Thursday’s analyst upgrades and downgrades

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Inside the Market's roundup of some of today's key analyst actions. This file will be updated during the trading day so check back for new details.

Canadian Imperial Bank of Commerce (CM-T;CM-N) "has clearly made progress" in its plan to transform from a product centric to client centric model, said Credit Suisse analyst Kevin Choquette following its first investor day since 2010.

He said the bank emphasized "its financial strength" including an industry-high common equity tier 1 capital ratio (CET1) of 10.8 per cent and return on equity of 20 per cent. He said lower return on equity is possible through growth and potential acquisitions.  

"CM reiterated its desire to acquire lending and deposit taking capabilities in the U.S. and stated its concern about being able to meet the needs of its Canadian based business clients that have U.S. interests in the longer-term," he said.

Maintaining his "neutral" rating, he increased his target price for the stock to $110 from $104 to reflect the execution of its retail strategy. Consensus is $101.75.

Mr. Choquette said:  "[The neutral rating remains] as recent valuation expansion reflects the improved operating results and aggressive dividend increases (four out of past five quarters) that are not likely repeatable in the next year given the earnings growth outlook and payout ratio (an estimated 47 per cent in 2015)"

Meanwhile, National Bank analyst Peter Routledge downgraded the stock to "underperform" from "sector perform" while raising his target by a loonie to $99.

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In the wake of Hilary Clinton's drug pricing control proposal, Canaccord Genuity analyst Neil Maruoka said the issue is a "red herring."

"Drug pricing has been a point of discussion in the U.S. previously, and many of the companies hit hardest this time around have, in our view, modest exposure to any potential government action," he said. "We believe that the real issue is the rapid widening of credit spreads (which rose 120 basis points above annual lows versus 10-year treasuries) and, more specifically, the future cost of debt that has been fueling M&A."

Prior to the issue flaring up in the wake of Ms. Clinton's comments, Mr. Maruoka said industry valuations "were already teetering but had yet to fall." He pointed to a number of underlying issues, including "an impending Fed tightening cycle" and "organic growth concerns." He said the potential impact will also be felt in the Canadian specialty pharma sector.

"We expect this phenomenon of multiple compression will continue to be widespread in across the sector, but will likely impact the valuations of some companies more than others," he said. "Based on a macro view of multiples, we still see a worst-case possibility of approximately 20-per-cent downside from current levels; however, given the recent declines, we believe that much of the risk is baked into these stocks and the bias is now skewed to the upside. Because we believe much of the downside from widening credit spreads is likely reflected in the stock prices, we have made no downgrades to our Canadian specialty pharma names."

He made the following price target changes:

- Valeant Pharmaceuticals International Inc. (VRX-T;VRX-N) to $235 (U.S.) from $300, compared to a consensus of $273.09.
- Concordia Healthcare Corp (CXR-T;CXRX-Q) to $55 (U.S.) from $80. Consensus is $85.31.
- Merus Labs International Inc. (MSL-T;MSLI-Q) to $3.25 (Canadian) from $4. Consensus is $3.84.

"We believe that Concordia, with its high debt leverage and decelerating growth will be the most exposed," he said. "Because Valeant has been a focal point of recent attacks on drug pricing, we believe that much of the downside is reflected in the stock. Furthermore, despite its elevated leverage, Valeant's fundamentals remain intact; we believe the company has a very strong platform and organic growth prospects and we expect will – eventually – again trade at a premium to the group. As such, we are lowering target prices across the board for our Canadian specialty pharma names."

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RBC Dominion Securities analyst Neil Downey said he views Brookfield Asset Management  Inc. (BAM.A-T;BAM-N) as a "core holding for most Canadian equity portfolios."

Mr. Downey said the company's recent New York investor day reinforced his belief in its business model. Touting its "impressive growth" in both fee-related earnings and fee-bearing capital, he also said "momentum is strong" to reach its target for new private fund commitments.

"It has taken time, but post-2008 global financial crisis, there has been a rationalization in the industry," said Mr. Downey. "This has resulted in a handful of alternative asset managers that appear to be separating from the pack. Each typically has: 1) global reach; 2) size/scale, 3) strong investment track records; and 4) multiple funds/strategies. These attributes allow for a wide range of investment offerings to clients and they help clients consolidate their manager lists. BAM cites a growing and diversified client base which now includes over 320 global private fund investors (up from 280 last year) at average commitments of [approximately] $8-million. Today [about] 40 per cent of BAM's client base invests in multiple funds leaving meaningful growth potential over time."

Despite this optimism, Mr. Downey said the asset manager is suffering from the "Brazilian blues" which will limit near-term net asset value growth. He estimates Brazil represents 15 per cent of its tangible NAV, and, thus, the devaluation of the country's currency versus the greenback has caused him to tweak his NAV estimates.

Accordingly, he lowered his price target for the stock to $40 (U.S.) from $41. Consensus is $37.89. He maintained his "outperform" rating.

"Overall, we believe our target valuation metrics are appropriate in light of BAM's high-quality asset base and the growing profitability of its asset management platform," he said. "We believe there are few if any companies that are truly comparable to Brookfield Asset Management and we continue to view BAM's shares as a 'core holding.' "

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The "unique scalable" business model of DIRTT Environmental Solutions Ltd. (DRT-T) has proven its ability to deliver "impressive results," according to Industrial Alliance Securities Inc. analyst Neil Linsdell.

He initiated coverage of the stock with a "strong buy" rating.

"The company has managed to expand its client list significantly and continues to win more projects as it scales its operations," the analyst said. "This is a direct result of DIRTT's robust and expanding distribution network that allows the company to gain access to various markets through partnerships with key players, bringing in investments from these distribution partners (DPs) to share the cost. Currently, its distribution network consists of 98 partners that make DIRTT solutions available in 180 locations across nine countries, serving in excess of 5,600 end users. This will accelerate the adoption rate of DIRTT solutions in various markets and expand the company's presence in these markets at a shared cost between DIRTT and its partners. DIRTT's strengthening DP network has resulted in rapid growth over the last two years."

Mr. Linsdell expects annual revenue growth of approximately 20 per cent for  the next few years as the company gains increased orders through its existing vertical markets, including commercial, education, government and healthcare. He calls the latter a "key focus" which will provide a "significant" percentage of its revenue.

Calling the long-term outlook for the global construction industry "favourable" with an increased focus on emerging markets, Mr. Linsdell said the company's plan to expand and diversify beyond North American is a positive, noting it could highlight "the immense potential from which the company could benefit." He said that diversification "provides an attractive growth opportunity."

"DIRTT's approach to construction delivers superior results on the basis of cost, efficiency, speed and sustainability when compared to conventional construction methods," he said. "The company's internally developed ICE software has automated tedious and time consuming tasks that occur under the conventional approach such as design, engineering, quotation, and ordering, etc., significantly reducing delivery times and material waste, while improving transparency and communication between all the departments involved in a project. …  This revolutionized approach to a conventional process such as construction provides many tangible advantages and an overall better experience for the client. With the company being at the early stages of its adoption cycle, and operating within an industry of immense size and scale, we see strong potential for DIRTT to post significant growth over time."

He set a $8 price target for the stock. Consensus is $8.82.

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In a third-quarter sector preview notes, CIBC World Markets analysts updated their gold and silver price forecasts.

The third-quarter gold price is actualized at $1,125 (U.S.) per ounce, and they lowered the fourth-quarter price to the same figure. Both were forecasted to be $1,200. They also lowered the 2016 price forecast to $1,150 from $1,250, and maintained their 2017 and long-term assumption at $1,200.

Using their 75 times gold-to-silver-ratio, their silver forecasts moved to $15 (U.S.) per ounce from $17 in 2016 and $16 from 2017 onwards.

"The potential for a Federal Reserve rate hike remains a near-term headwind for the gold price, particularly if the inverse relationship between the U.S. dollar and gold is maintained," they said. "In terms of the bullion market, CIBC analysis suggests continuing consumer demand in the emerging economies (along with some encouraging signs in the Western economies) that may lend support to the gold price, while Central Bank net purchases and stability in the ETF markets could also help. Collectively, using the new CIBC gold price assumptions, [net asset values] decreased on average by 3 per cent, while 2016 EPS estimates decreased on average by 14 per cent."

On silver, they noted: "As in gold, where very little makes any sense anymore once we drop below $1,200/oz., the silver space runs into a proverbial wall at about $15/oz., with several silver companies in tough positions, though we note that on average the silver sector continues to retain less leveraged balance sheets."

In the gold note, they upgraded Gold Fields Ltd. (GFI-N) to "sector outperformer" from "sector performer" and Pan African Resources (PAF-L) to "sector performer" from "sector underperformer."

They also downgraded Euromax Resources (EOX-X) to "sector performer" from "sector outperformer-speculative" due to its sensitivity to metal prices.

Based on lower silver forecasts, CIBC  upgraded Tahoe Resources Inc. (THO-T;TAHO-N) and Fortuna Silver Mines Inc (FVI-T;FSM-N) to "sector outperformer" from "sector performer." They downgraded Silver Standard Resources Inc.  (SSO-T;SSRI-Q) to "sector performer" from "sector outperformer" based on "very strong performance."

"Silver Standard has a number of key attributes going for it: It has built up a solid delivery track record over the past couple of years; Both its mines should continue to generate positive cash flows even at current metals prices; It has two attractive growth projects that could be brought to account if metals prices improve (although permitting delays and community issues could make for a longer timeline); It has significant balance sheet fire power, which can be used as a buffer if metals prices decline further. Alternatively, this liquidity could be used to capitalize on the current market conditions by picking up distressed assets at good prices; and, it remains highly levered to gold and silver prices, making it an ideal vehicle for investors looking to gain exposure to precious metals," the note said. "However, despite all of these attributes, the current market valuation adequately captures this upside, especially given a perceived need to keep buying more assets."

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In other analyst actions:

Actuant Corp (ATU-N) was raised to "neutral" from "underweight" at JPMorgan by equity analyst Ann Duignan. The 18-month target price is $21 (U.S.) per share.

Amaya Inc (AYA-T) was raised to "top pick" from "buy" at Cormark Securities by equity analyst David Mcfadgen. The 12-month target price is $37 (Canadian) per share.

Canadian Imperial Bank of Commerce (CM-T) was downgraded to "underperform" from "sector perform" at National Bank by equity analyst Peter Routledge. The 12-month target price is $99 (Canadian) per share.

Dalradian Resources Inc (DNA-T) was raised to "buy" from "speculative buy" at Cormark Securities by equity analyst Tyron Breytenbach. The 12-month target price is $1.60 (Canadian) per share.

Franco-Nevada Corp (FNV-N) was raised to "action list buy" from "buy" at TD Securities by equity analyst Greg Barnes. The 12-month target price is $65 (U.S.) per share.

Groupon Inc (GRPN-Q) was rated new "underperform" at Cowen by equity analyst Kevin Kopelman. The 12-month target price is $2.75 (U.S.) per share.

Helmerich & Payne Inc (HP-N) was raised to "sector outperform" from "sector perform" at Scotia Howard Weil by equity analyst David Wilson. The target price is $65 (U.S.) per share.

Infinera Corp (INFN-Q) was raised to "buy" from "hold" at Needham & Co. by equity analyst Alexander Henderson. The 12-month target price is $24 (U.S.) per share.

Nabors Industries Ltd (NBR-N) was downgraded to "sector perform" from "sector outperform" at Scotia Howard Weil by equity analyst David Wilson. The target price is $14 (U.S.) per share.

Targa Resources Partners LP (NGLS-N) was downgraded to "hold" from "buy" at Jefferies by equity analyst Christopher Sighinolfi. The 12-month target price is $33 (U.S.) per share.

Nike Inc (NKE-N) was raised to "Buy" from "Neutral" at DA Davidson by equity analyst Andrew Burns. The target price is $140 (U.S.) per share.

Russel Metals Inc (RUS-T) was downgraded to "underperform" from "sector perform" at RBC Capital by equity analyst Sara O'brien. The 12-month target price is $19 (Canadian) per share.

United Technologies Corp (UTX-N) was rated new "neutral" at JPMorgan by equity analyst Steve Tusa. The target price is $104 (U.S.) per share.

Williams-Sonoma Inc (WSM-N) was rated new "hold" at Jefferies by equity analyst Daniel Binder. The 12-month target price is $83 (U.S.) per share.

Yum! Brands Inc (YUM-N) was raised to "neutral" from "underperform" at Credit Suisse by equity analyst Jason West. The target price is $75 (U.S.) per share.

With files from Bloomberg News