Monday’s analyst upgrades and downgrades

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

The ongoing success of Restaurant Brands International Inc. (QSR-N, QSR-T) is a bullish sign for the U.S. fast food industry, according to RBC Dominion Securities analyst David Palmer.

Emphasizing the sales momentum of Burger King in the U.S., distribution savings at Tim Hortons and lower foreign exchange headwinds, Mr. Palmer upgraded his rating for the stock to "outperform" from "sector perform."

"Our prior thesis cited three chief concerns that could constrain EPS [earnings per share] upside: 1) the return of nationally advertised value platforms by the competition, 2) fewer opportunities to procure cost efficiencies, and 3) persistent FX headwinds," he said. "However, we believe sales momentum has sustained in the first quarter at BK US and the company is finding new opportunities to cut costs at Tim Horton's beyond the G&A expense line. We also believe consensus estimates do not account for the recent U.S. dollar weakness, which implies FX could be a tailwind by year end, after a 10 percentage point drag to EPS last year."

Mr. Palmer raised his first-quarter same-store sales growth projections for the U.S. segment of the Burger King chain to 4 per cent from 2 per cent. He said it has "weathered the storm of competitive discounting" through its own value items, in particular chicken nuggets, adding hot dogs will also contribute to growth.

"We present a strategic review of U.S. Restaurants and Packaged Food through the lens of 3G Capital," said Mr. Palmer. "Across both sectors, we have now seen several examples in which companies—through better structure—have found better execution. 3G Capital is not investing in the packaged food or restaurant sectors to teach other companies how to do business. However, strategies and execution of the 3G Capital controlled companies in each sector — Kraft Heinz and Restaurant Brands — are case studies that are already reshaping business strategies in the respective sectors. We believe each company is exploiting different areas for value creation in each industry. … Ultimately, we believe 3G Capital's involvement in each sector continues to be bullish for both sectors even as each sector reaches valuation levels toward the high end of five-year ranges.

"Since 3G Capital purchased Burger King Worldwide, the company has gone through significant operational changes. After negative low single digit top-line growth from 2009- 2011, Burger King has achieved 9-per-cent top-line growth (currency-neutral) under the ownership of 3G Capital, with 3-per-cent same store sales growth and 5-per-cent-plus unit growth. The company's various joint-venture structures and incentives for franchisees has led to sustainable top-line and unit growth. From an overhead standpoint, Burger King G&A per store has decreased from $29,000 (U.S.) in 2010 to $11,000 in 2015 and Tim Horton's G&A per store from $42,000 in 2014 to $21,000 in 2015. Following the Burger King takeover, the company moved to [approximately] 100-percent franchised from 90 per cent, creating a more stable, leaner operating model while paving the way for greater financial leverage and share repurchases. We believe there are plenty of opportunities for QSR's peers to generate value creation through top-line differentiation, overhead cost reduction, a higher franchising mix, followed by increased financial leverage and share purchases. Already, companies such as McDonald's, Wendy's, and Yum Brands are implementing similar initiatives."

He added: "While we continue to believe Yum Brands would be the next most likely acquisition candidate for RBI, it increasingly appears that both YUM and QSR shares can outperform without that deal. Already, Yum Brands has taken some important steps to improve its business and financial structure—and ultimately, we can imagine Yum Brands accelerating unit growth as RBI has with Burger King."

Mr. Palmer raised his price target for the stock to $48 (U.S.) from $38. The analyst consensus price target is $42.82, according to Thomson Reuters.

"Our price target equates to 29 times our new above consensus 2017 EPS estimate of $1.64 (an increase of 17 per cent year over year; $1.60 prior), but we base our price target on 23.5 times the PV [present value] of our 2018 EPS estimate of $2.23 (an increase of 36 per cent year over year)," he said. "Assuming 5.5-per-cent senior unsecured borrowing rate, we estimate refinancing the company's preferred equity could add 35 cents to 2018 EPS and is largely unaccounted for in consensus estimates. We believe our 2018 target multiple to be conservative given our outlook for 8-per-cent-plus top-line growth leveraging into 15-per-cent-plus EPS growth over the long term."

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Encana Corp. (ECA-N, ECA-T) is well-positioned to benefit from rising oil and natural gas prices, according to BMO Nesbitt Burns analyst Randy Ollenberger.

Noting the stock currently trades at an "attractive" valuation in comparison to its peers, Mr. Ollenberger upgraded his rating to "outperform" from "market perform."

"We believe that Encana has a strong portfolio of assets and provides investors with leverage to an improving commodity outlook," he said.

Mr. Ollenberger lowered his cash flow per share projection for 2016 and to 90 cents (U.S.) and $1.11 from $1.15 and $1.30, respectively. He did not change his production average estimates of 349,395 barrels of oil equivalent a day (boe/d) and 317,472 boe/d.

He raised his target price to $7.50 from $6. Consensus is $7.18.

"At current prices, the shares reflect a 2016 estimated EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization] multiple of 12.8 times, which is a material discount to its peer group median of 18x," he said. "On a 2016 P/NAV [price to net asset value] basis, the company trades at a steeper discount of 0.6x vs. the peer group average of 1.3x. Our revised $7.50 target price implies a 2016 EV/EBITDA multiple of 14.3x and a 29-per-cent discount to our 2016 estimated risked NAV of $10.62/share."

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The production profile of Kinross Gold Corp. (KGC-N, K-T) has improved following the acquisition of assets from Barrick Gold Corp. (ABX-N, ABX-T) and the planned expansion of its Tasiast mine in Mauritania, said RBC Dominion Securities analyst Stephen Walker.

Also noting the leverage of recent gold price moves, Mr. Walker upgraded Kinross to "outperform" from "sector perform."

"Our previous cautious outlook was predicated on the view that with production declining and costs increasing, there was risk that both valuation multiples and financial estimates would decline and a value trap would be created," the analyst said. "Our view of Kinross' mine portfolio and potential organic growth projects has improved significantly. The 2018 and then 2020 production declines we previously forecast from maturing assets have been offset by the acquisition of Bald Mountain and 50 per cent of Round Mountain in Nevada and the Tasiast Phase I expansion. We believe the Nevada lands have significant exploration upside and potential to extend the current mine lives."

The analyst said the $610-million (U.S.) acquisition of Barrick's 50-per-cent stake in the Round Mountain mine and 100 per cent of the Bald Mountain mine is a "positive step," noting it improves its geopolitical risk profile, adds reserves/resources and reduces operating costs.

"On our numbers, the transaction is accretive on the basis of NAV, CFPS and AMC per reserve & resource ounce," sad Mr. Walker. "We like the acquisition as it mitigates the impact of Kinross' declining reserve base on the production profile and lowers the company's geopolitical risk, with 2016 estimated gold production in the Americas improved to 61 per cent versus an estimated 48 per cent prior to the acquisitions."

Mr. Walker raised his price target for the stock to $4.75 from $3.50 after increasing his near-term gold forecast by $100 per ounce to $1,250 in 2016 and $1,300 in 2017. His long-term forecast increased by $50 per ounce to $1,300.

The analyst consensus price target is $4.12.

"In comparison to the North American Tier I gold producers, at our estimates Kinross is trading at a discount on the basis of price/net asset value, price/cash flow and enterprise value/adjusted cash flow," he said. "While Kinross has traded at a valuation discount to its Tier I peers given the risk associated with Russia (16 per cent of our operating NAV) and relatively short reserve life average (approximately 9 years versus its peers at 12 years), we believe there is potential for this discount to contract as the market pays up for (1) the recent acquisition in the U.S. of Bald Mountain and 50 per cent of Round Mountain; and (2) the successful development of the Tasiast 12k project."

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Based on its current "lofty" valuation, RBC Dominion Securities analyst Stephen Walker downgraded Goldcorp Inc. (GG-N, G-T) to "underperform" from "sector perform."

Mr. Walker expressed a lower level of confidence in the company's near-term fortunes following a recent cut in its guidance. His production profile for Goldcorp is now "flat" from 2016 to 2012 and is now similar to peers, like Barrick Gold Corp. (ABX-T, ABX-N), Newmont Mining Corp. (NEM-N) and Kinross Gold Corp. (KGC-N, K-T).

"Goldcorp's recent 3-year guidance was well below expectations, resulting in a 20-per-cent decline in our estimates," he said. "We believe it will take time for new management to reestablish investor confidence in the operations and strategy. For example, Newmont began a similar refocusing/restructuring process more than 36 months ago and Barrick began some 18 months ago. Investor confidence should begin to return as Goldcorp meets or exceeds expectations throughout its 2016 quarterly reporting. We would highlight that large and geologically complex mining operations such as Peñasquito, Porcupine and Red Lake can take time to deliver predictable and sustainable results."

Mr. Walker said the company traded at a premium valuation from 2004 to 2010 as it grew to become a Tier I producer. However, he said that premium has since declined, pointing to the failure to meet operating guidance in 2012 and 2014; construction delays and capital overruns at its Cerro Negro project; start-up challenges at Eleonore and variability of its Cochenour zones.

"GG has previously traded at a significant valuation premium, given the expected production growth," he said. "However, we currently model no growth and on our numbers the shares are trading at a significant cash flow (CF) and adjusted CF premium, and are inline on an NAV [net asset value] basis versus the Tier I peers."

He added: "We believe Goldcorp has the potential to trade once again at a premium valuation, given the overall quality of the mining assets, should the company consistently meet or beat the market's expectations on production and costs throughout 2016."

Mr. Walker did increase his price target for the stock to $16.50 (U.S.) from $12. Consensus is $17.92.

"We expect Goldcorp's shares to underperform its peers given its current premium valuation to its peers and the need to re-establish the market's confidence," he said. "Our target multiples are at the low end of Goldcorp's prior trading ranges due to the company's failure to meet its production guidance and new mine start-up schedules/budgets over the last three years."

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BMO Nesbitt Burns analyst Randy Ollenberger downgraded ARC Resources Ltd. (ARX-T) due to share price appreciation as well as weak Canadian gas prices.

He moved the Calgary-based energy company to "market perform" from "outperform," noting shares have risen in price by 10.66 per cent thus far in 2016, and, accordingly, have reduced upside to his target price.

Mr. Ollenberger lowered his 2016 and 2017 cash flow per share projection to $1.56 and $1.92 from $1.74 and $1.99, respectively.

He increased his target price for the stock by a loonie to $20. Consensus is $21.35.

"At current prices the shares are trading at a 2016 estimated enterprise value (EV)/EBITDA multiple of 12.8 times, slightly ahead of its peer group median of 11.8x," he said. "Given our outlook for weak Western Canadian natural gas prices, we see only modest upside from current levels. Our revised target price implies a 2016E EV/EBITDA multiple of 13.4x and is supported by our 2017 estimate net asset value estimate of $18.86/share."

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BMO Nesbitt Burns analyst Randy Ollenberger upgraded Tourmaline Oil Corp. (TOU-T), citing its improved balance sheet and current valuation.

"While we believe that Western Canadian natural gas prices will remain under pressure in 2016 due to the combination of growing production and bloated storage levels, Tourmaline's strong balance sheet and strong hedge book position the company well, in our view," said Mr. Ollenberger, who moved his rating to "outperform" from "market perform."

He added: "We believe the shares are attractively valued relative to their peers at current levels."

The analyst moved his 2016 and 2017 cash flow per share projections to $3.01 and $4.10 from $3.49 and $4.58, respectively.

He maintained a target price of $32. Consensus is $35.85.

"At current prices the shares are trading at a 2016 estimated EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization] multiple of 10.3 times, which is below its North American peer group median of 11.8x," said Mr. Ollenberger.

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In other analyst actions:

AutoNation Inc (AN-N) was rated new "hold" at Jefferies by equity analyst Bret Jordan. The 12-month target price is $50 (U.S.) per share.

Apple Hospitality REIT Inc (APLE-N) was rated new "market perform" at FBR Capital Markets by equity analyst Bryan Maher. The 12-month target price is $20 (U.S.) per share.

Cabot Corp (CBT-N) was downgraded to "sector weight" from "overweight" at KeyBanc by equity analyst Ivan Marcuse.

Cummins Inc (CMI-N) was downgraded to "neutral" from "outperform" at Macquarie by equity analyst Sameer Rathod. The 12-month target price is $111 (U.S.) per share.

IAMGOLD Corp (IMG-T) was raised to "buy" from "market perform" at Cormark Securities by equity analyst Richard Gray. The 12-month target price is $4.25 (Canadian) per share.

MTY Food Group Inc (MTY-T) was downgraded to "hold" from "buy" at Laurentian Bank by equity analyst Elizabeth Johnston. The 12-month target price is $37 (Canadian) per share.

PACCAR Inc (PCAR-Q) was downgraded to "neutral" from "outperform" at Macquarie by equity analyst Sameer Rathod. The 12-month target price is $56 (U.S.) per share.

Toromont Industries Ltd (TIH-T) was downgraded to "hold" from "buy" at TD Securities by equity analyst Cherilyn Radbourne. The 12-month target price is $35 (Canadian) per share.

With files from Bloomberg News