Monday’s analyst upgrades and downgrades

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

Raymond James' Frederic Bastien added Bird Construction Inc. (BDT-T) to the firm's "Canadian Analyst Current Favourites" list.

"Our Best Pick for 2018 trades at a big discount to the contractors' average forward EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization] multiple, which we believe is unreasonable for a company with renewed momentum in Canada's public-private partnership (P3) sector and significantly improved industrial prospects," said Mr. Bastien. "On the one hand Bird landed most P3s it was vying for in 2017 and, by our count, made the shortlist on ten more design-build opportunities that will be tendered in 2018. On the other, the well-run company is bidding on progressively more jobs in Alberta's mid-stream oil and gas market and in Quebec's iron ore belt.

"Just as importantly, the firm has recently strung together small contract wins in new verticals (nuclear power and mechanical processing) and positioned itself for lithium and gold related opportunities in Canada's North. These gains, in our view, are evidence that management's efforts to diversify the business and produce consistently superior returns for its shareholders are starting to bear fruit."

Mr. Bastien has an "outperform" rating and $12 target price for Mississauga-based Bird. The average target on the Street is currently $11.25, according to Thomson Reuters data.

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Industrial Alliance Securities analyst Elias Foscolos upgraded his rating for CES Energy Solutions Corp. (CEU-T) in a research note previewing 2018 in the energy sector released Monday.

In the note, Mr. Foscolos lowered his rig count forecast for Canada by 3 per cent in 2018, however he said the impact on revenue for exploration and production companies will be marginal. At the same time, he expects rig count to increase by 3 per cent.

Mr. Foscolos also increased his FX rate due to the strengthening of the Canadian dollar. He expects the dollar to close 2018 at 85 U.S. cents.

In the wake of those changes, he raised CEU to "strong buy" from "buy."

"CEU's revenue stream is strongly correlated to U.S. and Canadian rig counts," he said. "Furthermore, approximately 6 per cent of CEU's revenue comes from the U.S.. Therefore, the strengthening CAD together with our decreased forecast for U.S. and Canadian rig counts result in lower EBITDA estimates for 2018 and 2019. However, the positive impact of rolling forward our DCF based valuation (due to pushing back last year's huge working capital build) more than offsets the lower EBITDA and results in an increase in our target price. Additionally, CEU's 12-per-cent share price decline since our last note in November results in an updated Strong Buy rating.

Mr. Foscolos raised his target to $7.75 from $7.50. The average is $9.04.

The analyst also made these other target changes:

- Badger Daylighting Ltd. (BAD-T, "strong buy") to $38.50 from $37. The average is $35.40.

- Computer Modelling Group Ltd. (CMG-T, "buy") to $10.75 from $11. The average is $10.04.

- Enerflex Ltd. (EFX-T, "strong buy") to $22 from $21. The average is $22.06.

- High Arctic Energy Services Inc. (HWO-T, "buy") to $6 from $6.20. The average is $5.76.

- STEP Energy Services Ltd. (STEP-T, "buy") to $17 from $18. The average is $17.75.

- Strad Energy Services Ltd. (SDY-T, "buy") to $2.40 from $2.50. The average is $2.44.

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The U.S. Federal Reserve's latest regulatory action against Wells Fargo & Company (WFC-N) led several equity analysts on the Street to downgrade their rating for the third-largest U.S. bank.

Though RBC Dominion Securities analyst Gerard Cassidy acknowledged the bank is "open for business," he said the day-to-day operations will be "challenged" after the Fed ordered Wells Fargo to halt its growth "until it sufficiently improves its governance and controls" in order to fix systemic compliance problems that led to consumer abuses.

"A Cease and Desist Order (C&D) is the most severe regulatory action against a bank," the analyst said. "Adding to the severity is the requirement that WFC's balance sheet cannot grow. We were surprised by the C&D considering the amount of money, time and effort the company has already put into remedying the sales practice issues that were disclosed in late 2016.

"As a result of the opaqueness (which is normal regarding regulatory actions) investors will have difficulty determining when the C&D will be lifted, resulting in an ongoing "cloud" over the stock price and earnings."

Mr. Cassidy said he has a "very positive outlook" toward the U.S. banking sector. However, he said investors should look toward other large banks, including Bank of America (BAC-N), Citigroup Inc. (C-N) for the banking industry and as a result, investors will be better suited owning other large bank stocks, and JPMorgan Chase & Co. (JPM-N), who he said "will be able to harness the growth of the U.S. economy whereas WFC will be handcuffed by the C&D."

Accordingly, Mr. Cassidy moved his rating for Wells Fargo to "underperform" from "outperform."

"The challenge for investors is trying to determine how onerous the C&D will be for WFC's day-to-day business and when the C&D will be lifted," he said. "By nature any regulatory act with a bank is confidential and cannot be disclosed, therefore, this C&D cloud will weigh on the stock for an indefinite time period. Over time we have no doubt WFC will fix the problems identified by the Federal Reserve and have the C&D lifted, but we believe it will take longer than expected and prove more damaging to the company's businesses. Additionally, the company will be vulnerable to losing some customers and revenue producers (loan officers) to its competitors due to inability to grow on a consolidated basis.

"We recognize the company has a plan in place to re-mix its balance sheet to accommodate its customers' growth and we believe it will help them mitigate some of the damage. If the C&D, however, remains in place for an extended period of time it will become increasingly difficult to satisfy all of its customers' growth needs let alone winning new customers, in our opinion."

Mr. Cassidy lowered his price target for Wells Fargo shares to US$50 from US$65. The average on the Street is currently $64.79.

"It has been our experience that C&Ds are rarely lifted within 12 months and often times last for much longer. Therefore, the company's ability to grow its business and earnings will be reduced, in our opinion," he said. "We also believe as a result of the C&D there is elevated risk the company could experience a qualitative fail for CCAR 2018. Failing CCAR in 2018 would prevent the company from authorizing a stock buyback but it could still pay its current dividend."

Other downgrades included:

Citigroup to "neutral" from "buy" with a US$65 target, falling from US$70.

Keefe, Bruyette & Woods Inc. analyst Brian Kleinhanzl to "market perform" from "outperform" with a US$63 target, down from US$70.

Morgan Stanley to "underweight" from "overweight" with a US$64 target, falling from US$75.

JPMorgan's Vivek Juneja to "underweight" from "neutral."

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MAG Silver Corp.'s (MAG-T) joint venture at the Juanicipio silver project in Mexico "stands out from the pack," according to Raymond James analyst Tara Hassan, who resumed coverage of the Vancouver-based miner with an "outperform" rating.

MAG holds a 44-per-cent stake in Juanicipio, which Ms. Hassan believes is "competitively positioned against producing and development peers with its scale, high silver grade and notable byproduct credits ranking it amongst the top projects in the Americas."

She thinks the company is well financed to make a production decision following a first-quarter feasibility study on the project, which it shares with Fresnillo plc, despite not controlling the timeline or budgets related to the project.

"However, we believe that the project's high ranking on grade, cost and resource size coupled with Fresnillo's stated silver production goals will help limit deviation from the outlined timeline to production (targeting the first half of 2020)," said Ms. Hassan.

"The planned FS will be key for a production decision to be made at the project; however, with the study coming off the heels of the PEA and based only on measured and indicated resources, we expect the resulting economics will not capture the whole potential of the project. In particular, a large portion of the resource contained within the base metals rich Deep Zone will be disregarded due to its resource classification and optimization opportunities outlined in the PEA will not be incorporated. Considering this, we have chosen to model an operation that is more in line with the 2017 PEA."

Believing there is "significant" potential for further resource additions at Juanicipio, she set a target price of $21 for MAG shares. The average is $23.68.

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Laurentian Bank Securities analyst Ryan Hanley initiated coverage of Alamos Gold Inc. (AGI-T, AGI-N) with a "buy" rating, citing "the combination of a strong base of operating assets with extensive mine lives, declining cash costs, further potential growth from the development pipeline, and a compelling valuation."

"We believe Alamos' cornerstone assets offer up extensive mine lives given existing reserves & resources, including 15-plus years at Young-Davidson, 12-plus years at the Mulatos complex, and 11-plus years at the Island Gold mine (based on our projections)," he said.

"These assets are expected to combine to produce 512,000 ounces of gold in 2018E, with further upside to come from the development of satellite pits at Mulatos (i.e. La Yaqui Grande and Cerro Pelon), as well as the expansions of the Island Gold mine to 1,200 tons per day by late 2018 and the Young-Davidson mine to 8,000 tons per day by early 2020."

Mr. Hanley also feels Alamos' development pipeline possesses growth potential, pointing specifically to its Kirazlı gold development project in Turkey.

"Should permits be received as early as Q1/18 for Kirazlı, (Alamos has guided to 2018), this would imply the potential start of production in the second half of 2019," he said. "Kirazlı, as outlined in the 2017 Feasibility Study, is expected to produce an average of 104,000 ounces per year over a five year mine life at cash costs of $339/oz and all-in sustaining mine site costs of $373 per ounce. The project offers excellent potential returns, but remains subject to a lengthy permitting process as the construction and operating permit (GSM permit) remains outstanding."

Mr. Hanley called the company's current valuation, at 0.79 times price-to-net asset value versus peers at 1.28 times, compelling.

"We believe that as the company's key assets ramp-up and cash flow generation improves, that this valuation gap will narrow," he said. "Additionally, the receipt of operating permits for Kirazlı would also be a significant catalyst."

He set a price target for Alamos shares of $9.50. The average is $11.66.

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In other analyst actions:

TD Securities analyst Menno Hulshof raised Husky Energy Inc. (HSE-T) to "buy" from "hold" with a $21 target (unchanged). The analyst average target is $19.38.

Wells Fargo Securities analyst Timothy Willi upgraded PayPal Holdings Inc. (PYPL-Q) to "outperform" from "market perform" with a US$95 target, up from US$80. The average is US$84.81.

TD Securities analyst Graham Ryding lowered Canaccord Genuity Group Inc. (CF-T) to "hold" from "buy" with a target of $6.50, up from $6. The average is $7.25.

Jefferies analyst Daniel Binder raised Lowe's Companies Inc. (LOW-N) to "buy" from "hold" and hiked his target to US$129 from US$81. The average is $108.30.