" from "outperform" with a $2 target, down from $4.25.

- National Bank Financial's Endri Leno to "sector perform" from "outperform" with a $2.25 target, falling from $5.50.

- Desjardins Securities' Frederic Tremblay to "hold" from "buy" with a $2 target, dropping from $4.

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Acumen Capital analyst Trevor Reynolds expects the market for Questor Technology Inc. (QST-X) products to expand as climate change and air quality concerns prompts increased legislation across North America.

He initiated coverage of  the Calgary-based company, which designs and manufactures high-efficiency waste gas incinerators, with a "buy" rating.

"Incinerator rentals and sales account for essentially all the company's revenue at this time, however QST has several synergistic products which utilize waste heat for water vaporization (internally developed), and electricity production (acquired in 2014)," said Mr. Reynolds. "QST's water vaporization technology is currently in the test phase and if successful, has the potential to significantly reduce waste water (approximately 90-per-cent reduction) and in turn, the associated handling expenses. While it remains early days, the technology has the potential to be impactful to many producers in the oil and gas space given the costs associated with water disposal and handling. The company's waste heat energy system technology is a complement to the incinerator system, but doesn't provide the same upside potential as water vaporization, in our opinion.

"The revenue driver over the last 12-18 months has been a shift to the rental based model in Colorado where legislation was passed in 2014 (Regulation No. 7) restricting a producer's ability to flare, thus requiring the use of an incinerator. The transition of activity into Colorado did take time, but now appears to have taken hold as evidenced by the movement of QST's assets out of Canada and into the United States. In 2015, 56 per cent of QST's assets and 53 per cent of revenue were generated in Canada, a stark contrast to 2017 where 89 per cent of assets are located in, and 83 per cent of revenue year-to-date has been generated in the United States. In the past, QST's revenue generation was volatile as a result of the sales focused model which saw periods of strength followed up by extended periods of weakness. The transformation to the rental based and hybrid sales/rental model appears to have alleviated those issues for the time being, resulting in recurring revenue stability."

He set a price target for Questor shares of $4.85.

"QST's share price has seen strong positive momentum over the past 9 months on the back of growth in the Colorado market," said Mr. Reynolds. "We believe the adjustment to a rental focused model with more recurring revenue will continue to drive the stock higher over the medium term as the market becomes more comfortable with the outlook. We expect QST to continue growing the rental fleet given strong demand levels. Based on Colorado alone we estimate $15.7-million EBITDA for 2018. QST trades at 4.4 times 2018 fiscal EBITDA based on our estimates. With no direct public competitors to QST we arrive at our target based on a mix of environmental and rental based service company EBITDA multiples."

The lone other analyst currently covering the stock, according to Bloomberg, is Clarus Securities' Stephen Kammermayer, who has a "buy" rating and $2 target.

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Calling it his preferred name among the mid-tier base metals producers, Cantor Fitzgerald analyst Mike Kozak initiated coverage of Taseko Mines Ltd. (TKO-T) with a "buy" rating.

"As Canada's second largest open-pit copper mine, the cornerstone Gibraltar operation has a well-established (and improving) production history, a long-mine life, and provides excellent leverage to copper," he said.  "In our view, Taseko is fairly valued on Gibraltar on a standalone basis, and investors owning the stock today effectively receive 'free upside' on the Florence project that is quietly advancing, as well as Taseko's portfolio of earlier stage copper, gold, and niobium projects."

Mr. Kozak set a target price of $3.50, which exceeds the average target of $2.86.

"In our view, Taseko provides excellent leverage to copper at an attractive valuation," he said.

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Credit Suisse analyst John Pitzer upgraded Intel Corp. (INTC-Q) to "outperform" from "neutral" following "strong" fourth-quarter financial results and what he called "conservative" first-quarter 2018 guidance.

"While INTC modestly underperformed the SOX since 03/17, absolute performance has been strong and our valuation concerns did not materialize owing in large part to better execution," he said. "In addition: (1) Guidance continues to look conservative, (2) Rate of investment has peaked, and (3) Visibility on growth is improving. A still $1 gap between FCFPS/EPS and full EV/FCF valuation are risks, but investor sentiment significantly underappreciates INTC's leverage to our 'Data Paradigm' especially as analytics becomes more cost effective/pervasive; even if INTC is NOT successful in AI/DL, declining analytics cost will drive new use cases and significant incremental compute demand. With better execution, conservative estimates, and significant investor skepticism, we are willing to suffer thru high valuation."

He hiked his target to $55 (U.S.) from $42. The average is $49.55.

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"No longer giving the benefit of the doubt," RBC Dominion Securities analyst Nik Modi downgraded Newell Brands Inc. (NWL-N) to "sector perform" from "outperform" after the Rubbermaid-maker announced it is exploring its strategic options and may sell off assets.

"At this point, we do not have conviction in NWL estimates looking forward. This was the company's third downward revision in less than six months," said Mr. Modi. "Issues facing the company are numerous, including: input cost volatility, retail bankruptcies (notably top 10 customer Toys R' Us and sporting goods retailers), a dramatic shift to e-commerce, inventory de-stocking, mall traffic weakness, and elevated leverage, among others. Given lack of visibility on these issues, we no longer believe it is appropriate to take a leap of faith and continue to give management the benefit of the doubt and recommend the stock. While we acknowledge the long-term simplification benefits of the divestitures, holding these businesses for sale will be a near-term distraction for management and employees. We would also expect there to be a lot of estimate noise given the timing of divestitures, and it is unclear at this time whether the businesses held for sale will be included in the company's core sales growth calculation (which will likely weigh on management's credibility even further). Frankly, we also do not know whether additional divestitures may be announced, as this is the third time the company has announced divestitures since the Jarden acquisition. It was encouraging to hear that the company exceeded Q4 operational cash flow targets, though we have limited clarity on the actual drivers and whether they are sustainable (we should have more color when it reports earnings)."

Mr. Modi dropped his target price for Newell Brands shares to $27 (U.S.) from $35. The average on the Street is $31.21..

"Our call going into 2018 was that NWL was a classic second-derivative story," he said. "Things were tough but we thought sentiment had bottomed. That was until the company announced a reduction to 4Q17, lowered the bar for 2018, and announced more asset sales. As a sell sider, we often say, 'you are only as good as your last call' in this environment. Unfortunately, we did not hold Newell management to the same standard. It would be nice to say we are at a bottom...the problem is we have no confidence in that statement and we're not sure Newell has much visibility either."

After the announcement on Thursday, which caused the stock to dip 20.6 per cent on the day, Morgan Stanley analyst Dara Mohsenian downgraded the stock to"equal- weight" from "overweight" with a $25 target, falling from $38.

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In other analyst actions:

National Bank Financial analyst Adam Shine downgraded Rogers Communications Inc. (RCI.B-T) to "sector perform" from "outperform" and lowered his target by $3 to $64, which is below the consensus of $69.56.

National Bank's Shane Nagle downgraded First Majestic Silver Corp. (FR-T) to "sector perform" from "outperform" and lowered his target to $10 from $10.50. The average is $11.33.