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A pipeline is pictured at the Kinder Morgan Trans Mountain Expansion Project in Burnaby, B.C., on June 4, 2015.JONATHAN HAYWARD/The Canadian Press

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.

Saying he cannot defend the specialty pharmacy structure at Valeant Pharmaceuticals International Inc (VRX-T;VRX-N), BMO Nesbitt Burns analyst Alex Arfaei downgraded his rating for the embattled company to "market perform" from "outperform."

On Wednesday, Valeant shares fell 19 per cent after U.S. short-seller Citron Research accused the company of using specialty pharmacies, through a network led by its partner Philidor Rx Services, to inflate its revenue. Valeant denied the allegation.

"Based on our understanding, [about] 10 per cent of Valeant's revenues come from specialty pharmacies," said Mr. Arfaei. "While other companies also use specialty pharmacies, the structure of Valeant's network seems different. In the case of Philidor, Valeant consolidates their financials and seems to have a controlling financial interest, while other companies say their affiliated specialty pharmacies are 'fully independent.'

"Valeant's structure may not be illegal, but we find it aggressive and questionable. However, proof of a questionable business practice is not proof of financial wrong-doing. Our analysis of Valeant's cash flows does not support Citron's Enron-like thesis; in fact it supports the opposite conclusion. But we cannot refute Citron's allegation either. So we're left with their well-timed allegations, Valeant's 'categorical' denials and audited financial statements that support, but not necessarily prove Valeant's position. Thus, there is residual uncertainty that may not be fully resolved unless there is an investigation."

Mr. Arfaei also dropped his target price to $141 (U.S.) from $265. The analyst average, according to Bloomberg, is $243.05.

"The downside from here is not limited to the specialty pharmacy business in question (we estimate that is priced in); it is dependent on the impact of the residual uncertainty on the rest of the business," the analyst said. "We believe most VRX investors didn't know about Philidor; what else is out there that we don't know? While this question applies to every company in our coverage, the existence of a questionable, not fully disclosed business practice increases the risk of others. The stock is unquestionably cheap in our view, but for the upside to materialize, we believe investors need to become comfortable with this uncertainty. Unlike most other allegations, we cannot defend this practice; thus, we cannot argue for an Outperform thesis even though the rest of our bullish views are unchanged."

Bank of America/Merrill Lynch maintained a "buy" rating with a price target of $290 (U.S.). Analyst Sumant S. Kulkarni said he continues to monitor concerns related to improper pricing and alleged irregularities in financial reporting, but he believes Valeant presents an "enhanced buying opportunity" at current levels.


A combination of an increase to his target price and a recent drop in the share price of Pretium Resources Inc. (PVG-T;PVG-N) led Canaccord Genuity analyst Joe Mazumdar to upgrade his rating for the stock.

He moved the Canadian exploration and development company to "speculative buy" from "hold."

Mr. Mazumdar pointed out that his fourth-quarter commodity forecast, which included a 2.4-per-cent drop in his long-term gold price, and his foreign exchange projection, a drop of the loonie against the greenback by 4.1 per cent, caused an increase in his long-term Canadian dollar-denominated gold price.

"The higher [Canadian dollar]-denominated gold price combined with moving our valuation ahead to the end of 2016 generated a positive impact on the valuation of the permitted, high-grade, underground Brucejack gold project in northwest B.C., which is currently under construction," the analyst said. "This netted out to an increase of 35 cents (Canadian) or 3 to 4 per cent overall to a target price of $9.50 after adjusting for a drain in working capital, future financing, increase in long-term debt position and a reduced corporate adjustment."

That target change and the fact that the stock has dropped 8 to 9 per cent since its peak earlier this month brought the change in rating.

He said the target price of $9.50 (up from $9.15) is based largely on his valuation of the Brucejack project. The consensus is $11.95.


Kinder Morgan Inc (KMI-N) is likely to suffer slower growth due to lower commodity prices coupled with a slide in near-term volume, said Credit Suisse analyst John Edwards.

In the wake of management reducing guidance for the first time ever, Mr. Edwards downgraded his rating for the stock to "neutral" from "outperform."

"Despite KMI's size, geographic footprint, diversified asset base, proven track record, investment grade balance sheet, demonstrated access to capital, and strong management, KMI's dividend growth over the next few years is likely to slide down to average due to weak commodity prices that have now stretched for a year with further weakness expected in 2016 before showing recovery in 2017," the analyst said. "Cost of capital and high balance sheet leverage has also hurt prospects. Growth prospects of around average are more likely despite a healthy slate of organic growth projects ($21.3-billion backlog in aggregate, down $0.7-billion sequentially) across the Kinder complex. The higher cost of capital has also frustrated one of KMI's objectives to act as a consolidator in the midstream area."

He noted the fall in commodity prices and rising cost of capital caused management to step away from its objective of 10-per-cent dividend growth CAGR (compound annual growth rate) through 2020, including a cut of 6-10 per cent next year.

"We think investors react negatively – not so much for KMI as the slowing growth prospects are largely already baked in - but if KMI is resorting to creative financing alternatives, the weaker players also face equity issuance issues," said Mr. Edwards. "Not exactly a revelation to be clear but getting confirmation from a bellwether like KMI means other players with balance sheet issues could struggle. KMI affirmed it will hit its 5.6x leverage target by year end."

Calling its third-quarter results "another swing and a miss," he reduced his price target for the stock to $39 (U.S.) from $52. Consensus is $41.53.


Computer Modelling Group Ltd (CMG-T) is "an exceptional software story facing challenging end-markets," according to Canaccord Genuity analyst Doug Taylor.

He initiated coverage of the software technology company with a "hold" rating.

"The company has a long track record of consistent organic growth (near a 20 per cent compound annual growth rate for the past 10 years) and exceptional profitability," said Mr. Taylor. "However, given high exposure to energy end-markets, growth has slowed of late. Pending sustained evidence that end-market fundamentals are improving, we find the current valuation fair."

Mr. Taylor said CMG has set a standard for modelling on unconventional oil and gas recovery techniques. He said their refined work has set a "significant barrier to new entrants and has allowed the company to attract significant market share [estimated to be about 30 per cent] in its niche market."
He added the company's "competitive" leadership has also translated into "impressive" financial performance.

"CMG boasts a unique combination of growth (10-year revenue CAGR of 20 per cent), visibility (greater-than 75 per cent recurring revenue), profitability (greater than 50 per cent EBITDA margins), and the ability to grow while returning virtually all cash generated to shareholders (3.4 per cent dividend yield)," the analyst said.

However, Mr. Taylor expressed hesitancy about the company's current state based on the fact that its sales are almost exclusively to the oil and gas industry.

"With the energy commodity cycle near a low point, the level of investment by CMG's potential customers is challenged," he said. "There are offsets as CMG's product can be used to become more efficient with limited resources. CMG's highly recurring revenue model has meant past cycles translated to flattening growth rather than declining revenue."

He set a price target of $12.50 (Canadian) for the stock, compared to the consensus of $13.29.

"The current valuation of 19x forward EBITDA and 30x EPS is just below the historic range," he said. "However, in our view, the commodity backdrop warrants caution until end-market fundamentals show sustained improvement. Until such time, we view the current valuation as fair."


The proposed $19-billion (U.S.) acquisition of SanDisk Group (SNDK-Q) by Western Digital Corp. (WDC-Q) overshadows its well-below-expectation guidance for the fourth quarter, said BMO Nesbitt Burns analyst Ambrish Srivastava.

On the same day the bid was announced, SanDisk reported third-quarter results which exceeded expectations. It reported revenues of $1.45-billion (U.S.), up 17 per cent from the previous quarter and earnings per share of $1.09. The consensus was $1.4-billion and 80 cents.

The company's revenue guidance, however, came in below consensus projections with a midpoint of $1.44-billion versus a $1.58-billion estimate. Accordingly, Mr. Srivastava said his estimates for the 2016 calendar year "go down meaningfully."

He raised his 2015 EPS estimate to $3.23 from $3.10, but he lowered his 2016 projection to $3 from $4.03.

The analyst said the proposed acquisition "is at a pretty hefty premium to where the stock was trading at before the potential acquisition started to be discussed in Bloomberg." He raised his price target to $86 (U.S.) for the stock from $61.  Without the bid, he said the stock would be worth about $45.

He maintained a "market perform" rating.

Meanwhile, five analysts downgraded the stock:

- B Riley & Co's Craig Ellis to "neutral" from "buy"
- EVA Dimensions' Austin Burkett to "underweight" from "hold"
- Morgan Stanley's Joseph Moore to "equalweight/in-line" from "overweight/in-line"
- Argus Research's James Kelleher to "hold" from "buy"
- Macquarie's Deepon Nag to "neutral" from "outperform"

UBS upgraded Western Digital  to "neutral" from "sell" and boosted its price target to $75 (U.S.) from $67


eBay Inc. (EBAY-Q) posted a "solid" quarter against low expectations, said RBC Dominion Securities analyst Mark Mahaney.

On Wednesday, the tech company reported third-quarter revenue of $2.1-billion (U.S.), in line with expectations, while non-GAAP earnings per share of 43 cents topped the consensus projection of 40 cents. Mr. Mahaney pointed to "slightly greater than expected opex [operating expenditures] leverage and a lower than expected tax rate" as the rationale for the result.

"The key investor decision remains whether eBay is a Cash Cow, a Cash Cube (as in the melting kind), or potentially recovering Cash Cougar," he said. "Our 'sector perform' rating is based on the belief that one of the first two is the most likely. While the security breach/Google SEO changes from 2014 were significant factors behind eBay's fundamentals underperformance, we believe eBay will continue to face increasingly powerful headwinds from competition with Amazon, a series of vertical marketplaces, and large social platforms with 'Buy Button' potential."

He added: "After losing share to Amazon and other competitors in earlier years, we believe that eBay is proving out a successful pivot, wherein it has fundamentally turned around its Marketplaces segment."

He raised his price target for the stock by a dollar to $30 (U.S.). The average is $29.82.

"We view sentiment around eBay as mixed to negative but at [12 times 2016 estimated price-to-earnings], a lot of risk is already priced in, which does create a potentially attractive long opportunity if eBay can successfully execute," he said.


In other analyst actions:

UBS initiated coverage on GoDaddy Inc. (GDDY-N) with a "buy" rating and a price target of $40 (U.S.).

Brown-Forman Corp (BF.B-N) was downgraded to "market perform" from "outperform" at Cowen by equity analyst Vivien Azer. The 12-month target price is $111 (U.S.) per share.

CIT Group Inc (CIT-N) was raised to "outperform" from "neutral" at Macquarie by equity analyst Vincent Caintic. The 12-month target price is $65 (U.S.) per share.

Community Health Systems Inc (CYH-N) was downgraded to "market perform" from "outperform" at Raymond James by equity analyst John Ransom.

KLA-Tencor Corp (KLAC-Q) was downgraded to "neutral" from "overweight" at Piper Jaffray by equity analyst Ruben Roy. The 12-month target price is $67 (U.S.) per share. It was downgraded to "hold" from "buy" at Needham & Co. by equity analyst Y Edwin Mok.

Knight Transportation Inc (KNX-N) was downgraded to "neutral" from "buy" at UBS by equity analyst Thomas Wadewitz. The 12-month target price is $27 (U.S.) per share.

Kansas City Southern (KSU-N) was downgraded to "neutral" from "outperform" at Macquarie by equity analyst Cleo Zagrean. The 12-month target price is $92 (U.S.) per share.

LifePoint Health Inc (LPNT-Q) was downgraded to "neutral" from "buy" at Mizuho Securities USA by equity analyst Sheryl Skolnick. The target price is $74 (U.S.) per share.

Marquee Energy Ltd (MQL-T) was rated new "buy" at Mackie Research Capital by equity analyst David Ricciardi. The 12-month target price is $1 (Canadian) per share.

Polaris Industries Inc (PII-N) was downgraded to "market perform" from "outperform" at Wells Fargo by equity analyst Timothy Conder.

Red Hat Inc (RHT-N) was downgraded to "market perform" from "outperform" at Cowen by equity analyst Gregg Moskowitz. The 12-month target price is $82 (U.S.) per share.

Rubicon Minerals Corp (RMX-T) was downgraded to "hold" from "speculative buy" at Canaccord Genuity by equity analyst Joe Mazumdar. The 12-month target price is 60 cents (Canadian) per share.

Tenet Healthcare Corp (THC-N) was downgraded to "neutral" from "buy" at Mizuho Securities USA by equity analyst Sheryl Skolnick. The target price is $30 (U.S.) per share.

Texas Instruments Inc (TXN-Q) was downgraded to "neutral" from "buy" at B. Riley by equity analyst Craig Ellis. The 12-month target price is $58 (U.S.) per share.

VMware Inc (VMW-N) was downgraded to "market perform" from "outperform" at Oppenheimer by equity analyst Ittai Kidron.

With files from Bloomberg News