Friday’s analyst upgrades and downgrades

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

Apple Inc. (AAPL-Q) received a pair of downgrades as the Street showed rare signs of concern about the U.S. tech giant amid slowing iPhone sales.

On Thursday after market close, Apple released a second-quarter revenue forecast of between US$60-billion and US$62-billion, falling short of the US$65.73-billion projection among analysts covering the company.

That gap came in the aftermath of first-quarter sales of 77.32 million iPhone units, which also missed expectations (80.2 million). An average selling price of US$796 did top the average forecast of US$756.

In response to the weaker-than-anticipated results, KeyBanc Capital Markets analyst Andy Hargreaves lowered his rating for Apple shares to "sector weight" from "overweight."

"Soft iPhone sell-through suggests a saturated market and the lack of gross margin upside reduces our view of potential profit growth," said Mr. Hargreaves. "This reduces our view of potential upside in the stock and prompts the downgrade."

Though he pegged the company's "fair value" share price at US$178, he did not specify his target. The average price target on the Street is currently US$192.97, according to Bloomberg data.

Bernstein analyst Toni Sacconaghi dropped the stock to "market perform" from "outperform" with a target of US$170, dropping from US$195.

"Relative to expectations, the cycle is weak, and total iPhones sold are likely to be flat for the third straight year," said Mr. Sacconaghi. "We fear that unit growth could potentially decline by more than what we have seen over the last two years, largely due to the fact that iPhone X demand, in particular, appeared to slow dramatically since December."

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Following on the heels of a "healthy" fourth-quarter beat, Raymond James analyst Steve Hansen raised his target price for shares of Methanex Corp. (MEOH-Q, MX-T), expecting a "solid" first quarter.

On Wednesday, the Vancouver-based methanol company reported adjusted EBITDA of US$254-million, a rise of 77 per cent from the previous quarter and well above the Street's expectation of US$235-million. It was largely in line with Mr. Hansen's estimate of US$257-million.

"Management indicated 1Q18 EBITDA [earnings before interest, taxes, depreciation and amortization] will be 'much higher' versus 4Q17 based upon recent contract postings (higher avg. prices) and strong sustained production levels. We concur," the analyst said.

"While the aforementioned pricing environment will no doubt help Methanex post a robust 1Q18 performance, we continue to remain cautious near-term given our belief that methanol prices are poised to fade as recent supply-side constraints ease (i.e. China pollution crackdown, extreme winter, surging gas prices, unplanned outages), with the upcoming Chinese New Year (Feb. 16) likely to serve as an important catalyst, in our view."

Mr. Hansen hiked his target for Methanex shares to US$63.50 from US$60, which remains slightly below The Street's average is US$64.07. He kept a "market perform" rating.

"We are increasing our target price … upon stronger-than-anticipated winter 'fly-up' pricing and commensurate revisions to our financial estimates," he said. "That said, while Methanex remains one of our preferred long-term ideas, we remain tactically cautious based upon our belief that methanol prices are poised to decline through 1H18 as recent supply-side constraints fade."

Elsewhere, BMO Nesbitt Burns analyst Joel Jackson raised his target to US$72 from US$70 with an "outperform" rating (unchanged).

Mr. Jackson said: "Even assuming methanol prices retreat mid-year before rebounding (like 2017) as we do, we see MEOH continuing to outperform on strong FCF [free cash flow] and a robust methanol environment that could see higher year-over-year price floors/ceilings (costlier Chinese gas/coal feedstock, strong MTO demand/additions, supportive oil prices). No doubt month-to-month volatility always prevails in methanol, like many commodities we cover, but 2018 looks like a strong year."

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Expecting headwinds to persist for its international segment, BMO Nesbitt Burns analyst Peter Sklar lowered his financial expectations for Saputo Inc. (SAP-T).

On Thursday, the Montreal-based dairy company reported third-quarter fiscal 2018 adjusted diluted earnings of 47 cents per share, just a penny below Mr. Sklar's estimate of and 3 cents below the consensus on the Street.

"We note that the USA segment underperformed expectations, which the company attributed entirely to negative dairy commodity price factors, particularly the significant intra-quarter decline in the block cheese price," said Mr. Sklar. "Positively, management indicated that if block cheese prices remain stable, operating margins and earnings in Q4/18 should improve. Regarding the U.S. tax reform, Saputo indicated that the consolidated tax rate will decline by about 500 basis points from the current consolidated rate of 31 per cent. We have revised our fiscal 2019 and 2020 estimates accordingly.

"Negatively, management noted that due to an oversupply of dairy commodities in international markets, pricing headwinds will pressure International segment margins over the next several quarters."

With a decline in his revenue projections, Mr. Sklar lowered his 2018 and 2019 EPS expectations to $1.93 and $2.22, respectively, from $1.96 and $2.34.

Keeping a "market perform" rating, his target fell to $44 from $47. The average target is $45.

"We remain cautious based on concerns surrounding the current NAFTA [North American free trade agreement] renegotiation, which could potentially result in further duty-free access of imported dairy products into the Canadian market," he said.

Similarly, Desjardins Securities analyst Keith Howlett lowered his EPS [earnings per share] estimates for 2018 and 2019 to $1.92 and $2.19, respectively, from $2.03 and $2.35.

"Third quarter FY18 EPS was below expectations as a result of weak U.S. market conditions at quarter-end (lower realization of inventories), higher freight and logistics costs that persisted beyond the period of disruptive storm activity, and incremental year-over-year ERP [enterprise resource planning] implementation costs that were above expectations," he said. "US tax reform will reduce the overall tax rate by greater than 500 basis points (versus our preliminary estimate of 400 basis points). We remain confident that Saputo will be able to grow through consolidation."

Mr. Howlett kept a "buy" rating and $49 target for Saputo shares.

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Desjardins Securities analyst Ray Ray initiated coverage of Troilus Gold Corp. (TLG-X) with a "buy" rating, suggesting the restart of its Troilus Gold Project is one of the few remaining executable development-stage assets that could spark investor interest.

Troilus began trading on the TSX Venture Exchange on Jan. 3 following the Dec. 20 completion of its acquisition of the option to acquire the former gold and copper mine, a 4,700-hectare property.

"The Troilus project's location in the Nord-du-Quebec administrative region has its advantages," said Mr. Ray. "In addition to infrastructure and other support, the Quebec government has created two funds dedicated to investments in mining companies through Investissement Québec, the investment arm of the Government of Quebec, as well as measures to reduce governmental fees paid by exploration stage companies. The Troilus project also benefits from ease of access and the availability of key onsite infrastructure (including tailings area, high-voltage substation, etc) that potentially lower the capital requirement and development timeline vis-à-vis other development projects."

"Significant impediment faced by many low-grade, bulk-tonnage underground operations like the Troilus project is the amount of pre-production work and capital required. This creates an extended timeline without cash flows, which can significantly increase the project risk and diminish the rate of return. In this respect, Troilus' management has some flexibility that lends itself to a strategic and phased ramp up. This includes promising near-surface and underground exploration targets, multiple nearsurface satellite deposits and the possibility of an accelerated start-up from the underground aided by ramping down from the bottom of the existing pit. Based on our phased development approach, we estimate the after-tax IRR [internal rate of return] of the project is 18 per cent at a long-term gold price of US$1,300 per ounce."

Mr. Ray emphasized that the project already has a "sizeable" resource of gold, which he believes has a "significant" potential for near-term growth through infill and exploration drilling. He also feels the company's "technical know-how and sector dynamics seem to be in Troilus' favour."

Mr. Ray set a price target of $3.50 for Troilus shares.

"Timing is key for the Troilus project — alongside strategic benefits accruing as a result of the scarcity of junior gold producers and near-term executable projects in Canada, there now exists much improved technical know-how for the development of low-grade, bulk-tonnage underground operations, thereby clearing a path forward for Troilus," he said. "Overall, the Troilus project is among only a handful of assets that we believe are investable owing to its scale and scalability, ease of permitting given its brownfield nature and accessibility in a stable, mining-friendly jurisdiction that should appeal to investors."

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A "strong" first-quarter performance and "positive" outlook reinforced Desjardins Securities analyst Frederic Tremblay's "constructive bias" on Rogers Sugar Inc. (RSI-T).

On Thursday, the Vancouver-based company reported a 28.4-per-cent increase in revenue year over year, driven by its recent acquisitions of L.B. Maple Treat Corp. and Decacer. Sugar volume rose 3.4 per cent for the quarter.

Overall, Rogers reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $28.5-million, exceeding Mr. Tremblay's $26.6-million projection.

"2018 will the first full year of the 'new' Rogers Sugar as its defensive sugar business is now complemented by meaningful exposure to the higher-growth maple syrup market," he said. "The bulk of RSI's business (75–80 per cent) remains refined sugar where the company has a 55-per-cent share of the duopoly-like Canadian market and generates reliable cash flows. Although growth in the Canadian sugar market is relatively muted, RSI is expected to achieve its fourth consecutive year of sugar volume growth in FY18, with guidance calling for a 1.4-per-cent increase.

"We view maple syrup as a welcome addition to RSI's product portfolio as it brings a compelling growth platform, both organically and via M&A, in addition to revenue and cost synergy opportunities. From no presence in 1H17, we estimate that RSI has now accumulated a leading 5–30-per-cent share in the global maple syrup bottling and distribution market via the acquisitions of LB Maple Treat and Decacer in August and November 2017, respectively. We highlight that maple syrup consumption is increasing at a strong pace as per capita consumption rises and new markets are developed. Maple syrup offers not only healthier organic growth prospects than the mature Canadian refined sugar market, but also a larger number of M&A opportunities."

With the results and a raise in the company's sugar volume guidance for fiscal 2018, Mr. Tremblay increased his 2018 and 2019 adjusted earnings per share estimates to 51 cents and 55 cents, respectively, from 50 cents and 54 cents.

He kept a "buy" rating for its stock and increased his target to $7.50 from $7.25. The average on the Street is $7.10.

"In addition to valuation, our unchanged Buy–Average Risk recommendation is supported by: (1) RSI's leadership positions in its legacy Canadian refined sugar operations (55-per-cent market share) and in the global maple syrup products business (25– 30-per-cent market share), (2) revenue growth and cost-control opportunities offered by the LBMT and Decacer acquisitions, and (3) an attractive dividend (5.8-per-cent yield)," said Mr. Tremblay.

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Credit Suisse analyst Robert Moskow lowered his rating for Hershey Co. (HSY-N), believing it "merits a more narrow valuation premium to food peers than in the past due to the deceleration of its growth rate and the stagnation of its profit margin."

"We expect only 1-per-cent organic growth in 2018," said Mr. Moskow. "Hershey's organic sales growth dipped to 0.4 per cent in 2017 due to another weak year for growth in the confectionery category and heightened competition from Mars. Hershey's pipeline for new products in 2018 does not sound exciting enough to regain market share. More importantly, we expect the confectionery category to remain pressured due to competition from less sugary, alternative snacks."

"We expect profit margins to stagnate over the next two years as the higher cost of packaging and distribution offsets the benefit from lower cocoa commodity costs. Reinvestment into ERP systems, sales force technology, and digital marketing capabilities has offset the savings from overhead restructuring. Management signaled these concerns by pushing out its 22-23-per-cent operating margin target indefinitely."

Also expressing concern over its acquisition of Amplify Snacks, noting its "weak track record integrating acquisitions and the dilutive impact to margins," Mr. Moskow dropped his rating to "neutral" from "outperform" with a target of US$115, falling from US$129. The average is currently $110.24.

"Our $115 per share target price represents a 20 times price-to-earnings multiple against our 2019 EPS estimate," he said. "This represents an 11-per-cent valuation premium to its food peers compared to a 14-per-cent premium historically. Weaker growth trends in the confectionery category and rising reinvestment needs represent the biggest risks to our target price."

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In other analyst actions:

TD Securities analyst Vince Valentini upgraded Telus Corp. (T-T) to "buy" from "hold" with a target of $53. The average target on the Street is $50.68.

TD Securities' Aaron MacNeil upgraded Total Energy Services Inc. (TOT-T) to "buy" from "hold" and raised his target by a loonie to $19, which is 36 cents ahead of the consensus.

Tudor Pickering & Co initiated coverage of Peyto Exploration & Development Corp. (PEY-T) with a "hold" rating and $12 target. The average is $16.85.

Canaccord Genuity analyst T Michael Walkley downgraded Avigilon Corp. (AVO-T) to "hold" from "buy" and raised his target to $27 from $25. The average is $24.79.

Roth Capital Partners analyst Scott Searle initiated coverage of Sierra Wireless Inc. (SWIR-Q, SW-T) with a "neutral" rating and target of US$18. The average is $27.42.

DZ Bank AG analyst Ingo Wermann upgraded eBay Inc. (EBAY-Q) to "hold" from "sell" with a target of US$45, rising from US$31. The average is US$48.18.