Skip to main content

A depot used to store pipes for Transcanada Corp's Keystone XL pipeline in Gascoyne, North Dakota November 14, 2014.Reuters

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

The Bruce Power agreement is contributing to the de-risking of the outlook for TransCanada Corp. (TRP-T), according to CIBC World Markets analyst Paul Lechem.

Noting the company's management is refocusing its business "on the more consistent small-to-mid-sized contracts versus a previous focus on less predictable/controllable 'mega-projects' (such as Keystone XL, Energy East)," Mr. Lechem upgraded his rating for the stock to "sector outperformer" from "sector performer."

Last week, the pipeline operator announced signed an agreement to refurbish the Bruce nuclear facility and operate it through the estimate end of its life in 2064. It also exercised its right to increase its stake in the plant to 48.5 per cent for $236-million from Borealis Infrastructure.

"This agreement provides TransCanada with long-term visibility for both capital investment and operation of the Bruce Power facility," said Mr. Lechem. "The key risks relate to Bruce Power assuming responsibility for costs and schedule of the [asset management or AM] and [major component replacement or MCR] work, although the structure of the agreement and the split of AM/MCR work attempts to minimize risks of overruns. The company is targeting an after-tax unlevered IRR in the low double digits.

"We expect the transaction to be modestly accretive to EPS and cash flow in 2016 given a slightly higher realized power price (i.e., $65.73/MWh vs. YTD of $63/MWh), and a higher ownership position. Accretion will vary through 2019 as plant availability is expected to range between low and high 80-per-cents based on planned maintenance activities. The accretion for 2019 and beyond will also depend upon the power price adjustment for the first MCR, which has yet to be determined. We have adjusted our model to reflect our initial estimates."

Mr. Lechem noted TransCanada stock has declined approximately 27 per cent in the year to date. He blamed "concerns over future growth related to oil and gas production and related infrastructure, the prospect of rising interest rates, and company-specific issues such as the US denial of a presidential permit for Keystone XL, and limited visibility to the progress of the company"s other major projects."

"We view the Bruce Power contract, while a 'mega' project in terms of aggregate size, as contributing on an annual basis on a similar scale to these small-to-mid-sized projects with a similarly lower risk profile," the analyst said. "The Bruce Power contract supports TransCanada's 8-10-per-cent dividend growth target through 2020 and beyond."

"At this point, we view TransCanada"s investment outlook as sufficiently compelling to warrant an upgrade ... The company"s short- to mid-term growth is secured through its portfolio of small to mid-sized projects and the Bruce Power contract, with potential upside over the longer-term if any of the company"s mega-projects come to fruition."

He lowered his price target for the stock to $56 from $58, explaining the target is "based on a two stage dividend discount model averaging dividend growth of 8-10 per cent through 2020 and a growth rate of 1.5-2.5 per cent thereafter, driven by investments in small- to mid-sized projects and the Bruce Power contract."

The analyst consensus is $54.09.

=====

RBC Dominion Securities analyst Fraser Phillips expects the nickel market to "tighten significantly" over the next few years.

Accordingly, in reaction to downward revisions to his price forecasts, he downgraded Sherritt International Corp. (S-T) to "sector perform" from "outperform."

Mr. Phillips reduced his nickel price forecasts (per pound) for 2015, 2016, 2017 and 2018 to $5.38 (U.S.), $5, $6 and $8 from $5.50, $6, $8 and $10.

"The performance of the nickel market has been disappointing in 2015," he said. "Higher Chinese ore stockpiles and Philippine ore supply than we originally estimated, Chinese refined nickel destocking, and a weak stainless steel market combined to delay the tightening of the nickel market in response to the Indonesian export ban. However, we believe the nickel market has finally moved into deficit and believe the market will remain in deficit throughout our forecast period. At the same time, inventories are at historically high levels, and it will take some time for them to decline to levels that will support strong pricing. As a result, we have reduced our price forecasts and pushed out our expectation for a significant increase in nickel prices to 2017 and beyond."

Mr. Phillips said he expects Sherritt and its partners to continue to fund any related cash shortfalls at the Ambatovy project, a joint venture in Madagascar. He said: "Under our base case Sherritt is free cash flow positive from 2016 on. However, at current spot commodity prices and currencies our analysis indicates that Sherritt would be free cash flow negative after funding its share of operating deficits at Ambatovy. We expect Sherritt and its partners to negotiate a restructuring of the Ambatovy partnership now that the project is non-recourse and expect the outcome will be positive for Sherritt."

The analyst reduced his net asset value per share projection to $3.13 (Canadian) from $4.90. His earnings per share forecast for 2015, 2016 and 2017 dropped to losses of $1.14, $1.10 and 67 cents from losses of $1.10, 71 cents and breakeven.

He also reduced his price target for the stock to $1 from $1.75. The analyst consensus is $2.41, according to Thomson Reuters.

"Sherritt remains one of the few North American investment alternatives with significant leverage to nickel, which is the key to our investment thesis," Mr. Phillips said. "Any upside for the share price in our view depends on a recovery of the nickel price, and to a lesser extent, oil prices. Following the sale of the coal and royalty business, Sherritt's Oil business in Cuba continues to generate significant EBITDA, and an expansion at Moa could provide additional upside to our estimates. The start-up of the 40%-owned Ambatovy nickel project in Madagascar has gone well. Longer term, diminishing risks related to Cuba provide additional upside potential."

=====

Though he said cost reduction efforts by Reitmans Canada Ltd. (RET.A-T) are "positive," BMO Nesbitt Burns analyst John Morris expects the company's shares to remain "constrained" until "meaningful and consistent revenue growth returns."

On Thursday, the retailer reported break-even earnings per share for the third quarter, below Mr. Morris's estimate of 15 cents. Gross margins and operating income also missed expectations.

"Sales were slightly ahead of our expectations while gross margins were significantly weaker, 57.4 per cent versus 61.2 per cent a year ago and our expectation of 60.2 per cent, driven primarily by adverse foreign exchange effects that accounted for approximately 310 basis points of deleverage," the analyst said. "On a currency neutral basis gross margins would have been approximately 60.5 per cent. Inventory levels remain elevated, which could lead to additional gross margin pressure."

To reflect the earnings miss and "tempered" fourth-quarter expectations, Mr. Morris dropped his 2015 earnings per share forecast to a loss of 12 cents from a profit of 7 cents. His 2016 projection fell to 9 cents from 25 cents.

He kept his "market perform" rating for the stock while lowering his target price to $4 from $6.50. The analyst consensus is $6.25.

"We believe that ongoing efforts to reposition several major banners are encouraging but will take time for improved sales to materialize," said Mr. Morris.

=====

Baytex Energy Corp. (BTE-T)  has taken proactive steps toward withstanding a long-term period of low oil prices, said RBC Dominion Securities analyst Greg Pardy.

However, according to Mr. Pardy, that "hunker-down approach" will likely bring declining production and higher operating costs in 2016.

He initiated coverage of the company  with a "sector perform" rating.

"Baytex Energy's resolute steps to withstand a prolonged period of low oil prices, including the suspension of its dividend and curtailed capital investment, are sound, but will likely manifest themselves in declining production and higher unit operating costs until overall production growth resumes in a $60 (U.S)/barrel WTI price environment."

The analyst said the company has taken numerous steps to manage its balance sheet, and now possess sufficient liquidity through bank credit facilities to endure further price weakness.

"However, under our operating outlook, at WTI prices under $46/barrel through 2016, Baytex could breach its covenants by the third quarter, necessitating further relaxation with debt holders," said Mr. Pardy. "A covenant breach would increase the costs associated with Baytex's credit facility, and limit its financial flexibility."

He added:  "Baytex's survival steps this year should enable the company to resume growth once a sustained oil price recovery takes shape," he said. "Looking ahead into 2016, Baytex has framed a preliminary capital budget of $350–$400 million, which is down approximately 25 per cent year/year. At this level of spending, we expect Baytex's production to decline outside of the Eagle Ford. Our outlook for 2016 calls for production to decline 8% to 77,300 boe/d as the impact of reduced investment and natural declines unfold. Baytex's production growth will remain WTI dependent, with the potential for a resumption of growth in 2017."

Mr. Pardy set a price target of $8 for the stock. The analyst consensus is $9.97.

"We believe this target valuation reflects Baytex's capital discipline, above average balance sheet leverage, mixed production growth visibility and above average reserve life index," he said.

=====

Though its near-term sales and visibility will be hurt by a recent, highly publicized E. Coli outbreak, RBC Dominion Securities analyst David Palmer feels the potential for high returns and long-term growth remain for Chipotle Mexican Grill Inc. (CMG-N).

In reaction to the recent woes, Mr. Palmer lowered his fourth-quarter earnings per share forecast to $2.58 (U.S.), a 33-per-cent year-over-year drop, from $4.39. His 2016 EPS forecast fell to $15.50 from $17.31.

"We estimate the company's 4Q [same-store sales] range of -8 per cent to -11 per cent implies the company expects December trends to fall within the -9 per cent to -20 per cent range, following low single digit growth in October and a 16% decline in November," the analyst said. "For 4Q, we assume a SSS decline of 10 per cent, which is towards the low end of the company's range, as we believe Friday's headlines from the CDC indicating illnesses occurred in three additional states (Illinois, Maryland, and Pennsylvania) might lengthen the pace of recovery by a few weeks. Furthermore, we model [approximately] 1-per-cent SSS growth in 2016 with trends turning positive in 3Q16. However, in a downside scenario, we foresee a high-single digit SSS decline, with a modest rebound in 2017. We will be closely monitoring media mentions for an indication as to when trends may stabilize."

Mr. Palmer maintained his "outperform" rating for the stock while dropping his target price to $575 from $825. The analyst average, according to Bloomberg, is $576.65.

He said: "Our new price target equates to 27x our new 2017 EPS estimate of $21.61 (+26% YOY; $24.20 prior), which we believe is an appropriate discount to the company's historical 3-year average price/earnings ratio of 29x and reflects limited earnings visibility going forward. That said, our new assumptions imply a larger impact to EPS in 2016 than that of 2017."

Despite the company's struggles, Mr. Palmer said he believes the company's combination of high incremental returns and sustainable growth continues to a "premium ratio of P/E to earnings growth to high-growth peers."

"We see many reasons to believe that Chipotle can return to mid-single-digit SSS and 20-per-cent EPS growth following an initial recovery phase," said Mr. Palmer. "These include: 1) improving throughput; 2) the rollout of catering and new items; 3) a future mobile/loyalty program; and 4) strategic marketing. We believe the company is effectively reinforcing its above-average appeal to Millennials, who are increasing visits to Chipotle despite dramatically reducing spending at restaurants."

"Chipotle's food safety issues seem to have exposed deficiencies in the chain's supply testing protocol, particularly as it—like Yum China—manages hundreds of smaller suppliers. While this shortfall has been a surprise for a chain once owned by McDonald's, it is heartening to see how Chipotle has swiftly taken steps to increase the rigor of its product testing with outside consultant perspective. We still believe that Chipotle's reputation for "Food with Integrity" will be restored, along with its combination of high returns and a deep invested capital opportunity."

Elsewhere, the stock was downgraded to "market perform" from "outperform" by Cowen analyst Andrew Charles. It was downgraded to "neutral" from "buy" by Guggenheim analyst Matthew Difrisco.

=====

In other analyst actions:

Advanced Accelerator Applications SA (AAAP-Q) was rated new "buy" at Jefferies by equity analyst Peter Welford. The 12-month target price is $33.00 per share.

American Electric Power Co Inc (AEP-N) was raised to "buy" from "neutral" at UBS by equity analyst Julien Dumoulin-smith. The 12-month target price is $62 (U.S.) per share.

ARM Holdings PLC (ARMH-Q) was downgraded to "market perform" from "outperform" at Northland Securities by equity analyst Auguste Richard. The 12- month target price is $52 (U.S.) per share.

BB&T Corp (BBT-N) was raised to "strong buy" from "outperform" at Raymond James by equity analyst Michael Rose. The 12-month target price is $45 (U.S.) per share.

Bankers Petroleum Ltd (BNK-T) was downgraded to "speculative buy" from "buy" at TD Securities by equity analyst Shahin Amini. The 12-month target price is $3.25 (Canadian) per share.

Motorola Solutions Inc (MSI-N) was rated new "hold" at Jefferies by equity analyst George Notter. The 12-month target price is $68 (U.S.) per share.

Match Group Inc (MTCH-Q) was rated new "outperform" at Wells Fargo by equity analyst Peter Stabler.

Norfolk Southern Corp (NSC-N) was raised to "equal-weight" from "underweight" at Barclays by equity analyst Brandon Oglenski. The target price is $95 (U.S.) per share.

Polaris Industries Inc (PII-N) was downgraded to "neutral" from "buy" at UBS by equity analyst Robin Farley. The 12-month target price is $105 (U.S.) per share.

ProMetic Life Sciences Inc (PLI-T) was rated new "buy" at Euro Pacific Canada by equity analyst Douglas Loe. The 12-month target price is $4 (Canadian) per share.

Public Storage (PSA-N) was raised to "sector weight" from "underweight" at KeyBanc by equity analyst Todd Thomas.

Sonoco Products Co (SON-N) was downgraded to "underweight" from "equal- weight" at Barclays by equity analyst Scott Gaffner. The target price is $38 (U.S.) per share.

Teva Pharmaceutical Industries Ltd (TEVA-N) was rated new "buy" at Mizuho Securities USA by equity analyst Irina Koffler. The 12-month target price is $79 (U.S.) per share.

Towers Watson & Co (TW-Q) was downgraded to "market perform" from "outperform" at Raymond James by equity analyst C Gregory Peters.

WestJet Airlines Ltd (WJA-T) was raised to "outperform" from "neutral" at Macquarie by equity analyst Konark Gupta. The 12-month target price is $26 (Canadian) per share.

With files from Bloomberg News

Report an error

Editorial code of conduct