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.
Desjardins Securities analyst Maher Yaghi expects the telecom and cable sector to attract dividend-seeking investors in 2016, noting long-term interest rates are unlikely to change in an "uncertain" economic environment.
In his outlook for the year, Mr. Yaghi upgraded his rating for Cogeco Cable Inc. (CCA-T) to "buy" from "hold" based on valuation and made several changes to his target prices for stocks.
"We believe 2016 should provide a good environment for continued earnings growth similar to 2015; however, we see signs of potentially more difficult times in 2017 as industry growth begins to be pressured by lower subscriber growth and pricing," he said.
Mr. Yaghi added: "As in previous years, we expect interest rate movements to greatly affect stock returns. Nevertheless, we do not expect there to be a major movement in interest rates and, hence, we see the sector as continuing to attract income-seeking investors. TV viewing habits are shifting quickly and [broadcast distribution undertakings] will need to be nimble in 2016 to offer products and bundle services to retain existing customers — innovation and sourcing content will be key to profitability, in our view. While regulatory risks remain, we believe the government and CRTC are not going to stray from the long-standing facilities-based model in creating competition in Canada and, hence, we are not anticipating a major shift in competitive dynamics to occur in wireless or wireline over the coming period. Overall, we expect the sector to grow by 4.2 per cent in 2016 and 2.5 per cent in 2017."
In justifying his rating upgrade for Cogeco, Mr. Yaghi said: "This is due to the stock's significant price retraction over the last year. Since our last downgrade, the enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA) multiple on the stock has gone from 0.3 times below the peer group to close to a 1.8-time discount now. Historically, the stock has traded at a 1.0 times discount. We believe CCA's operations and free cash flow (FCF) production are still very healthy, and hence we see the current relative valuation as offering an attractive entry point for long-term shareholders."
He maintained his price target of $74 for the stock. The analyst consensus price target, according to Thomson Reuters, is $76.82.
Mr. Yaghi also made the following target changes:
- Rogers Communications Inc. (RCI.B-T, hold) to $52.50 from $52. Consensus is $51.69.
He said: "The revision is based on our reduced EBITDA and FCF forecasts for 2016, as a result of lower wireless revenue growth rates and higher expected cash taxes in future years. We continue to believe management is well underway in turning operations around; however, valuation is keeping us from upgrading the stock at this point."
- Shaw Communications Inc. (SJR.B-T, buy) to $28 from $29. Consensus is $27.46.
He said: "The decline is based on our assumption that the company will require external equity financing to fund its wireless business. We believe the decision to acquire WIND and offer true wireless service (not through a mobile virtual network operator agreement) is the right long-term strategy for the company; however, over the next several years, this will require elevated capex. Our new target price assumes around $600-million of external equity funding. We upgraded the stock in mid-December as we believe the recent stock correction offers a good opportunity for long-term investors to buy into a company that has historically rewarded investors with strong return on invested capital but that has been challenged recently as a result of not having a true wireless product offering. This disadvantage should diminish as WIND is integrated and its services improved through new capex investments."
- Telus Corp. (T-T, hold) to $44 from $47. Consensus is $43.55.
He said: "The reduction is due to two assumption changes. First, we assume that the company's aggressive stock buyback program will be materially reduced in the next couple of years as the company focuses on its fibre deployment and 10 per cent dividend growth strategy. Second, we have reduced our expectations of wireless profit growth due to lower average revenue per user (ARPU) growth in Alberta and lower general economic growth in the company's incumbent local exchange carrier (ILEC) territory."
The focus on Apple Inc.'s (AAPL-Q) ability to cope with the economic problems in China and concerns about its supply chain have created an attractive risk-reward for investors, according to Mizuho analyst Abhey Lamba.
Suggesting the company's core business has significant upside, the analyst upgraded his rating for the stock to "buy" from "neutral."
"It is the job of an analyst, especially one with an investment horizon longer than one quarter, to look beyond what 'everyone already knows' and to consider the implications of the near-term knowns and the longer-term potentials," said Mr. Lamba, according to Barrons.com. "We did that last year with Apple and made a non-consensus call.… At the current time, sentiment has turned completely negative. We recognize the recent flurry of bad news from the iPhone supply chain, lacklustre iPhone sell through, and fully understand the concerns presented by slowdown in China. However, as is usually the case with various technology companies, we think extrapolating current data points to eternity is neither fair to the company nor an appropriate way to value Apple as an investment."
Mr. Lamba lowered his 2016 and 2017 earnings per share projections to $9.45 (U.S.) and $10.20 from $9.78 and $11.45, respectively.
However, he noted a Mizuho survey of more than 1,000 customers "indicated that Apple continues to command a healthy eco-system with a large number of loyal customers who are likely to upgrade phones over the next few years."
He added, according to Benzinga.com: "Apple continues to represent a very strong franchise that has potential to keep gaining share."
Mr. Lamba did suggest first-quarter 2016 revenue and earnings will likely fail to meet expectations, and, accordingly, he lowered his target price for the stock to $120 from $125. The analyst consensus is $145.05.
Credit Suisse analyst Dan Galves said he believes the earnings power of General Motors Corp. (GM-N) is higher than assumed while the downside is less severe.
Touting "company-specific advantages and opportunities that position them to outperform peers over a variety of scenarios and will support trough earnings above expectations," he upgraded his rating for the auto maker's stock to "outperform" from "neutral."
"Clearly, there is significant concern that the global auto cycle has peaked, driving weak sentiment across the auto sector," the analyst said. "We believe these concerns are over-stated in the near-term and thus we see a good risk/reward that GM's [approximately] 13 per cent free cash flow yield can be sustained for longer than the Street expects. When a downturn does eventually come, we believe GM has company-specific advantages/opportunities that position them to outperform peers over a variety of scenarios and will support trough earnings above expectations. Overall, we remain bullish on auto volumes in 2016. We see a global auto market at different points of the cycle in different regions, and believe that the energy/commodity price unwind that is a major factor in recent global macro data weakness should be positive for vehicle affordability/driving trends (energy prices) and for vehicle production costs (metals/plastics)."
He raised his 2015, 2016 and 2017 EPS estimates to $4.85 (U.S.), $5.45 and $5.65, from $4.80, $5.40 and $5.50, respectively.
Predicting "substantial" cost savings are ahead and the company is "well-positioned for industry mega-trends," he raised his target price by a dollar to $38. Consensus is $41.63.
"GM is trading at a compelling 5.4 times 2016 EPS, and 11x the trough earnings estimate we lay out," he said. "More important than valuation, we believe GM can continue to outperform Street expectations due to substantial material cost savings (both supplied components and commodities) and a much better product cadence in '16/'17. This after GM outperformed expectations in 2015 by expanding global margin 120 basis points despite flat volume growth and a trough product cadence. And we see a mgmt. team coming into its own, in terms of driving efficiencies across the organization as well as positioning the company to win in a global auto market that is likely to change massively over the next 5-10 years."
Following its $295-million (U.S.) acquisition of Boulder Brands Inc. (BDBD-Q), BMO Nesbitt Burns analyst Kenneth Zaslow upgraded Pinnacle Foods Inc. (PF-N) to "outperform" from "market perform" and designated it his "top pick" for 2016.
On Friday, Pinnacle said it is extending its tender offer for all outstanding shares of Boulder at $11 each.
In justifying the rating change, Mr. Zaslow pointed out he expects the focus in 2016 to shift toward "1) earnings power, particularly for 2017; 2) the potential acceleration of its long-term growth relative to its initial growth algorithm in 2018 and beyond; and 3) the defensive nature of a domestic company with superior execution of a sound strategy."
He added: "The combination of internal growth opportunities, recent acquisitions, particularly Boulder Brands, and the likely need for defensive investment posturing in uncertain global markets has created a compelling investment opportunity. First, we expect PF to exceed its long-term growth algorithm for the third consecutive year in 2016, reflecting stellar execution of product innovation, pricing architecture, margin management, and cash deployment. Second, the Boulder acquisition should transform PF's earnings power. PF's synergy targets likely will prove conservative, as it likely will seek to extract synergies in three areas: 1) the implementation of a leaner G&A overhead structure; 2) optimization of Boulder's co-pack network and leveraging PF's in-house manufacturing; and 3) rationalization of low-margin, low-velocity stockkeeping units (SKUs). Also, PF likely will benefit in the 2017 fiscal year from more normalized egg white costs used in its gluten-free portfolio. Third, similar to the past several years, we expect PF's growth rate to accelerate from its long-term growth targets after 2017, reflecting 1) the evolution of its portfolio to higher-growth categories than its legacy portfolio at the time of the IPO; 2) continued cost opportunities from the Boulder integration; 3) revenue opportunities (e.g., extension of certain shelf-stable equities into refrigerated, distribution gains in EVOL); and 4) a reduction in interest expense as PF aggressively deleverages its balance sheet to under 4x."
Mr. Zaslow said he is not changing his financial estimates for the company until the acquisition closes, but he expects the deal to be accretive by at least 18 cents in 2017 "on the margin opportunity."
He raised his price target for the stock to $50 from $42. The analyst consensus is $47.17.
Stock of Owens Corning (OC-N) offers a favourable risk-reward profile with "abundant upside and limited downside with the caveat that results are likely to be volatile," said RBC Dominion Securities analyst Robert Wetenhall.
Saying "solid underlying demand trends across the portfolio and self-help initiatives designed to drive profitability provide good visibility into earnings," Mr. Wetenhall upgraded the company to "outperform" from "sector perform."
"OC delivered an exceptionally robust return (31.3 per cent) and outperformed its peers in the building product space … that are more heavily leveraged to domestic consumer spending," he said. "Many investors are now asking whether they missed the stock given last year's strong performance. On a fundamental basis, FY15E revenue growth is expected to increase only slightly (1 per cent) because strong FX headwinds pressured top-line performance in composites and insulation. Although revenue performance was tepid, FY15E operating margin is expected to rise by 200 basis points from 7.8 per cent to 9.8 per cent as a result of higher selling prices and a favorable product mix in composites and lower input costs in roofing."
Mr. Wetenhall expects 2016 sales to increase by 4.7 per cent, supported by higher prices and stronger volumes across each of the company's segments.
"The combination of higher selling prices, increased volumes, and lower input costs is expected to drive incremental profitability across the portfolio: composites (100 basis points year over year), insulation (210 bps y/y), and roofing (270 bps y/y)," he said. "As a result, we expect that FY16E EBITDA margin will rise by 200 basis points y/y, from 15.5 per cent to 17.5 per cent."
He raised his target price for the stock by a dollar to $53 (U.S.). Consensus is $50.03.
In other analyst actions:
Canadian Tire Corp Ltd (CTC.A-T) was downgraded to "outperform" from "top pick" at RBC Capital by equity analyst Irene Nattel. The 12-month target price is $146 (Canadian) per share.
Concho Resources Inc (CXO-N) was raised to "outperform" from "market perform" at Cowen by equity analyst Ryan Oatman. The target price is $112 (U.S.) per share.
Energen Corp (EGN-N) was raised to "outperform" from "market perform" at Cowen by equity analyst Ryan Oatman. The target price is $50 (U.S.) per share.
Laredo Petroleum Inc (LPI-N) was raised to "outperform" from "market perform" at Cowen by equity analyst Ryan Oatman. The target price is $10 (U.S.) per share.
Noble Corp plc (NE-N) was downgraded to "market perform" from "outperform" at Cowen by equity analyst Marc Bianchi. The target price is $10 (U.S.) per share.
Prospect Capital Corp (PSEC-Q) was downgraded to "underperform" from "market perform" at Wells Fargo by equity analyst Jonathan Bock.
Quebecor Inc (QBR.B-T) was raised to "top pick" from "buy" at Cormark Securities by equity analyst David Mcfadgen. The 12-month target price is $40 (Canadian) per share.
Syntel Inc (SYNT-Q) was raised to "neutral" from "underweight" at JPMorgan by equity analyst Puneet Jain. The 12-month target price is $50 (U.S.) per share.
Whiting Petroleum Corp (WLL-N) was raised to "outperform" from "market perform" at Wells Fargo by equity analyst David Tameron.
Williams-Sonoma Inc (WSM-N) was downgraded to "neutral" from "outperform" at Wedbush by equity analyst Seth Basham. The 12-month target price is $54 (U.S.) per share.
With files from Bloomberg News