Friday’s analyst upgrades and downgrades

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

"Sometimes it's good to be green," said Desjardins Securities analyst Doug Young in response to Toronto-Dominion Bank's (TD-T, TD-N) first-quarter 2018 financial results, which exceeded his expectations and led him to upgrade his rating for its stock to "buy" from "hold."

On Thursday, TD reported cash earnings per share for the quarter of $1.56, topping Mr. Young's projection and the average estimate on the Street of $1.46. The result was driven by a beat in all operating divisions.

Mr. Young noted the widest variance came from its U.S. retail segment, adding: "Including amortization of intangibles and charges related to the Scottrade acquisition, adjusted earnings increased 28 per cent. That said, this was bolstered by the acquisition of Scottrade (by TD and TD Ameritrade) and U.S. tax reform, and we do not view this level of growth as sustainable once year-over-year comparisons normalize ... It is worth noting that loan growth on a US dollar basis was 5%, NIMs increased 16 basis points year over year (higher deposit margins) and it held the line on expenses, with a NIX [cash efficiency] ratio of 54.6 per cent and positive operating leverage of 380 basis points. That said, the PCL [provision for credit losses] rate of 0.51 per cent was higher than our 0.46-per-cent estimate, although it was down slightly from 0.53 per cent last year. Like last quarter, this was attributed to volume growth and seasonality in its credit card and auto loan books."

Based on the results, Mr. Young raised his 2018 and 2019 cash EPS projections to $6.20 and $6.65, respectively, from $5.97 and $6.40. His reported EPS estimates jumped to $5.74 and $6.52 from $5.57 and $6.30.

With those changes, he raised his target price for TD shares to $84 from $78. The average target on the Street is currently $80.47, according to Bloomberg data.

"We are encouraged by recent expense trends, the ongoing benefits of U.S. tax reform, potential positive impact on TD if there are further rate increases in Canada and the U.S., and its strong CET1 ratio pro forma the reversal of the Basel I floor," said Mr. Young.

Meanwhile, Eight Capital analyst Stephen Gordon Theriault upgraded TD to "buy" from "neutral" and raised his target to $86 from $76.

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Citing its bullish outlook for 2018 and 2019  "driven by strong demand for its supply chain software offering," Canaccord Genuity analyst Robert Young upgraded Kinaxis Inc. (KXS-T) to "buy" from "hold."

On Wednesday, Kinaxis, an Ottawa-based supply chain management and sales and operation planning software company, reported fourth-quarter revenue of $34.4-million, up 14 per cent year over year though falling short of both Mr. Young's projection ($35.3-million) and the expectation on the Street ($34.6-million). Subscription revenue growth grew 19 per cent  from the previous year, but also missed the analyst's estimate ($27.6-million).

"This marked the second quarter of strong growth in Europe, up 240 per cent year over year and 70 per cent quarter over quarter," said Mr. Young. "Management highlighted growing interest in Kinaxis from international markets and had recently added a partnership with supply chain specialist consultant mSE, supporting growth in Europe. "

"Kinaxis delivered very strong adj. EBITDA of $11.2-million representing 32-per-cent EBITDA margin. This crushed our estimate of $9.2-million (26-per-cent margin) and consensus of $9.1-million (again 26-per-cent margin). With a lack of larger deals in the Q4, EBITDA did benefit from lower sales expenses which Kinaxis expenses in the period. Gross margin of 71.7 per cent also surprised positively as compared to our estimates and consensus of 69.7 per cent and 70.8 per cent. We attribute this to the growing mix of subscription revenue as lower margin pro-services continue to move to the channel."

Moving forward, Mr. Young said the company's deal pipeline remains "strong" with "very engaged" partners.

"The company has not seen a compression of its sales cycle but indicated that partners have been active with a vast majority of new customer activity influenced by channel partners," the analyst said. "Kinaxis is responding to the strong demand through partners, direct sales efforts and unsolicited interest with an aggressive expansion of its sales force by 40 per cent in 2018. We expect the maturation of the channel and an expanded sales force points to a fruitful 2019. For 2018, Kinaxis expects subscription revenue growth of 23-26 per cent with EBITDA margin of 23-36 per cent. Not bad for an investment year. We suspect this guidance is conservative and expect to see upside as the year plays out. The company's growing subscription revenue base acts as a predictable source of sales for the company, which we believe can continue to grow at 25 per cent annually with a 25-per-cent EBITDA margin in the long term. This is a premium combination."

Mr. Young raised his target for Kinaxis shares to $96 from $75. The average is $91.36.

"Kinaxis shares have garnered a premium valuation based on a leading combination of growth and EBITDA margin," he said. "This premium multiple is predicated on a high level of predictability and consistent, strong execution. We believe that the appropriate multiple is ultimately determined by the relative level of revenue growth and FCF margin. As can be seen in the charts below, revenue multiples in the software space are well tuned to these metrics and even inflect upwards as growth increases. We believe the risk presented by the large Asian customer loss has been mitigated by the wins of the fourth and fifth automotive OEMs in early 2018. The company's growing subscription revenue base acts as a predictable stream of revenue for the company, which we believe can continue to grow at 25 per cent annually with a 25-per-cent EBITDA margin in the long term. We increase our target valuation to 9 times 2019 estimated enterprise value-to-sales (from 8 times 2018E) to reflect this improved growth profile and rate Kinaxis a BUY with an increased price target .... We are upgrading Kinaxis shares to reflect the increasing visibility of the business and what we view as the sustainable path to our long-term growth estimates."

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Pattern Energy Group Inc.'s (PEGI-T, PEGI-Q) fourth-quarter financial results drew a mixed reaction from the Street.

On Thursday, San Francisco-based company reported quarterly earnings before interest, taxes, depreciation and amortization (EBITDA) of US$99-million, exceeding the consensus expectation of US$93-million. Cash available for distribution (CAFD) of US$42-million missed the Street's estimate of $45-million

The company also announced it expects CAFD for 2018 of between US$151-million and US$181-million, lower than the consensus range of US$176-million and US$185-million.

Despite the mixed results and guidance, Industrial Alliance Securities analyst Jeremy Rosenfield upgraded Pattern shares to "buy" from "hold," believing a recent price depreciation provides investors with an "attractive buying window."

He did lower his target price for the stock to US$23 from US$26 to reflect lower-than-anticipated free cash flow guidance for 2018 and lower near-term cash flow growth expectations following its recent US$326-million acquisition of a 260 megawatt net renewable power portfolio in Japan. The analyst average target is US$23.82.

"PEGI continues to offer investors (1) stable cash flows from its existing portfolio of largely contracted wind assets, (2) healthy CAFD per share growth (6-8 per cent compound annual growth rate 2017-2022 without further acquisitions), (3) longer-term potential upside (900 MW in the iROFO pipeline, plus additional development prospects, (4) an attractive dividend (9.9-per-cent yield), and now (5) a discounted valuation compared with Canadian renewable IPP peers (greater-than 8 times price-to-free cash flow versus 12-14 times for peers)," he said.

The stock was also raised to "neutral" from "underperform" by Bank of American Merrill Lynch analyst Julien Dumoulin-Smith, who lowered his target to US$17 from US$19.

However, Raymond James analyst Frederic Bastien downgraded his rating for Pattern to "market perform" from "outperform" with a US$20 target, down from US$23.

"We are downgrading Pattern Energy … as we expect the stock price to remain depressed over the next 6-12 months," said Mr. Bastien. "We are not worried about the sustainability of PEGI's dividend, to which the Board maintains an unwavering commitment. However, we fear that a low valuation and inflation-driven market volatility are all but shutting the door on potential equity raises and accretive drop-downs in the near term. This is happening just as a high payout ratio and future capital calls on Pattern Development 2.0 are limiting the firm's ability to self-fund its growth this year."

The stock was also downgraded to "hold" from "buy" at Williams Capital.

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Following the release of "strong" fourth-quarter financial results, Echelon Wealth Partners analyst Douglas Loe raised his rating for Extendicare Inc. (EXE-T), touting both its current valuation and "sustained yield attractiveness."

"Extendicare reported FQ417 financial data for the December-end period that were comparatively strong both by FQ4 standard and in comparison to more recent quarters, generating EBITDA and AFFO [adjusted funds from operations] that exceeded our own forecasts and thus again as in most recent quarters showing us that core Canadian nursing care/home care operations can comfortably fund current dividend policy, and with upwardly-scaling assisted living operations providing upside to overall economics," said Mr. Loe in a research note released late Thursday.

"Payout ratio of 67.7 per cent compared favorably to recent periods (68.1 per cent in FQ317, 73.9 per cent in FQ217, 79.6 per cent in FQ416, for example) and is the most attractive ratio generated by the firm since FQ316."

On Wednesday after market close, Markham, Ont.-based Extendicare, which provides care and services for seniors, reported EBITDA for the quarter of $27.6-million, exceeding Mr. Loe's projection of $24-million and a rise of $1.6-millon from the third quarter, which he attributed to "unusually strong" earnings from investments made by Laurier Indemnity, its U.S.-based captive insurance.

"Still, on direct comparison to EBITDA from Canadian operations alone, comparisons to recent quarters are correspondingly favorable, with FQ417 'Canadian' EBITDA of $25.2-million exceeding all prior quarters in F2017 ($24.3-million in FQ317, $23.6-million in FQ217, $20.5-million in FQ117)," said Mr. Loe. "Sequential EBITDA comparison is somewhat confounded by one-time compensation charges ($2.0-million in total) that compressed what is otherwise a seasonally strong quarter for the firm, but even after considering this detail, FQ417 EBITDA was still sequentially strong in what is normally a seasonally soft margin quarter for the firm."

Citing "FQ417 EBITDA/AFFO strength (which will justify the characterization of strength below) and recent share price softness that makes dividend yield more attractive," Mr. Loe upgraded Extendicare shares to "buy" from "hold."

His target for the stock rose to $10 from $9.25. The average on the Street is $9.67.

"We believe that EXE's yield of 5.9 per cent at current share price levels is attractive for yield-conscious investors, and recent share price softness coupled with our target revision together justify to our satisfaction that EXE represents a prudent investment on price appreciation potential as well," said Mr. Loe. "Current yield compares favorably, for example, to yield currently ascribed to Extendicare's best healthcare services/eldercare residences operator hybrid firm Sienna Senior Living (SIA-T, BUY, PT $19.50) that is currently valued at implied dividend yield of 5.2 per cent."

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Stronger than expected well performance in the fourth-quarter led Raymond James analyst Kurt Molnar to raise his rating for Storm Resources Ltd. (SRX-T) to "outperform" from "market perform."

On Thursday, the Calgary-based company reported production for the quarter of 17,936 barrels of oil equivalent per day, meeting Mr. Molnar's forecast of 17,800 boed though liquids production came in 10 per cent higher than his expectation.

"This increase in liquids has dually been a function of better than forecast gas rates over the life of the wells (minimizing declines) where 11th month gas rates on recent wells have averaged 4 mmcfd, along with improving liquids ratios on Storm lands to the South and Northwest," he said.

"Improved well performance means that Storm can grow production and cash flow in 2018 while spending well under cash flow. Most importantly, we expect Storm to generate cash netbacks of $9.50-$10 per barrel of oil equivalent in 2018 against their just reported PDP F&D cost of $5.76/Boe for PDP recycle ratios of 1.8 times even at cycle low gas prices."

Mr. Molnar bumped his target for its stock to $3.35 from $3. Consensus is $3.85.

"These are the best lean gas results we have seen thus far," he said. "Our past downgrade was to reflect our expectation that Storm would intentionally conserve capital due to low gas prices, but the operational results just reported (on new well EURs and reserves) more than compensate for a conservative spending outlook. Storms operational and financial strength should be uniquely outstanding for whenever gas price outlook improves. In the meantime, we expect Storm to continue to grow with strong returns on capital while reducing debt at the same time."

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Expressing skepticism about its online sales expectations, Oppenheimer & Co analyst Rupesh Parikh downgraded Walmart Inc. (WMT-N) to "perform" from "outperform."

"We are increasingly concerned that with recent key drivers of outsized e-commerce sales expansion potentially waning and given our now more muted EPS growth expectations, the valuation at which shares trade could prove capped," the analyst said. "As a result, we no longer see the case for outperformance."

His target fell to US$93 from US$110. The average on the Street is US$104.79.

"Over the past ten-plus years, WMT has traded at an above-market multiple only three times, including once during an economic downturn and more recently on e-commerce enthusiasm," said Mr. Parikh. "As the potential for outsized growth at WMT wanes, we are concerned that shares could be capped at a market valuation."

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Canaccord Genuity's John Bereznicki upgraded Calfrac Well Services Ltd. (CFW-T) to "buy" from "speculative buy."

"Calfrac recently released Q4/17 results that readily beat our revenue estimate of $420.3-million, with higher than expected G&A (primarily due to deferred performance incentive costs) keeping EBITDA in line with our $50.2-million estimate (consensus was $56-million)," he said. "Calfrac also booked a $76.3-million reversal of a previous PP&E impairment charge that drove 40 cents in positive EPS variance relative to our 3-cent loss estimate.

"In the spirit of the recent winter Olympics, we believe Calfrac's US squad will handily champion its 2018 growth as the company's home team faces structural challenges and its international contingent remains a few years from the podium. We are removing the Speculative qualifier from our BUY recommendation to reflect Calfrac's improving balance sheet and reiterating our $8.50 target price."

The average on the Street is $8.12.

Elsewhere, Scotia Capital analyst Vladislav Vlad upgraded Calfrac to "sector outperform" from "sector perform" with a target of $10, rising from $8.50.

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Clarus Securities analyst Nana Sangmuah upgraded Orezone Gold Corp. (ORE-X) to "speculative buy" from "sell."

"With management proposing a simplified CIL (no heap leach) flowsheet focused on processing free-dig oxides at Bombore we expect to see significant savings in both the capex and opex that could significantly boost valuation" he said. "We have reflected our best-estimates for this new flowsheet in our mine model for Bombore and the potential cost savings drive our revised corporate NAV estimate of US$384-million or US$1.13 per share."

Mr. Sangmuah bumped his target by a loonie to $1.50. Consensus is $1.40.

"On our revised estimates, the stock trades at a significant discount to peers," he said. "We believe the current valuation of the stock does not reflect the potential boost in economics from the revised engineering.  We are encouraged by the progress to date and are upgrading our recommendation."

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In other analyst actions:

Raymond James analyst Aaron Kessler upgraded eBay Inc. (EBAY-Q) to "strong buy" from "market perform" with a US$52 target, which exceeds the consensus of US$48.29.

Argus Research Corp analyst David Coleman downgraded Barrick Gold Corp. (ABX-T, ABX-N) to "hold" from "buy."

Industrial Alliance Securities analyst Dylan Steuart upgraded VersaBank (VB-T) to "buy" from "speculative buy" and raised his target to $9.25 from $8.50. The average is $9.13

Beacon Securities Ltd initiated coverage of NanoXplore Inc. (GRA-X) with a "buy" rating and $3 target, which is higher than the $2.83 average.

The firm also initiated coverage of Nemaska Lithium Inc. (NMX-T) with a "buy" rating and $2.50 target price, which is 7 cents higher than the average.

Beacon Securities also gave a "buy" rating to Mason Graphite Inc. (LLG-X) with a $3 target, falling 11 cents below the average.

Craig-Hallum Capital Group LLC analyst Steven Dyer upgraded American Outdoor Brands Corp. (AOBC-Q) to "buy" from "hold."

Bank of American Merrill Lynch downgraded United States Steel Corp. (X-N) to "neutral" from "buy".