Monday’s analyst upgrades and downgrades

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

Shares of Agnico Eagles Mines Ltd. (AEM-N, AEM-T) are fairly valued at their current level and suggest limited near-term upside, according to RBC Dominion Securities analyst Stephen Walker.

He downgraded his rating to "sector perform" from "outperform."

"Agnico Eagle shares have performed well and have outperformed many of the Tier I & II gold producers, driven in large part by meeting or beating operating guidance and delivering new high quality resources and reserves with a very successful multi-year brownfields exploration program," he said. "However, the shares are presently trading at a premium to the Tier II NA gold producers and appear to be fairly valued. As a result of the more modest implied target return, which supports our sector perform rating, we expect AEM shares to perform in line with its Tier II peers."

Mr. Walker cited as an example of Agnico's "industry-leading excellence" its 3.3-million ounce resource at its Amaruq gold project in Nunvaut, which has a discovery cost of about $15 per ounce compared to recent resource M&A at $65 per ounce.

After updating his financial models for the company to incorporate improved guidance and expectations for new resources and reserves, Mr. Walker raised his price target for the stock to $67 (U.S.) from $65. The analyst consensus price target is $55.86, according to Thomson Reuters

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In a research report on the timber and wood products sector, BMO Nesbitt Burns analyst Mark Wilde downgraded both Norbord Inc. (OSB-N, OSB-T) and Louisiana-Pacific Corp. (LPX-N) based on valuation.

Noting both stocks are trading near their target prices, he moved his rating for the companies to "market perform" from "outperform."

"The two companies are the largest global producers of oriented strand board (OSB) and both have performed well on the back of a strong rally in North American OSB prices: the benchmark North Central index price is currently at $310/msf [thousand square feet]," said Mr. Wilde. "Twelve months ago, it was at $192/msf, up 61 per cent year over year. Over the past 15 years, the index has averaged $228/msf. BMO's estimate of 'mid-cycle' pricing is $240/msf."

Mr. Wilde said the supply/demand balance has improved "marketedly."

"Operating rates have improved from low/mid-80 per cent to low-90's driven by a combination of improving housing demand and relatively static supply over the past couple of years," the analyst said.

"But, strong OSB prices have shifted focus to supply additions. Any meaningful capacity increase appears unlikely before mid/late-2017. However, it is clear the current rally is triggering capacity restart discussions."

He added: "Is it different this time? The OSB industry has historically been highly fragmented, with little supply discipline. A late-2012/early-2013 flurry of mill restarts is only the most recent example. While one can argue that a slower growing and an increasingly consolidated industry will think/act differently in the future, we remain wary about hanging too much of an investment thesis on that argument. It is possible, but it remains an unproven hypothesis. There is also a reasonable argument that supply/demand will keep OSB markets healthy for some time. However, with LPX above $20 and NBD above $25, we think the prudent decision is to move to the sidelines."

Mr. Wilde raised his EBITDA forecast for Louisiana-Pacific for 2016 to $302-million from $281-million and to $407-million in 2017 from $386-million.

He maintained a price target of $20. Consensus is $22.18.

"Our $20 price target is based on a blended EV/EBITDA multiple of 6.7x on our mid-cycle EBITDA of $427 million. We value LP's OSB, Engineered Wood and South America businesses at 6.2x and the Siding business at 7.5x. Through the housing downturn, LP has done an impressive job of growing the Siding franchise — providing an important second leg to LP's growth story. Siding offers a higher growth rate as well as greater cross cycle earnings stability."

For Norbord, he maintained his estimates and his target of $26 (U.S.). Consensus is $28.32.

"Much like LPX, Norbord's European operations offer more EBITDA stability. The ongoing expansion at the Scotland mill will help to increase EBITDA over the next 12-24 months."

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Citing improving operational performance and positive cost trends through the second quarter, RBC Dominion Securities analyst Dan Rollins upgraded IAMGOLD Corp. (IAG-N, IMG-T) to "sector perform" from "underperform."

Along with a "healthier" gold price environment, Mr. Rollins said those factors should allow the Toronto-based company to deliver both sustaining and operating free cash flow in the second half of 2016.

"IAMGOLD's operational performance has improved the last few quarters with productivity initiatives, cost cutting, process improvements and greater efficiencies delivering gains at Essakane and Rosebel, both higher cost mines," the analyst said. "These benefits in conjunction with weaker currencies and oil prices (including costly elimination of hedges) have played a role in the positive cost trends. Underground development and progress at Westwood remains on track with IAMGOLD's expectations."

However, Mr. Rollins emphasized that capital allocation in the future remains a significant concern.

"With IAMGOLD openly talking up a right-sized Cote Gold project on its Q2/16 call, we remain concerned the higher gold price could see cash deployed towards this higher risk low-grade project versus reducing debt," he said. "While paying down debt may not be as glamorous as production growth, the move would reduce balance sheet risk and free up cash flow. Interest savings could then be deployed towards brownfield opportunities and exploration, given recent success on a number of fronts.

"By paying down 50-per-cent of long-term debt of $635-million, IAMGOLD would still have $237-million in cash and positive sustaining free cash flow to direct towards funding the company's share of the Sadiola Sulphide project ($190-millionon a 50/50 basis). The project could provide IAMGOLD with annual average production of 130 Koz (all-in sustaining cost of $825/oz) over 10 years assuming AngloGold (operator) agrees to move forward with the project."

Mr. Rollins raised his target price for the stock to $6.50 (U.S.) from $5.50. Consensus is $5.45.

"IAMGOLD's shares have rallied materially since the Dec. 15 lows driven by the improved gold price and operational performance," he said. "Under our revised thesis and current environment, we expect IAMGOLD's shares will track movements in gold as long as prudent capital allocation occurs."

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Though he still believes Primero Mining Corp. (PPP-N, P-T) offers patient investors a long-term value proposition, RBC Dominion Securities analyst Dan Rollins downgraded the stock to "sector perform" from "outperform."

He said he expects most investors to "sit on the sidelines" until operational consistency is achieved at its San Dimas mine in Mexico and "sustainable" gains come from its Black Fox mine in Northern Ontario.

"Following another downward revision to guidance, we now believe the operational and tax-related headwinds facing Primero are too great," he said.

He lowered his target price for the stock to $2.25 (U.S.) from $3.25, citing "the impact lower near-term production and higher costs had on our sustaining free cash flow forecasts as well as use of lower blended P/NAV [price to net asset value] (0.95x versus 1.00x) and EV/AdjCF [enterprise value to adjusted cash flow] (9.5x versus 10x) multiples reflecting operational and tax related headwinds."

Consensus is $4.45.

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Given the expectation of continued challenges in Alberta over the next 12 to 18 months, CIBC World Markets Alex Avery downgraded Artis Real Estate Investment Trust (AX.UN-T) to "sector performer" from "sector outperformer."

"We expect the REIT's 14-per-cent NOI [net operating income] exposure to the Calgary office market and broader 31-per-cent NOI exposure to Alberta property markets (including the much more stable and resilient retail property market and industrial property market) could continue to weigh on the REIT's unit price, maintaining a discount to NAV [net asset value] associated with this exposure while market conditions continue to be challenging," the analyst said. "We expect the Calgary office market could see challenging conditions persist for an extended period, reflecting both the reduced demand for office space resulting from lower energy prices and energy industry investment, and also resulting from significant inventory growth, with significant space still under construction.

"While we expect the REIT is well positioned to manage these challenges, with limited lease maturities and a strong management track record of leasing and asset management, the likelihood of a persistent discount to NAV driven by Alberta exposure could tend to limit unit price appreciation, prompting our adoption of a sector performer rating."

Mr. Avery said he expects Artis to continue to "recycle" capital, including the dispositions of portions of its Alberta holdings while growing its portfolio south of the border. He also expects a reduction in its exposure to the Calgary office market and its overall Alberta presence to less than 25-per-cent of its NOI, adding that figure "could be significant thresholds for changing investor perceptions of Artis as an 'Alberta-exposed' REIT to a more diversified exposure."

"Alternatively, we expect a significant improvement in the outlook for the Calgary office market, and the Alberta economy in general could reduce the current discount to NAV," he said. "We rate Artis REIT sector performer, balancing a significantly discounted unit price, on both a discount to NAV basis and a relative multiple basis, a very high and sustainable 8.0-per-cent distribution yield, and what we expect to be very steady and consistent overall financial and operating performance over the next few years, with persistent investor concerns about Alberta and Calgary office market exposure, which we expect could continue while these markets continue to soften, and the associated price appreciation limitation associated with an investor concern-driven discount to NAV."

He lowered his price target to $14 per unit from $14.50. Consensus is $14.47.

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There is no longer significant near-term upside in JP Morgan Chase & Co. (JPM-N), according to Citi analyst Keith Horowitz.

He downgraded the stock to "neutral" from "buy."

"One of our favorite valuation metrics is the implied cost of equity, which we back into using our 2016-2018 EPS estimates along with our view of long term normalized returns. When we compare the historical cost of equity to 6 month forward returns … cost of equity for the group fell 20 basis points to 10.3 per cent on Friday's stock performance, and at current levels, we don't see valuation for the sector as particularly compelling. JPM's implied cost of equity of 10.5 per cent is also fairly inline with the group, significantly lower than BAC's 11.8 per cent and the lowest of the G-SIB's, besides WFC at 10.2 per cent. At current levels, we don't see much upside potential for JPM."

He added: "The risk of downgrading JPM here is that we continue to see good news on the rate front, but we prefer BAC since we view it as better positioned for higher rates and more room for multiple revaluation (BAC currently trades at highest implied cost of equity in our group of 11.8 per cent vs JPM at 10.5 per cent). BAC does carry similar regulatory risk as JPM (such as higher GSIB buffers), so for investors looking for a rate play with less regulatory risk we like CFG. We also view KEY as best value in the group with the most room for multiple expansion (currently 11.0-per-cent cost of equity."

Mr. Horowitz maintained his price target of $65 (U.S.). Consensus is $69.71.

"JPM is probably one of the most consensus longs on the buy side and sell side (76 per cent of the 38 analyst ratings are Buy), which we believe is reflective of a strong management team that has been able to weather the tough macro and regulatory environment better than peers," he said.

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In reaction to Friday's announcement from Bristol-Myers Squibb Co. (BMY-N) that its drug Opdivo failed in a lung cancer trial, BMO Nesbitt Burns analyst Alex Arfaei upgraded his rating for Merck & Co Inc. (MRK-N).

"This is an extraordinarily fortunate outcome for Merck's Keytruda and we argue it has seismic commercial market share implications given that we expect NSCLC [non-small cell lung cancer] to be the largest IO [immune-oncology] indication," said Mr. Arfaei.  "We now argue that Keytruda will likely dominate first line (1L) NSCLC, where patients are healthier, are treated more aggressively, and the duration of treatment is long. We believe that Keytruda will now be used exclusively in patients with at least 50-per-cent PD-L1 expression (i.e., 25 per cent of the market), and we now also expect some off-label use in patients above 10-per-cent PD-L1 expression given that there is no other PD-1 alternative in 1L."

Mr. Arfaei increased his forecast for Keytruda NSCLC to $2.3-billion (U.S.) from $1.7-billion and to $6.4-billion in 2020 from $4-billion.

"We now forecast peak Keytruda forecasts of $12-billion by 2026, up from $9-billion," the analyst said. "As a result, we now forecast that Merck will grow revenue by a CAGR [compound annual growth rate] of 5 per cent and EPS by at least 14 per cent from 2016 to 2020."

He raised his target to $72 from $62. Consensus is $62.90.

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In other analyst actions:

Weyerhaeuser Co. (WY-N) was downgraded to "neutral" from "buy" at Davidson based on its second-quarter earnings and revenue miss. The firm maintained a $33 (U.S.) target for the stock, versus the $35.22 average.

Barclays analyst Kannan Venkateshwar downgraded Twenty-First Century Fox Inc. (FOX-Q) to "equal-weight" from "overweight" with a target of $29 (from $33). The average is $32.48.