Inside the Market's roundup of some of today's key analyst actions. This file will be updated often during the trading day so check back for new details.
A "severe" drop in unit price for RioCan Real Estate Investment Trust (REI.UN-T) presents a "compelling" entry point for investors, according to Canaccord Genuity analyst Mark Rothschild.
The price for the REIT has dropped "dramatically" from a high of $30.25 in April to $24.28 at the close of market trading on Wednesday, a decline of 19.7 per cent. Mr. Rothschild pointed out units have returned negative 17.2 per cent since the beginning of May, well below the negative-1.2-per-cent return for U.S. retail REITs , the negative-10.4-per-cent return from the broader Canadian equity market and the negative-10.5-per-cent return from the S&P/TSX Capped REIT Index.
Acknowledging the retail environment is "challenging" currently, Mr. Rothschild said the current valuation for RioCan has caused him to upgrade his rating to "buy" from "hold."
"In order to continue its growth in the face of more difficult retail fundamentals and a lack of quality retail properties to acquire, RioCan has increased its exposure to residential development," the analyst said. "The REIT owns a number of exceptional value creation projects, and in our view over the long-term, there is potential for dramatic [net asset value] growth through residential development. However, it is important to recognize that these projects will generally take several years to complete and are not likely to drive cash flow growth in the next couple of years. Therefore, while we remain cautious towards the retail sector in the near-term due to the increased store closures and more tepid outlook, longer-term, we believe RioCan remains well positioned to perform well."
Mr. Rothschild's NAV per unit estimate for RioCan is $25.57. Units currently trade at a 5-per-cent discount to that estimate. He said that gap is "attractive given its liquidity, the quality of the REIT's portfolio, and the significant development pipeline."
He added: "When compared to its peers, RioCan trades at the largest discount to NAV, below the weighted average 1.5-per-cent discount for retail REITs/REOC under coverage, including First Capital Realty (1.5-per-cent discount) and SmartREIT (1.6-per-cent discount)."
The analyst's price target of $29.50 did not change. The consensus price target is $29.88, according to Thomson Reuters.
Calling Caterpillar Inc. (CAT-N) "a short, with material downside," Axiom Capital analyst Gordon Johnson initiated coverage of the stock with a "sell rating."
Mr. Johnson said the company could see "modest downsize" to its second-half guidance and "outsized risk" to 2016 consensus estimates.
"Despite non-GAAP EPS remaining resilient, after our scrub of the financials, as well as roughly $9-billion of failed acquisitions in the past four years (one of which was later rendered a fraud), two business segments that we believe are in a state of structural decline, and one that appears to be rolling over at present, we see forward EPS revision risk as high," said Mr. Johnson, as quoted in a StreetInsider.com report.
He set a price target of $28 (U.S.), an implied 60-per-cent downside. Consensus is $80.85.
Though its $6.8-billion (U.S.) acquisition of Pepco Holdings Inc. (POM-N) continues to be under dispute, RBC Dominion Securities analyst Shelby Tucker said the market's recent negative move against Exelon Corp. (EXC-N) is "overdone" and provides investors with an attractive entry point.
"With Exelon expected to file for re-hearing and reconsideration this week regarding the D.C. commission's rejection decision of the proposed Pepco (PHI) acquisition, we expect to the company to decide before year-end whether to continue to pursue completion of the deal," said Mr. Tucker. "We continue to not incorporate the potential earnings accretion from the deal into our estimates, but we now assume management walks away from the deal and initiates a $3-billion share repurchase program in [the first quarter of 2016] to utilize the issued acquisition financing. We expect this move to be $0.10 and $0.06 accretive in 2016 and 2017, respectively, to Exelon's earnings versus our estimates prior to acquisition financing."
Mr. Tucker said that while three recent capacity performance auctions procured lower-than-expected prices, they were still positive for PJM Interconnection LLC players, including Exelon. He said the results bring an 18-cent and 35-cent "boost" in incremental earnings per share in 2016 and 2017, respectively.
"We are somewhat perplexed by the lack of upside movement after what we believe to be a successful CP auction process, which adds stability to ExGen's future cash flows," said the analyst. "With EXC currently trading at a 15-per-cent discount to the de-regulated peer group and having the lowest P/E multiple in the space, we believe the stock looks very attractive on a valuation basis. Assuming PHI deal falls through, we believe Exelon can achieve 6-per-cent three-year earnings [compound annual growth rate] through 2017. However, we acknowledge that significant upside could be limited near term given the continued overhang with the PHI acquisition, lack of other catalysts now that CP auctions have been completed, and a lack of recovery in forward gas and power prices. Despite these factors, we believe the negativity has been overdone and see current levels as an attractive entry point for patient investors willing to ride out the various moving parts."
Reiterating his "outperform" rating for the stock, Mr. Tucker lowered his price target to $35 (U.S.) from $39 to reflect lower open EBITDA in 2017. Consensus is $36.23.
The ongoing weakness in commodity prices and subsequent fall in capital spending has caused Industrial Alliance Securities analyst Elias Foscolos to reduce his 2016 forecast for North American drilling activity.
He provided the following reasons for his reductions:
- Baker Hughes and Canadian Association of Oilwell Drilling Contractors rig count data shows no rebound in drilling;
- prolonged price downturn is leading to bankruptcies, like Samson Resources, and leaving less money for drilling;
- banking facilities will contract for companies able to avoid liquidity issues;
- drop in oil prices has allowed companies the opportunity to hedge production at similar prices to last year, and, accordingly, economic momentum will not build in Canada ahead of the winter drilling season.
"While we remain optimistic with respect to a rebound in the price of oil and gas due to steep projected declines in non-OPEC production (particularly in the U.S.), we are less optimistic about the prospects for a rebound in rig counts as we believe deleveraging balance sheets will take priority over drilling," said Mr. Foscolos.
With the change to his forecast, he reduced his rating for Canadian Energy Services (CEU-T) to "sell" from "hold" and Lonestar West (LSI-X) to "speculative buy" from "buy."
For CEU, he noted the stock has increased 7 per cent and has become a relative sector outperformer since his last update on Aug. 14. His revised drilling forecast reduces his estimate for the company's 2016 earnings before interest, taxes, depreciation and amortization by 19 per cent.
"Barring an acquisition, we see up to four quarters of relatively weak EBITDA with an increase only commencing in [the third quarter of 2016]," said Mr. Foscolos. "In our view, CEU's valuation and debt levels remain elevated compared to its peers. We believe the market has fully capitalized CEU's equity for the time being."
Mr. Foscolos blames the fact that Lonestar's share price reached a 52-week low this week on the market assuming a bankruptcy scenario for the company. He lowered his rating due to the share price falling below $1 and a market capitalization below $50-million.
The analyst also lowered his target prices for several companies. The changes were:
- Enterprise Group (E-T) to 55 cents from 65 cents. Consensus is $1.52.
- High Arctic Energy Services (HWO-T) to $5 from $5.25. Consensus is $5.81.
- Lonestar West (LSI-X) to $2.20 from $2.60. Consensus is $2.55.
- Pulse Seismic (PSD-T) to $3.10 from $3.25. Consensus is $3.25.
CIBC World Markets analyst Jon Morrison said he's "disappointed" in the wake of the decision by Total Energy Services Inc. (TOT-T) to not proceed with its hostile takeover bid for Strad Energy Services (SDY-T).
"We viewed the potential acquisition as being financially accretive and holding strong strategic merit," said Mr. Morrison. "We believe Total will have a number of other inorganic growth opportunities over the coming period. In addition, we believe it is fairly pragmatic for Total to cut its losses and walk away from the deal early on given the headwinds against the transaction from Strad's newly adopted shareholders rights plan."
He added: "Although Strad's rights plan included a number of headwinds which would have made it difficult for Total to successfully proceed with its takeover offer, we believe the largest sticking point was the minimum 120-day offer period that was contained in the permitted bid clause. As such, should Total have wanted to continue to move forward with its takeover plans, the company would have been required to keep the offer open until Q1/16, which is a fairly lengthy period of time with a significant opportunity cost given the current macro environment and potential alternative acquisitions."
Mr. Morrison said there is not an impact on his forward financial estimates for Total, but he did lower his price target for the stock to $17.75 from $19 in order to remove the multiple expansion he built into Total's valuation based on the hostile takeover plans. The analyst consensus is $17.08.
In other analyst actions:
8Point3 Energy Partners LP (CAFD-Q) was raised to "market perform" from "market underperform" at Avondale Partners by equity analyst Michael Morosi. The target price is $15 (U.S.) per share.
Caterpillar Inc (CAT-N) was rated new "sell" at Axiom Capital by equity analyst Gordon Johnson. The target price is $28 (U.S.) per share.
Entergy Corp (ETR-N) was downgraded to "sell" from "neutral" at UBS by equity analyst Julien Dumoulin-smith. The 12-month target price is $59 (U.S.) per share.
Liberty Global PLC (LBTYA-Q) was raised to "buy" from "hold" at Mirabaud by equity analyst Andrew Hogley. The 12-month target price is $58 (U.S.) per share.
Nimble Storage Inc (NMBL-N) was raised to "buy" from "neutral" at Longbow Research by equity analyst Joe Wittine. The 12-month target price is $32 (U.S.) per share.
Qualys Inc (QLYS-Q) was raised to "neutral" from "underperform" at Macquarie by equity analyst Michael Cikos. The 12-month target price is $31 (U.S.) per share.
Sabra Health Care REIT Inc (SBRA-Q) was downgraded to "sector perform" from "outperform" at RBC Capital by equity analyst Michael Carroll. The 12-month target price is $26 (U.S.) per share.
Trex Co Inc (TREX-N) was raised to "outperform" from "neutral" at Wedbush by equity analyst Al Kaschalk. The 12-month target price is $45 (U.S.) per share.