Monday’s analyst upgrades and downgrades

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

Metro Inc.'s (MRU-T) premium valuation leaves "little" room for multiple expansion going forward, according to CIBC World Markets analyst Mark Petrie, who noted "the gap to peers is at or near all-time highs."

Citing the valuation challenge and an outlook for "stable, but slower" earnings growth, Mr. Petrie downgraded his rating for the stock to "sector performer" from "sector outperformer."

Mr. Petrie called the Montreal-based retailer's second-quarter results, released on Aug. 12, "solid," emphasizing same-store sales growth was "nicely" ahead of his projections. Earnings per share of 72 cents was slightly below his 74-cent forecast, which he attributed to a higher tax rate and slower share buyback activity.

"Numerous media reports are building a wall of worry about massive price wars in food retail," he said. "But from where we're sitting, there is more smoke than fire. Undoubtedly, the market is more competitive than just a year ago. Square footage growth has largely resumed a normal trajectory closer to 2 per cent than the 1.4 per cent seen in 2015, and perhaps more importantly, shoppers are migrating to discount. In and of itself this is not overly meaningful to players with a diversified portfolio (like Metro), but as it happens, this trend does favour the two of the players that have been most aggressive at adding food space – WalMart and Costco. Wal-Mart in particular has upped its presence as of late, but we do not view either as having leapfrogged ahead on store-level execution or become irrational chasing sales with crazy prices. The function of their growth is more a matter of selling space and today's consumer tastes.

"But they are growing, and they are taking market share. Clearly Metro is as well however, and we view Empire as the most substantial net loser - a reflection of poor execution in Western Canada; under-representation in the discount channel; and a third-man-in real estate portfolio in an increasingly competitive Ontario conventional business. As inflation slows, this places greater pressure on all retailers to find other ways to grow the top-line or extract margin leverage. Though square footage remains rational, there appears little appetite to pass price increases given the loss of traffic in conventional and consumers' addiction to the flyer across segments. Enter suppliers. Loblaw's highly-publicized ask was promptly followed by its competitors, and while negotiations remain underway, suppliers will begrudgingly be giving up their pound of flesh. In our view, this will largely fund any price investments, and expect Metro's gross margin to hold relatively stable. In the case of Metro, tonnage results are very strong, and as noted, Metro is clearly taking market share. However, we believe the bulk of this is occurring in Quebec, and stems from the closure of the Loblaws banner in that province. Outside of this event, we do not believe tonnage would have deviated substantially from the recent range of 0 per cent to 0.8 per cent. Of course, this itself is a strong result, and we believe Metro continues to execute across banners and regions."

In lowering his financial projections for Metro going forward, Mr. Petrie said: "The rapid deceleration in food inflation that we've witnessed from all the grocers has meant a reduced SSS figure next year, as well as a lower gross margin. SG&A and interest costs have been pared down." His EPS projection for 2016 is down to $2.36 from $2.40. His 2017 estimate is now $2.56, down from $2.69.

Mr. Petrie also lowered his price target for the stock by a loonie to $46. The analyst consensus price target is $45.92, according to Thomson Reuters.

"Looking at the immediate peer group, the valuation … looks rich," he said. "While we have no doubt that Metro deserves a premium valuation, we hesitate with the gap seen today … The gap becomes even more noteworthy if you break out the Shoppers business buried within Loblaw's consolidated retail segment and assign a more typical drug store multiple. Likewise, FCF yield highlights the significant premium being attributed to Metro."

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BMO Nesbitt Burns analyst Fadi Chamoun boosted his rating for Westshore Terminals Investment Corp. (WTE-T) in reaction to the stock's recent woes.

Mr. Chamoun said Westshore has underperformed both the overall market as well as most transportation/infrastructure assets by a "significant margin" since he downgraded the stock to "underperform" on May 29, "rendering the stock's relative valuation less punitive." Accordingly, he moved his rating back to "market perform."

"At the same time, sentiment on coal has improved with increases in thermal coal and hard coking coal pricing," the analyst said. "We note that Teck recently upgraded its 2016 [fiscal] export coal outlook by 1 million tonnes; while we do not believe this improved export outlook will help WTE (as these additional volumes are likely to be shipped through Teck's Neptune facility), it does suggest that export coal markets are, at the minimum, stabilizing."

Mr. Chamoun said the company's second-quarter results, reported on Aug. 3, met his expectations.

"In our view, the outlook for the company appears steadier, with guidance for volume throughput of 25 million tonnes in F2016," he said. "We see little risk to downside this year; albeit we continue to believe approximately 4 million tonnes of total throughput represents thermal coal that we characterize to be high risk over the longer term."

He raised his target price for the stock to $19 from $14. The analyst consensus price target is $19.90.

"We believe the combination of stabilizing markets in coal and a current lower relative valuation for WTE moderates the bear case for the stock," Mr. Chamoun said. "We continue to see the potential for rewards as being a lot more attractive in the railroad industry where we see opportunities for margin expansion, EPS growth, and improving cash flow, which could result in dividend growth at a much faster pace."

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BMO Nesbitt Burns analyst Heather Kirk upgraded H&R Real Estate Investment Trust (HR.UN-T) to "outperform" from "market perform," calling it "a high-quality portfolio with cash flow visibility."

Ms. Kirk also raised her target to $26 per unit from $24 . Consensus is $24.55.

"The REIT trades at a discount to NAV [net asset value] of 10 per cent despite an institutional quality portfolio, significant financial flexibility and strong cash flow visibility," she said. "The REIT's Calgary office portfolio has lower risk of cash flow erosion due to the credit quality of the tenancies and average lease term of over 17 years and upcoming asset sales are expected to reduce the overall exposure to this more challenged market."

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CIBC World Markets analyst Prakash Gowd downgraded Concordia International Corp. (CXRX-Q) in reaction to the drug maker's decision to lower its guidance and suspend its dividend as its chief executive officer departs.

Mr. Gowd lowered his rating to "sector underperformer" from "sector performer" as dropped his target to $7.80 (U.S.) from $27.50, compared to the consensus of $40.03.

On Friday, shares of Concordia, based in Oakville, Ont., plunged to a two-year low, dropping 39 per cent, after its second-quarter results failed to meet expectations.

Based on forex changes and competitive issues south of the border, the company  lowered its 2016 guidance. EBITDA fell to $510-million-$540-million (from $610-million to $640-million), while revenue dropped to $859-million to $888-million (from $1.02-billion to $1.06-billion).

"While Brexit affects AMCo revenues negatively, it appears that high single/low double digit growth should be achievable going forward, contingent on the company's ability to execute on its planned product launches, and to continue to take price increases," said Mr. Gowd.

"The U.S. legacy business will remain significantly challenged as generics erode the market share of some of its top drugs, and the pricing/reimbursement environment remains unfriendly. We do not expect a recovery in the U.S."

He lowered his 2016 and 2017 EBITDA projections to $522-million and $489-million, respectively, from $569-million and $623-million.

"Based on our estimates, we believe Concordia will have difficulty in meeting its debt obligations when they start coming due in 2021," the analyst said. "We have modelled our forward-looking debt, interest and purchase consideration payments closely based on the schedule provided by the company in its latest MD&A. In spite of that, we expect the company to face a cash shortfall of $170-million when $1.66-billion of term loans come due in Q4/21. An expected total cash shortfall of over $500-million could prevent Concordia from fulfilling its full obligations to its creditors."

Elsewhere, Laurentian analyst Joseph Walewicz downgraded the stock to "hold" from "buy" and lowered his target to $12 from $35. GMP's Martin Landry also moved it to "hold" from "buy" with a target of $14, down from $40.

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The second-quarter results for Badger Daylighting Ltd. (BAD-T) showed "signs of a turn," said BMO Nesbitt Burns analyst Bert Powell.

He upgraded his rating for the Calgary-based provider of non-destructive excavating services to "outperform" from "market perform."

"Turn looks like it came sooner than we expected," he said. "Oil and gas market [are] less of a headwind for Badger; underlying growth in non-oil & gas regions should start to surface; effort to re-position fleet and improvement in Eastern Canada appear to be paying off. New CEO seems focused on continuity of what has worked."

He raised his target price to $30 from $22.50. The analyst consensus is $24.60.

Elsewhere, Canaccord Genuity analyst Yuri Lynk also upgraded the stock, moving it to "buy" from "hold" with a target of $28 (up from $23).

"While we would rather avoid upgrading Badger after a 17-per-cent one-day stock price surge in response to strong Q2/16 results, the fact remains we still see good upside potential," said Mr. Lynk. "Put simply, the 2H/16 recovery built into our model occurred earlier than expected. We have more confidence in the company achieving these numbers leading us to take our target valuation multiple to 8.25x forward EBITDA from 7.50x, which is well within the 7.5x-13.5x range of the last three years (every 1x impacts our target by $3.25)."

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Stock in Sprott Inc. (SII-T) is "significantly lagging growth drivers," said CIBC World Markets analyst Paul Holden, who upgraded his rating to "sector outperformer" from "sector performer."

"While the company has taken steps to diversify the business, there remains a significant component that is tied to precious metals," said Mr. Holden. "AUM [assets under management] is up 32 per cent through the first two quarters of 2016 and the 3rd quarter is off to a good start. We see the potential for a step function in performance fees at year-end for the first time in many years. Closing of the Private Resource Lending LP is an important step in de-risking the balance sheet."

Mr. Holden called Sprott's second quarter its best in almost five years, based largely on gains on proprietary investments. AUM of $9.8-billion was an increase of 11 per cent from the previous quarter.

"We believe that Q3 could be another quarter of big AUM growth given flows into gold related funds and returns on Sprott funds in July and August," he said.

"We are increasing our estimate for 2016 performance fees from $9-million to $26-million. The Sprott Hedge Fund LP is up 106 per cent year to date and could drive meaningful performance fees for the first time since 2010."

Mr. Holden raised his target price to $3.50 from $2.75 "based on asset growth and potential performance fees." Consensus is $2.64.

"We see the potential for Sprott to significantly outperform in the near term particularly heading into year-end when performance fees are determined," he said. "The greatest risk to our call is a reversal of precious metals prices and gold equities."

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After a "soft" second quarter, CIBC World Markets analyst Jon Morrison downgraded Black Diamond Group Ltd. (BDI-T) to "sector underperformer" from "sector performer."

"After originally placing a sector underperformer rating on Black Diamond in August 2014 due to: 1) our broad concerns about a deteriorating outlook for Canadian oil sands capital spending; 2) our view for large pending contract rollover within the company's contract profile; and 3) an elevated valuation, we upgraded the stock to sector performer in September 2015 as the shares had a much more reasonable valuation and the relative outlook was improving," said Mr. Morrison. "However, given some of the core trends that were realized within the platform during the second quarter, we believe the stability of the company's outlook is more questionable. More specifically, the net impact of Q2/16 is a 25 per cent reduction in our 2017 estimates."

Mr. Morrison emphasized quarterly data from its camping and lodging segment signal "fairly negative" trends in its workforce accommodation segment.  He noted lodging revenue per operating day fell to $31 from $78 in the first quarter and $89 in the second quarter of 2015.

"We believed this magnitude of decline warranted further investigation and understanding to assess how much of the fall-off was one-time in nature versus a structural issue," the analyst said. "Our conclusion is fairly negative as we believe the bulk of the decline was in relation to its large customer contract at the company's Sunday Creek Open Lodge coming to an end. As such, we believe that this lower level of Lodging revenue per operating day will be more indicative of the near-term operational performance for Black Diamond versus being a one-time fluctuation in its rates."

Mr. Morrison lowered his target to $4.50 per share from $6. Consensus is $6.74.

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Raymond James analyst Steve Hansen said he continues to "admire" the niche market position and risk-mitigated free cash flow of Chemtrade Logistics Income Fund (CHE.UN-T).

However, he downgraded his rating to "market perform" from "outperform."

In justifying the move, he pointed to numerous "incremental" factors, including "slipping utilization rates at US refineries, lingering competitive challenges in WSSC [Water Solutions & Specialty Chemicals segment], and most recently, news [Thursday] that the company has taken a $55.7-million write-down on its Augusta, Georgia sulphuric acid facility in response to news that Fibrant LLC, its largest pipeline-connected customer, intends to permanently shutter its Augusta facility within the next 16 months."

The move comes despite a "modest" second-quarter beat, with adjusted EBITDA of $59.4-million topping the $58-million projection of both Mr. Hansen and the Street. He said "the bulk of the upside attributable to better-than-expected SPPC [Sulphur Products & Performance Chemicals] margins."

He maintained a target price of $20. Consensus is $19.50.

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In other analyst actions:

Mizuho analyst Irina Koffler upgraded Valeant Pharmaceuticals International Inc. (VRX-N, VRX-T) to "neutral" from "underperform" with a target price increase to $25 (U.S.) from $11. The analyst average is $37, according to Bloomberg.

Argus Research analyst John Staszak downgraded McDonald's Corp. (MCD-N) to "hold" from "buy" with a target of $144 (U.S.), which did not change. The average is $130.10.

Jefferies analyst Daniel Binder downgraded Best Buy Co. Inc. (BBY-N) to "hold" from "buy" and lowered his target to $36 (U.S.) from $39. The average is $33.