Inside the Market's roundup of some of today's key analyst actions
Though its long-term growth profile remains "robust," Industrial Alliance Securities analyst Brad Sturges lowered his rating for InterRent Real Estate Investment Trust (IIP.UN-T).
Moving the Ottawa-based REIT to "buy" from "strong buy," Mr. Sturges noted it has achieved a total return of 34 per cent since the start of 2017, versus a 10-per-cent total return for the S&P/TSX Capped REIT Index.
"Affordable housing options in existing Ontario property markets including the Greater Toronto Area (GTA) and the National Capital Region (Ottawa and Gatineau) remain fairly limited, which could support further market rental rate growth in the Ontario property market in 2018," he said. "We believe that InterRent remains well positioned to surface value from its non-stabilized Canadian apartment portfolio through additional capital investment and active management strategies, as the REIT's senior management team has established a compelling track record of creating value for the REIT's unitholders over the past several years. The REIT's non-stabilized properties provide possible significant NAV [net asset value] and AFFO [adjusted funds from operations] per unit upside through increasing average occupancy levels, rising AMRs for occupied suites, and improving NOI [net operating income] margins as assets reach rental income stabilization."
Mr. Sturges sees InterRent providing investors with sustained NAV and AFFO per unit growth through "continued" execution of redevelopment strategies and the potential start of a development program. He also believes its below-average 2018 AFFO payout ratio provides the capacity for distribution increases moving forward.
He did, however, lower his FFO and AFFO projections for 2018 and 2019 to adjust for higher borrowing rates in the wake of the Bank of Canada's decision to hike its overnight rate target as well as the REIT's higher concentration of variable interest rate debt, which he pegged at 40 per cent of total debt, and near-term mortgage maturities.
His 2018 FFO and AFFO estimates fell to 45 cents per unit and 36 cents per unit, respectively, from 46 cents and 37 cents. His 2019 expectations fell to 48 cents and 40 cents from 50 cents and 41 cents.
Mr. Sturges did raise his target for InterRent units to $10.75 from $10.25. The average target on the Street is currently $10.05, according to Bloomberg data.
"We believe that the stabilization of InterRent's multi-family asset portfolio could translate into significant AFFO per unit and NAV per unit growth in the next few years," the analyst said. "At Sept. 30, approximately 45 per cent of the REIT's apartment property portfolio remains in various stages of repositioning, while 55 per cent of InterRent's apartment suites have fully repositioned and stabilized."
Apple Inc. (AAPL-Q) was handed its second downgrade in a week on Monday.
The U.S. tech giant was lowered to "neutral" from "overweight" by Atlantic Equities analyst James Cordwell, who expects iPhone demand to disappoint.
"[We see] signs that iPhone demand is starting to soften, limited visibility into the potential for future iPhone cycles and emerging challenges to the smartphone's dominance at the centre of consumer technology, we believe the stock's multiple will compress, limiting upside potential," said Mr. Cordwell.
He maintained a $190 (U.S.) target for Apple share. The average target is $193.51.
"Tougher ASP [average selling price] comps and the lack of a volume 'supercycle' with the iPhone X will leave it difficult to build conviction in future cycles," said Mr. Cordwell. "Meanwhile, there also appears potential that concerns could increase over Apple's position at the centre of consumer technology, particularly given the growing consumer interest and rapid innovation in voice-based devices."
Similarly, on Jan. 17, Longbow Research analyst Shawn Harrison lowered Apple to "neutral" from "buy" after predicting the latest iPhone cycle is likely to be a disappointment for investors."
After a recent pullback in price, CIBC World Markets analyst Oscar Cabrera raised his rating for Ivanhoe Mines Ltd. (IVN-T) to "outperformer" from "neutral."
"The 18-per-cent pullback on IVN shares from the end of November 2017 to date, on expectation of an equity financing, is over-done in our opinion," he said. "Despite a $315-million equity raise assumption in [the first half of 2018], our analysis suggests a potential IVN share appreciation return of 25 per cent."
His target fell slightly to $5.25 from $5.50. The average is $7.13.
"Our analysis suggests that a small premium would be warranted given the potential upside in IVN's cash flow generation from its world-class Kamoa-Kakula deposit, albeit with development and financing risks," said Mr. Cabrera.
Saying a "show-me story continues," Mr. Cabrera downgraded Lundin Mining Corp. (LUN-T) to "neutral" from "outperformer" following a recent "strong" share performance.
"LUN's management credibility suffered a major set-back due to the lack of disclosure around a pit wall slide at Candelaria on Oct. 31, 2017," the analyst said. "However, the company's track record led to a 30-per-cent share appreciation since Dec. 7, 2017. Given LUN's recent strong share performance, our analysis suggests that risks are well balanced with potential returns, given a lack of near-term catalysts. We are not concerned with capital deployment at Candelaria, but are cautious on the potential negative impact of labor disruptions to Neves Corvo production and the deposit's zinc expansion."
He maintained a $10 target, which is above the $9.14 consensus.
"LUN shares are trading at a 33-per-cent and 5-per-cent discount to the copper peer averages of 6.3 times 2019 estimated enterprise value-to-EBITDA and 0.8 times price-to-net asset value, respectively," said Mr. Cabrera. "We expect the valuation gap to close with strong execution of Candelaria's new mine plan and Neves Corvo zinc expansion."
When Harley-Davidson Inc. (HOG-N) reports fourth-quarter financial results on Jan. 30, investor focus will largely centre on its guidance for 2018, according to RBC Dominion Securities analyst Joseph Spak, who increased its target price for the U.S. motorcycle manufacturer.
"We believe that retail trends continued to be soft in the U.S. in 4Q17, as we estimate sales could be down 5-7 per cent year over year," said Mr. Spak. "Additionally, it appears that consumer interest in the new MY18 lineup has been largely underwhelming and dealers reported that there has not been much interest yet. From an inventory perspective, while HOG has destocked and looks to be in a better position than last year, we still have some questions as to whether this is the right level of inventory for what looks to be soft demand."
"The crux of the quarter comes down to 2018 guidance. Historically, management has taken an overly optimistic stance on the industry, resulting in overly optimistic shipment guidance, only to reduce their outlook throughout the year. We believe management needs to rebuild their credibility and set 2018 shipment guidance conservatively though we don't have a lot of confidence this will be done. We'd also like to hear more about the potential cost cutting opportunities as the cost structure has not kept pace with the demand environment."
Mr. Spak lowered his fourth-quarter earnings per share by a dime to 50 cents (U.S.) based a decline in his shipment and gross margin forecast.
The analyst believes the company will benefit moving forward from U.S. tax reform, noting 60 per cent of its revenue stems from south of the border. That led him to raise his 2018 and 2019 EPS projections to $4.20 and $4.35, respectively, from $3.75 and $3.90.
Calling its stock "fairly valued," he raised his target to $54 (U.S.) from $51 with a "sector perform" rating (unchanged). The average on the Street is $53.58.
"We are curious to hear if the additional tax benefit could help fund needed restructuring and/or RD&E to refresh the portfolio and inspire a new generation of riders," he said.
Meanwhile, Harley-Davidson was upgraded to "outperform" from "market perform" by Wells Fargo analyst Tim Conder, who believes the benefits from U.S. tax reform are underappreciated by the market.
Expecting a "significant portion" of the company's tax benefit to be returned to shareholders, he raised his target to $59 (U.S.) from $49.
Citing "more positive" demand trends and the benefits of U.S. tax reforms, Mr. Spak raised his rating for Polaris Industries Inc. (PII-N), a Minnesota-based recreational vehicle manufacturer, to "sector perform" from "underperform."
"Our 4Q17 checks/survey shows that dealers appear more optimistic about Polaris SxS [side-by-side] unit sales growth in 2018," said Mr. Spak. Note that checks show (and we still believe) that the environment will remain heavily promotional and that competitor Can-Am will increasingly take floor space from PII. So in part, this may be a view that the industry may be a little healthier than we previously thought. As we think about the landscape for 2018, we believe PII's "commercial" customers could help drive growth. While PII officially states that 90 per cent of ORV [off-road vehicle] volume is retail, we believe this is deceiving as that solely refers to pure commercial sales to businesses such as cities, utility companies, campus premises, rental companies and government. If we look at product mix, utility vs. recreational split (think Ranger/RZR) is 60/40. The utility buyer is likely more mixed use for personal and use on the farm/ranch and thus able to buy through a business and hence benefit from tax reform changes on capex. Remember, PII estimates that 10 per cent of total ORV is to the agriculture end-market which feels better as farmer sentiment has stabilized and shows potential to improve.
"We are adjusting our 2018+ EPS estimates for a lower U.S. statutory rate. Consensus looks to not have incorporated this yet so there should be positive earnings revisions, though we would argue that the market has already incorporated a good chunk of the benefit. 80 per cent of PII's income is from the U.S. so as such we believe their tax rate could fall to 22 per cent from 32 per cent today. Meanwhile, NAFTA changes could impact PII given their Monterrey plant (of which 2/3rd volume goes to the U.S.). However, PII may be relatively better positioned than competitors."
His target for Polaris shares rose from $102 to $127 (U.S.), which is $1 below the consensus.
"While we are feeling a little bit better about the business, demand, and the valuation looks more reasonable with tax-adjusted EPS, we wouldn't classify the name as showing good value and we still believe the industry is structurally changed from greater competition and higher promotions which could limit future profits," he said.
Credit Suisse analyst Brad Zelnick believes the lofty expectations for Symantec Corp.'s (SYMC-Q) enterprise segment do not currently align with the "mixed" channel sentiment he discovered in a check of over 20 value-added resellers, leading him to downgraded the California-based cybersecurity company to "neutral" from "outperform."
"Consensus revenue estimates, and guidance, embed expectations for a substantial ProForma CC ramp into 2H18, primarily driven by the Enterprise segment," he said. "There are several factors that are expected to drive the accelerated performance. However, while we remain optimistic on the Consumer opportunity, we are less optimistic on Enterprise given our field checks (over 20 VARs representing several $100-million in annual Symantec revenue). Our channel dialogue suggests several tailwinds for the Enterprise segment may not be materializing."
"On balance we believe the combination of lofty expectations and mixed (skewing negative) channel sentiment means turbulence may lie ahead. In recognition of this we reduce our Enterprise forecasts, lower our target price to $30 and downgrade to Neutral."
After lowering his revenue expectation for the enterprise segment for the second half of fiscal 2018 and 2019, his target fell to $30 (U.S.) from $36, while the consensus is $31.50.
Increasingly "uncomfortable" with the outlook for its key diabetes products, Credit Suisse analyst Vamil Divan dropped Eli Lilly & Co. (LLY-N) to "underperform" from "neutral."
"We downgraded LLY shares to Neutral in Oct 2017 given concerns we had over growing competitive challenges to key diabetes products Trulicity and Humalog. The stock has underperformed the broader market and, less so, the group since then," he said.
"We now take the additional step and downgrade LLY to Underperform (from Neutral) and lower our target price to $82 (from $88) as we are increasingly uncomfortable with the outlook for these products and others and do not believe LLY is on track to hit their midterm guidance of 5-per-cent sales CAGR [compound annual growth rate] from 2015-2020."
Mr. Divan's target of $82 (U.S.) sits below the consensus of $93.20.
In other analyst actions:
TD Securities analyst Graham Ryding upgraded Home Capital Group Inc. (HCG-T) to "buy" from "hold" with a $21 target, rising from $17. The average is $17.92.
Cormark Securities Inc. analyst Amir Arif downgraded Crew Energy Inc. (CR-T) to "buy" from "top pick" and lowered his target to $5.75 from $6.50. The average is currently $4.93.
Mackie Research Capital Corp. initiated coverage of Troilus Gold Corp. (TLG-X) with a "speculative buy" rating and target of $3.75, which is 3 cents below the consensus.
Scotia Capital analyst Jeffrey Fan upgraded Verizon Communications Inc. (VZ-N) to "sector outperform" from "sector perform." Mr. Fan hiked his target to $60 (U.S.) from $50. The average is $54.05.
Atlantic Equities LLP analyst Hamilton Faber upgraded Twenty-First Century Fox Inc. (FOX-Q) to "overweight" from "neutral" with a target price of $49 (U.S.), up from $31. The average is $40.18.
Guggenheim Securities analyst Michael Lamotte upgraded Halliburton Co. (HAL-N) to "buy" from "neutral."