Monday's analyst upgrades and downgrades

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Inside the Market's roundup of some of today's key analyst actions. This file will be updated often during the trading day so check back for new details

Beacon Securities analyst Gabriel Leung upgraded Redknee Solutions Inc. (RKN-T) to "speculative buy" from "hold" in the wake of a "sharp decline" in share price.

Noting the stock has fallen almost 35 per cent since the release of weaker-than-expected third-quarter earnings, Mr. Leung pointed to both those results and a lack of clarity about the integration of recently acquired Orga Solutions as reasons for the pullback.

"While we agree there is uncertainty around the company's near-term growth prospects (organically and via Orga), we believe a lot of the risks have been priced in given the current valuation of 1x sales and 8.5x EBITDA (based on our 2016 fiscal year estimates, which are below consensus)," he said.

The company will release its fourth-quarter results on Dec. 2 after the market close. Mr. Leung said his quarterly projections (of $55.6-million in revenues and EBITDA of $4.3-million) are "relatively conservative that we've only assumed a minor quarter-over-quarter improvement in core revenues (i.e. from last quarter's very weak result)."

"Bottom-line, we believe the bar has been set relatively low for the upcoming fiscal Q4 results, which could enable the company to outperform, which could act as a catalyst," he said. "Based on the aforementioned points, we believe there is an interesting risk-return opportunity and we are upgrading our rating."

He maintained his target price of $4. The analyst average is $5.50.

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BMO Nesbitt Burns analyst Charles Sebaski believes James River Group Holdings Ltd. (JRVR-Q) is "much more an earnings story than we previously recognized."

He upgraded his rating for the stock for the Bermuda-based insurance holding company to "outperform" from "market perform" following recent meetings with the company's management.

"We believe this earnings-focused operating model will do three things: (1) Lead to increasing capital returns, including a sustained special dividend; we estimate dividends of $2.30 in 2017; (2) Allow for increasing operating leverage; and (3) Generate [estimated return on total assets] expansion of 250 basis points over the next two years. Consequently, we will be moving to a forward earnings multiple valuation; this compared to the tangible book value multiple that is more typical of commercial insurers and that we have been using for James River prior.

"While James River's focus on smaller niche products and minimal appetite for property risk was known, our recent meetings with management highlighted how they truly seem to run the business from an earnings perspective. This means management is incredibly focused on keeping the company's balance sheet sheltered from loss. This lack of risk appetite is perhaps best shown in the company's 1-1000 year [probable maximum loss]  that stands at $10-million, or approximately 2 per cent of capital compared to commercial insurers that often expose upwards of 20 per cent at the more frequent 1-250 year level. The meaningfully low $1-million policy limits create more of a frequency (earnings) exposure as compared to a severity (capital) exposure; which also supports an earnings valuation. "

Based on the company's third-quarter results, Mr. Sebaski raised his earnings per share estimate for 2015 by 5 cents to $2.10 (U.S.). However, he lowered his 2016 EPS projection to $2.35 based on reinsurance contraction.

He maintained his price target for the stock of $36 (U.S.). The analyst consensus is $33, according to Thomson Reuters.

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The $85-million (U.S.)  sale of sections of its Duvernay mineral rights to an undisclosed buyer "moves the chains" for Trilogy Energy Corp. (TET-T), said Raymond James analyst Kurt Molnar.

He upgraded the stock to "outperform" from "market perform."

"Trilogy attributes the deal value as $30-million for the production and reserves and $82-million for the raw undeveloped land," said Mr. Molnar, who believes the buyer is Shell. "That translates into $51,725/barrels of oil equivalent per day or about $10/barrels of oil equivalent for reserves and $9-million per undeveloped section (we only value Duvernay at $5-million/section in our current model). The last number is the most relevant because Trilogy still retains 190 net sections of undeveloped land in the Duvernay (including 5.25 net sections swapped in this deal to make some blocks bigger and more contiguous). This value per section is on par with the highest valued transactions done in the Duvernay to date despite a collapse in commodity prices since the last high water mark deals done in the Duvernay by Chevron. This too speaks to how far the project has come on costs, curves and implied returns on invested capital."

He added: "Some will say not all of Trilogy's Duvernay will be worth $9-million/section, but some of its lands will be worth more (the Duvernay just sold was not their best) and some will be worth less if nothing else changed. But we expect drilling and completion costs to come down more in the Duvernay, type curves to continue to rise and oil prices to recover materially. So $9-million per section may be the kind of number that is achievable over time or better. If we use that benchmark, Trilogy's undeveloped Duvernay alone (190 sections) is worth $1.7-billion while the enterprise value for the entire business in the market right now is just north of $1.0-billion."

Mr. Molnar said Trilogy requires at least one more large transaction in the Duvernay in order to complete the process of normalizing its financial position. He estimated the company has reduced its net debt from $780-million in the fourth quarter of 2014 to $575-million in the fourth quarter of 2015 while maintaining the bulk of their Duvernay holdings.

"One of the fundamental appeals of the Duvernay is that the number of companies with exposure to the play is limited," the analyst said. "There are lots of ways for investors or companies to 'play in' the Montney and other projects but very few ways in the Duvernay. This scarcity improves Trilogy's negotiating position for its next Duvernay deal and also makes Trilogy one of the exceptionally rare ways an equity market investor can get meaningful direct leverage to the Duvernay (the scale of the Duvernay within Shell, Exxon, Chevron and EnCana is modest) adding another scarcity value in terms of stock market investors."

In the wake of the deal, Mr. Molnar lowered his 2015 EPS estimate by a cent to 86 cents, but he raised his 2016 projection to 92 cents from 87 cents.

He raised his price target for the stock to $9.50 from $9. Consensus is $5.64.

"In our view, the sale of a small portion of Trilogy's Duvernay lands for very strong transaction metrics suggests that perhaps the most 'educated' current company active in the play effectively agrees with us," he said.

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The stock of Chipotle Mexican Grill Inc (CMG-N ) is likely to remain volatile in the near-term though the impact of its high-publicized E. coli woes will "prove temporary," said BMO Nesbitt Burns analyst Andrew Strelzik.

On Friday, the U.S. Centers for Disease Control and Prevention announced six additional cases of E. coli linked to the fast good chain across four states – California, Ohio, New York and Minnesota. Mr. Strelzik noted 35 per cent of the company's units are located in those four states.

"While we originally believed media coverage of E. coli and consumer perception issues created risk only to the fourth quarter 2015, the incremental occurrences create risk to the first quarter of 2016 that we had not expected and increase the probability CMG realizes a traffic decline in 4Q15," the analyst said. "We continue to believe the comp impact will be temporary; however, near-term uncertainties remain in terms of risk of additional E. coli cases, the number of stores at which comps may be affected, and the potential timeline of a comp recovery."

Mr. Strelzik lowered his price target for the stock to $730 (U.S.) from $767. The analyst average is $711.77, according to Bloomberg.

He explained: "Our assumptions include 1) 2016 EPS low case of $19.80 driven by our sensitivity analysis of the potential comp impact; 2) 24x price to earnings, in line with CMG's trough valuation over the past five years; 3) no additional E. coli cases; and 4) no structural change in consumer perception of CMG. Our sensitivity assumes 100 per cent of CMG's stores realize a similar initial same-store sales decline from the company baseline (mid-teens for first several weeks) and timeline of recovery (eight weeks) that we believe CMG realized in Minnesota during the September salmonella outbreak. We expect CMG to provide an update on trends prior to reporting 4Q15 results."

He maintained an "outperform" rating, while Sterne Agee CRT analyst Lynne Collier downgraded her rating to "neutral" from "buy."

"The source of the problem has not been identified, which we believe creates uncertainty about whether the bad news is fully behind the company," Ms. Collier said.

Maxim analyst Stephen Anderson lowered its target to $585 from $718.

"Although all Chipotle restaurants have reopened, we argue that headline risk is likely to depress traffic for an extended period," Mr. Anderson said. "We argue that the outbreak now threatens to depress CMG's traffic nationwide more profoundly for the next few quarters."

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Significant changes to the business model of Kellogg Company (K-N)  have bolstered  the confidence of  Credit Suisse analyst Robert Moskow.

Calling the stock "the best risk-reward in our [coverage] space," he upgraded his rating to "outperform" from "neutral" following the company's recent investor day.

"For a traditionally slow and sleepy company, we were impressed by the significant changes CEO John Bryant put it place," said Mr. Moskow. "Half of the management team presenting came from outside Kellogg over the past four years. The Kashi business has returned to its birthplace in Solana Beach and is expected to return to growth in 2016. Importantly, we sensed a shift away from what had become an overly dogmatic approach toward using innovation to improve gross margin and mix. Instead, Kellogg is making an enormous commitment to bring new Millennial consumers to the franchise by improving the quality of its food. This includes adding more nuts and berries to existing lines, introducing muesilis and granolas, and removing artificial colors and flavors. Management told us that the benefits from SG&A leverage, including the implementation of zero-based budgeting across its business geographically gives it the cushion it needs to more than offset these important investments."

Noting heightened pressure on management is a "win-win scenario for shareholders," he added: "We might be jumping to conclusions, but we see evidence that management is feeling more pressure than normal to turn around the business, either from an activist investor or just from a dissatisfied board of directors. For example, it made an out-of-character decision to give its 2016 guidance early during its [second-quarter] earnings call and it pulled together its analyst day at the last minute. Our sense is that the company has reached a crossroads where management either achieves its targets over the next two years or the board chooses to pursue a more aggressive avenue for shareholder creation. Kraft Heinz would be ready and eager to buy the business if the board opened the door. Recent ownership stakes taken by activist investor JANA and Soros Fund Management indicate a growing (albeit early) view that Kellogg may become an event-driven story."

Mr. Moskow said the company reached "an inflection point" in the third quarter without fanfare. He said the company delivered 2-per-cent sales growth, excluding currency, increased its operating profit growth by 6 per cent, excluding an executive compensation reset, and raised its gross margin by 20 basis points.

"This may not sound like much to celebrate, but it represents top-tier performance in the context of the consumer staples sector," he said. "More importantly, it should give investors confidence that they don't need to believe in a turnaround just around the corner to buy the stock. The company merely needs to keep delivering the results it is capable of delivering today."

He raised his price target for the stock to $76 (U.S.) from $72. The analyst average is $69.87.

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Following a shakeup of the senior management team at Textura Corp. (TXTR-N), Credit Suisse analyst Michael Nemeroff downgraded his rating for the software company to "neutral" from "outperform."

The rating change came after co-founder and former chief executive officer Patrick Allin resigned as executive chairman and as a member of the board of directors.

"The departure of Mr. Allin, who assumed the executive chairman role in [the second quarter of 2015] to focus solely on sales and client strategy, increases TXTR's near-term sales execution risk, in our view, as he was a key relationship manager for many of the company's large general contractor and owner customers," said Mr. Nemeroff. "His departure could also impact the company's near-term ability to build the company's sales pipeline and convert potential customers that are currently in the sales funnel."

The analyst lowered his 2016 revenue growth estimate to an increase of 30.1 per cent year over year from 32.5 per cent. Consensus is 32 per cent.

He also lowered his 2016 EPS projection to 50 cents (U.S.) from 58 cents.

His price target is now $24 (U.S.), down from $27. Consensus is $31.

"Despite our belief that TXTR's product portfolio provides significant value to customers throughout the commercial construction industry, and that the company's financial model is compelling and will show significant leverage at scale, we feel that the risk/reward on TXTR shares are now fairly balanced," he said. "On top of disappointing sales execution over the last few quarters (slower international ramp, ODR headwinds), the big holes in senior management (CEO, chairman, new sales) cause us to move to the sidelines."

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In other analyst actions:

Bankers Petroleum Ltd (BNKT) was downgraded to "buy" from "action list buy" at TD Securities by equity analyst Shahin Amini. The 12-month target price is $4.75 (Canadian) per share.

Copa Holdings SA (CPA-N) was rated new "buy" at HSBC by equity analyst Ravi Jain. The target price is $75 (U.S.) per share.

California Resources Corp (CRC-N) was rated new "buy" at Ladenburg Thalmann by equity analyst Noel Parks. The 12-month target price is $7 (U.S.) per share.

Fairchild Semiconductor International Inc (FCS-Q) was downgraded to "neutral" from "positive" at Susquehanna by equity analyst Christopher Caso. The 12-month target price is $20 (U.S.) per share.

Hewlett Packard Enterprise Co (HPE-N) was rated new "hold" at Maxim Group by equity analyst Nehal Chokshi. The 12-month target price is $13.50 (U.S.) per share.

HP Inc (HPQ-N) was raised to "buy" from "hold" at Maxim Group by equity analyst Nehal Chokshi. The 12-month target price is $17 (U.S.) per share.

KeyCorp (KEY-N) was raised to "buy" from "hold" at Jefferies by equity analyst Kenneth Usdin. The 12-month target price is $15.50 (U.S.) per share.

Panera Bread Co (PNRA-Q) was raised to "buy" from "hold" at Maxim Group by equity analyst Stephen Anderson. The 12-month target price is $210 (U.S.) per share.

Sonoco Products Co (SON-N) was raised to "outperform" from "neutral" at Macquarie by equity analyst Danny Moran. The 12-month target price is $50 (U.S.) per share.

Seaspan Corp (SSW-N) was downgraded to "market perform" from "outperform" at Wells Fargo by equity analyst Michael Webber.

Constellation Brands Inc (STZ-N) was raised to "outperform" from "market perform" at Cowen by equity analyst Vivien Azer. The 12-month target price is $170 (U.S.) per share.

Synchrony Financial (SYF-N) was raised to "buy" from "neutral" at Sterne Agee CRT by equity analyst Henry Coffey. The 12-month target price is $38 (U.S.) per share.

TransAlta Corp (TA-T) was raised to "sector perform" from "underperform" at RBC Capital by equity analyst Robert Kwan. The 12-month target price is $7 (Canadian) per share.

With files from Bloomberg News