Thursday's analyst upgrades and downgrades

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

Citing its recent strong share price performance, RBC Dominion Securities analyst Fraser Phillips downgraded his rating for Cameco Corp. (CCO-T, CCJ-N).

In moving his rating to "sector perform" from "outperform," Mr. Phillips also emphasized his belief that there is limited further upside to uranium prices in the near term as well Tokyo Electric Power's decision to scrap its supply contract with the company.

"The 10 per cent or 5 million pounds per year production cut by Kazatomprom was a clear positive and helped to propel the spot price from a 12-year low of $18.25 (U.S.) per pound in November to the current level of $24.50 per pound," he said. "Despite the cut, our analysis suggests that the market still faces a 21.5 million pound surplus in 2017 and [Ux Consulting Co.] believes the surplus could be as much as 19 million lbs. As a result, we believe that further upside for the uranium price will be limited in the absence of additional supply cuts or a significant increase in utility purchases."

On Wednesday, Cameco said it considers Tepco's decision to terminate its contract unfair and plans to seek legal action. Tepo cited force majeure for ending the agreement, saying it has been unable to operate its nuclear plants for 18 months due to regulations stemming from the 2011 Fukushima nuclear accident.

"The obvious question is whether other Japanese customers might follow suit," said Mr. Phillips. "Japan makes up 11 per cent of Cameco's contract portfolio. Cameco believes the cancellation is an isolated incident and unjustified and intends to defend itself and seek compensation. The company points to a previous post-Fukushima cancellation claiming force majeure due to regulatory issues, which was resolved in its favour in 2014, with compensation of the present value of the contract revenue less the spot price at the time."

"The 2014 arbitration process took 30 months. It therefore seems likely that revenues and volumes will be reduced by $126-million and 855,000 pounds, respectively, in 2017 and 2018 and perhaps 2019. We estimate that this will reduce our EPS estimates by 23 cents in each year, assuming no resale of the material and excluding any offsetting compensation. We have not yet adjusted our estimates but await updated guidance on Feb. 9."

At the same time, Mr. Phillips adjusted his financial model for the company to reflect the company's earnings warning on Jan. 17, in which they said there was a "significant discrepancy between analyst earnings estimates and our current expectations."

Accordingly, his earnings per share projections for 2016 and 2017 moved to 38 cents and 56 cents, respectively, from 77 cents and 55 cents. His 2018 estimate was introduced at $1.05.

Mr. Phillips maintained a price target of $15 for the stock. The analyst consensus price target is $16.50, according to Thomson Reuters.

"The global uranium market is in a state of significant oversupply," he said. "Our supply/demand analysis suggests that the uranium market will not be balanced until 2024, with large surpluses in the intervening years. The current spot price has recovered from 12-year lows but is still putting tremendous pressure on producers. We expect that further production cuts, some further progress with the slow reactor restart process in Japan, and increased utility purchases will lead to an increase in the uranium price over the next 12 to 24 months. However, we expect the upside to be limited until the market begins to tighten. We expect upside for Cameco's shares to be limited as a result. Longer term we see significant upside for the shares based on our view that uranium prices must eventually rise to encourage new supply."

Meanwhile, Cantor Fitzgerald analyst Rob Chang downgraded the stock to "hold" from "buy" and lowered his target price to $15.35 from $17.10 based on the Tepco termination.

"Cameco noted that it defended against a force majeure claim in 2014 and was ultimately successful in winning the case," said Mr. Chang. "After a 30-month process, Cameco was awarded a "net pay" settlement, whereby the revenue difference between the current spot price and the contract prices were calculated and discounted to the present. Management notes that they will pursue a similar settlement here. We believe Cameco does have a legitimate case against TEPCO and that force majeure does not apply in this situation. However, the impact on cash flows will be significant if the TEPCO dispute lasts as long as the 2014 dispute.

"Cameco notes that the uranium supply contract provides for disputes to be resolved via binding arbitration after a period of good faith negotiations. However, it is unclear what the timeline for a resolution will be at this point."

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When considering investing in the base metals sector, investors should focus on companies displaying on growth and improving balance sheets, said BMO Nesbitt Burns analyst Alex Terentiew, who initiated coverage of nine TSX-listed miners.

"After four years of declining metal prices, balance sheets have started to regain strength, with most companies now able to look beyond just surviving, and towards future growth," he said. "Throughout 2015, miners were largely focused on managing liquidity, staying on-side with covenants, and finding ways to reduce or defer costs, while improving the strength of their respective balance sheets. In 2014, spending and costs (no FX or fuel price reprieve) were still high and debt loads had risen as spending on some remaining projects came to an end, and softening metal prices reduced operating cash flow. In 2016, we estimate that most companies were able to reduce their net debt position (average of 17 per cent), with Capstone, Teck, and Trevali making substantial gains, helped by high-grade-driven cash flow (Minto mine at Capstone), rising met coal (Teck), and zinc prices (both Teck and TV).

"Unfortunately, the cupboard for most companies is bare. Over the past four to five years, investment in the mining industry on exploration and new growth has been curtailed, with most spending directed towards maintaining existing operations, or completing construction of projects that started before most in the industry acknowledged that the downturn in the sector was more than just a short-term event. As such, most miners have little to no growth in the near-term pipeline, with most projects showing only small advancements over the past few years."

Mr. Terentiew initiated coverage of the following companies:

• Trevali Mining Corp. (TV-T) with a “outperform” rating and $2 target. Consensus is $1.58.
  
  He said: “We believe Trevali is just starting its operating and financial turnaround, and investors will be rewarded by accumulating shares in the company.”
   
• First Quantum Minerals Ltd. (FM-T) with an “outperform” rating and $21 target. Consensus is $16.90.
  
  “Investing in new projects during a period when cash flow was tight and most of its peers played it safe by focusing on optimizing existing operations, First Quantum is about to be rewarded for its higher level of risk. The company is on the cusp of realizing significant growth, with Cu production set to nearly double by 2020, surging in each of 2017, 2018, and 2019, helping to generate accelerated cash flow growth, which in turn will substantially alleviate the strain placed on its balance sheet over the past couple of years. With Sentinel expected to have reached commercial production in Q4/16, but still ramping up, Cobre Panama’s construction seeming to be on track, and sufficient liquidity we believe on hand to meet its funding commitments, both operating and balance sheet risk for this growth company are declining, supporting our Outperform thesis. We view First Quantum as our top pick in the sector.”
  
  
• Arizona Mining Inc. (AZ-T) with a “outperform” and $3.75 target. Consensus is $4.30.
  
  “While Arizona Mining will undoubtedly have a heavy work load in the coming years, especially as it relates to advancing permitting and clarifying the Taylor deposit’s metallurgy, we think the deposit’s growing size and good grade, and the scarcity of large zinc deposits in the world make Arizona Mining an attractive investment opportunity at current prices.”
   
• Capstone Mining Corp. (CS-T) with an “outperform” rating and $2 target. Consensus is $1.53.
  
  “The company’s share price over the past couple years also suffered, in our view, due to a higher level of USD cost exposure than some of its peers, which experienced more cost relief with depreciating foreign currencies. Considering current exchange rates, we think the relative benefit will begin to move in Capstone’s favour in the coming years, as the USD weakens. With Pinto Valley beginning to prove its worth, Capstone’s financial position improving (CS paid $650-million cash for the mine) and its valuation at a discount to its peers, we rate the shares Outperform.”
  
  
• Teck Resources Ltd. (TECK.B-T) with a “outperform” rating and $43 target. Consensus is $34.70.
  
  “Considering Teck’s diversified production base, we see the company in many ways as an index for the industry, especially during static commodity price markets. Currently, however, commodity prices are varying wildly, and we think Teck’s cash flow strength is not fully appreciated by the market, with many investors reacting to the declining met coal price and locking in profits after Teck’s stellar share price performance over the last 12 months (up greater-than 600 per cent), leaving room for upside share price appreciation.”
   
• HudBay Minerals Inc. (HBM-T) with a “market perform” rating and $12 target. Consensus is $10.71.
  
  “With Constancia’s technical report now updated, Rosemont’s and Lalor’s mine plans to be updated within the quarter, and its debt refinanced, HudBay’s future cash flow potential is now more clearly defined, a welcome change from the operational uncertainty that we believe held back the company’s share price throughout most of 2016.”
   
• Nevsun Resources Ltd. (NSU-T) with a “market perform” rating and $4.75 target. Consensus is $5.64.
  
  “The company’s valuation in our view already reflects the Zn price upside, and growth from Timok is still approximately four years away from being realized. In addition, Bisha’s Zn circuit metallurgical issues have not yet been resolved, and the company’s ultimate plan of development for both Bisha (underground scoping assessment due Q2/17) and Timok (PFS Q3/17) have yet to be finalized, creating an elevated level of uncertainty.”
   
• Taseko Mines Ltd. (TKO-T) with a “market perform” rating and $2 target. Consensus is $1.60.
  
  “To preserve margins and combat low copper prices and the low grade at its Gibraltar mine in British Columbia, Taseko has successfully reduced operating costs over the past few years. Despite these efforts, the company’s total cash flow (excluding net financings) has not been able to improve over the past two years, with Taseko meeting its near-term commitments, but unable to build a cash buffer to materially ease potential future liquidity concerns, in our view.”
   
• Copper Mountain Mining Corp. (CMMC-T) with a “underperform” rating and $1.25 target. Consensus is $1.11.
  
  "Copper Mountain represents some of the highest leverage to copper prices and the value of the Canadian dollar amongst its producing Canadian peers. In addition to operating leverage, the company also has a highly levered balance sheet, with an estimated year-ending net debt position of $364-million (100-per-cent consolidated) and one of the highest net debt/lb CuEq production in our coverage. While we see the debt as low risk and low cost, it is nonetheless a weight on the company, and with no growth in its plan, the company’s fortunes are tied heavily to the price of copper and the value of the Canadian dollar."

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With "solid" fourth-quarter results, Brookfield Infrastructure Partners LP (BIP-N, BIP.UN-T) delivered in "utility-like fashion yet again," according to Raymond James analyst Frederic Bastien.

On Wednesday, Brookfield reported funds from operations per unit of 69 cents (U.S.), an increase of 17 per cent year over year and ahead of both Mr. Bastien's projection (64 cents) and the consensus expectation (66 cents).

"The positive variance to our FFO forecast is attributable to higher-than-expected tariff and volume growth within BIP's toll road business plus another monster quarter from the North American natural gas transmission business (NGPL)," the analyst said. "Corporate costs were also delivered below our forecasts, for a payout ratio of 67 per cent that remains comfortably within BIP's 60 per cent to 70 per cent target range. Against this backdrop the Board boosted the distribution per unit by 11 per cent, marking the seventh consecutive year of double-digit distribution growth."

Mr. Bastien called its potential for growth "robust," noting: "With corporate liquidity of over $3-billion, and access to virtually unlimited capital through Brookfield's private infrastructure funds, we are confident BIP is in an excellent position to grow its portfolio of assets further and generate strong FFO growth in the coming years. In what we see as a first step to bigger and better things in India, for example, the partnership recently committed $200-million to acquire 40,000 towers from Reliance Telecom. BIP also remains focused on corporate carve-out transactions, and is monitoring opportunities in the North American energy sector with great interest."

"Protectionist rhetoric from U.S. President Donald Trump, and the resulting anxiety related to Mexico's economic outlook, have caused the Peso to tumble to its lowest level since 1994. The timing of all this may prove fortuitous for BIP, which opened an office a few years back to pursue prospects arising from the liberalization of the country's energy sector. Should concerns over Mexico overshoot, we can envision a scenario where the firm capitalizes on deep-value opportunities, much like it did last year in Brazil."

Mr. Bastien also pointed to the potential for water becoming "big business" in the future.

"We see water becoming big business further out. BIP invested $15-million in a Peruvian water utility in 4Q16, adding another leg to a budding water franchise that also includes a desalination project in California," he said. "While we expect BIP to focus more on niche, district energy-type assets in the short run, we know it's equally capable of adding scale should an opportunity to buy for value presents itself. Stay tuned."

With an "outperform" rating (unchanged), he raised his target price to $43 (U.S.) from $39. Consensus is $37.84.

BMO Nesbitt Burns analyst Bert Powell bumped his target to $39 from $37 with an "outperform" rating.

Mr. Powell said: "Still a great name to own. BIP's Q4/16 results were ahead of expectations due to better performance in the Energy segment and lower corporate costs. Dividend increased 11 per cent as expected. Businesses continue to find organic growth opportunities and BIP believes M&A opportunities will surface. After an active M&A and financing year in 2016, we believe that BIP's liquidity needs are manageable in the context of its current commitments. We do not believe there is another pending large transaction, and 2017 should see the monetization of mature assets."

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"Multi-layered" growth continues for Facebook Inc. (FB-Q), said Canaccord Genuity analyst Michael Graham.

On Wednesday after markets closed, the social media giant reported fourth-quarter results that Mr. Graham deemed "solid," pointing to a 17-per-cent monthly active user (MAU) growth and 53-per-cent growth in ad revenue.

"We continue to like the multilayered revenue story (users x engagement x ad load x ad pricing + other properties), and believe that our estimate for 41-per-cent revenue growth in 2017 (approximately 13 points of deceleration) is conservative relative to management's semi-cautious outlook commentary," he said. "With a still-reasonable valuation, strong revenue momentum, and the likelihood that revenue growth will absorb heavier spending, we continue to like the stock."

Though he said impression growth is still "robust," Mr. Graham emphasized "tempered" growth expectations overall.

"In Q4, ad impressions grew 49 per cent year over year, slightly below the 50-per-cent growth rate observed in Q3, continuing the trend since Q4/15 when declines reversed," he said. "This is being driven by core mobile FB News Feed and Instagram ad loads. However, management highlighted its view from the last few quarters that it expects ad load to be a less significant factor in 2017 revenue growth (from core FB). This is also impacting growth expectations, as the company reiterated an anticipated significant deceleration in revenue growth for 2017. While higher ad pricing (from less right-hand column ads) may slightly mitigate this impact in 2017, longer-term monetization levers (from video ads, new ad formats, and increased ad load on Instagram) will take longer."

With the results, Mr. Graham raised his revenue and EPS estimates.

"Revenue estimates are being adjusted to account for strong MAU growth, engagement, and ARPU, which should help advertising growth remain relatively strong," he said. "Our EPS estimate revisions account for a tax adjustment, which is completely offsetting heightened opex, driven by content, R&D and S&M expenditures."

Mr. Graham's 2017 and 2018 EPS estimates rose to $4.81 and $6.22, respectively, from $4.55 and $5.95.

He did not change his "buy" rating for the stock, but his target increased to $155 from $150. Consensus is $153.72.

Elsewhere, Credit Suisse analyst Stephen Ju raised his target to $170 from $165 with an "outperform" rating.

"We expect investor focus to lie with the higher-than-expected OpEx growth guidance of GAAP 40 per cent to 50 per cent and non-GAAP 47 per cent to 57 per cent respectively with the likely delta due to planned incremental investments in video (revenue share in COGS) as well as Oculus (dev costs in R&D). CapEx guidance was also higher than expectations at $7.0-$7.5-billion," said Mr. Ju. "We do note that for both video and eventually Oculus, this does come attached to generated revenue so we continue to believe there is upward bias to estimates and remain buyers of FB shares as we do not view our investment thesis as being impaired in any way: 1) Facebook will be able to drive long term revenue growth without a material lift in ad loads - near-term drivers include Instagram, Premium Video, and DPA, 2) Street models continue to underestimate the long-term monetization potential of upcoming new products (Graph Search), 3) optionality and upward bias to estimates, which do not contemplate contributions from multiple other products including Messenger and WhatsApp."

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It's "steady as she goes" for Calian Group Ltd. (CGY-T), said Desjardins Securities analyst Benoit Poirier on its in-line first-quarter financial results.

On Wednesday, the Kanata, Ont.-based technology company report adjusted earnings per share of 45 cents, meeting the consensus analyst projection and a penny better than Mr. Poirier's expectation. Revenue of $69-million met estimates, while a "solid" EBITDA margin of 7.6 per cent exceeded Mr. Porier's projection (7.3 per cent).

"In January, the federal government released the RFP for an enlarged version of the Department of National Defence healthcare contract (two new government departments—RCMP and Veterans Affairs)," said Mr. Poirier. "The initial contract period ends on March 31, 2022, with an option to extend the contract by up to eight years. This contract represents a sizeable opportunity for CGY as the company is the contractor on the current version of the project, representing revenue of $65-million per year. We believe the company is well-positioned to win this upcoming contract, which would be a sizeable catalyst.

"M&A remains a focus. Management reiterated its intention to perform M&A. The company sees several opportunities to complement its five distinct service segments. CGY is looking for targets that (1) contribute to customer diversification or service line evolution, and (2) can sustain good margins. The company is also open to both small and large acquisitions."

With a "buy" rating (unchanged), Mr. Poirier bumped his target to $30 from $27. Consensus is $29.43.

"We believe CGY's decent 1Q results and positive outlook provide a favourable read-through for FY17," he said. "Meanwhile, the 4-per-cent dividend yield provides good support until the company uses its pristine balance sheet for M&A. We also believe CGY is well-positioned to benefit from the Liberal government's plans to increase federal spending in the longer term."

At the same time, Acumen Capital analyst Brian Pow raised his target to $29.50 from $28.30 with a "buy" rating.

"CGY currently benefits from a strong contract backlog which should help drive growth in the near term," said Mr. Pow. "The Company is well respected, and we expect to see additional business be earned as opportunities are presented. Acquisitions are another source of revenue growth for the Company, and we believe management is keen to be active sooner than later to help diversify its customer base and service lines."

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In other analyst actions:

AutoCanada Inc. (ACQ-T) was downgraded to "sector perform" from "outperform" at RBC Capital by analyst Steven Arthur. His target rose to $26 from $24. The analyst average is $25.25, according to Bloomberg.

Sirius XM Canada Holdings Inc. (XSR-T) was downgraded to "reduce" from "hold" by TD Securities analyst Vince Valentini. His target remains $5.25, while the average is $4.82.

SEMAFO Inc. (SMF-T) was downgraded to "sector perform" from "sector outperform" at Scotia by analyst Ovais Habib with a target of $5.25, down from $5.75 per share. The average is $6.25.

Lululemon Athletica Inc.(LULU-Q) was upgraded to "neutral" from "sell" by Goldman analyst Lindsay Drucker Mann with a target of $65 (U.S.), up from $50. The analyst average is $73.87.

Alcoa Corp. (AA-N) was upgraded to "overweight" from "neutral" by JPMorgan analyst Michael Gambardella, who believes the company is now in a better position to weather weaker commodity prices. He raised his target price for the stock to a Street-high $46 (U.S.) from $21.65. The analyst average is $33.82, according to Bloomberg.

CVS Health Corp. (CVS-N) was downgraded to "neutral" from "outperform" at Baird by analyst Eric Coldwell, who lowered his target to $77 (U.S.) from $86. The average is $88.35.