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 often during the trading day so check back for new details.

The fourth-quarter results for Metro Inc. (MRU-T) put an "exclamation mark on a great year," said Raymond James analyst Kenric Tyghe.

The retailer reported earnings per share of 52 cents, topping the consensus of 51 cents despite weaker-than-expected sales. Mr. Tyghe said the beat was due largely to higher gross margins, the company's "increased fresh penetration and improved pass-through of fresh pricing (on the moderation in the pace of fresh inflation, particularly meat)" as well as Première Moisson, its Quebec bakery chain.

Same-store sales grew 3.4 per cent on the quarter, falling below Mr. Tyghe's 3.9-per-cent projection and reflecting internal food inflation of 2.8 per cent. He called the result "relatively solid" despite being weaker than expected.

"Metro's continued traction in fresh reflects the sustained shift in consumers' preferences towards healthy (or at least healthier) food choices, and the increasing usage of data-analytics-driven merchandising and promotional decisions from its metro&moi and Air Miles loyalty programs," the analyst said. "The competitive landscape, while highly promotional, remains rational which, combined with the continued traction of Metro's analytics-driven merchandising strategy (driving high promotional efficiency) and continued fresh focus, is supportive of (modest) further gross margin expansion despite f/x and related pressures."

While sales increased "a touch weaker" 4.5 per cent to $2.834-billion, below the consensus of $2.841-billion, Mr. Tyghe noted gross margins expanded 69 basis points to 20 per cent.

"Metro's continued strong merchandising in both full-service and discount (driven by the insights gained from its increasingly rich analytics capabilities), in-stock guarantee in discount (at both Food Basics and Super C) and the increased resonance of WOW stores supported both traffic and (modest) tonnage increases in the quarter," he said. "In addition, Première Moisson's growth represented 30 basis points of Metro's 4.5-per-cent sales increase."

Maintaining his "outperform" rating for the stock, he increased his target price by a loonie to $42. The average analyst target price is $41.08, according to Bloomberg.

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The $533-million (U.S.) sale of a portion of its equity in HBS Global Properties by Hudson's Bay Company (HBC-T) provides an additional valuation marker and provides "third-party validation" of the retailer's owned real estate, said RBC Dominion Securities analyst Sabahat Khan.

Though Mr. Khan reduced his price target for HBC stock in the wake of the deal, he called the transaction "a positive development."

"HBC intends to use the proceeds from the equity sale and some additional cash on hand to reduce the outstanding balance on its term loan B by [approximately] $585-million," the analyst said. "The lower leverage improves the company's balance sheet as it continues to invest in projects across its platform. Major projects currently underway or expected to begin in the near term include: the planned renovation of the Saks Fifth Ave. Manhattan flagship; introduction of Saks full-line and OFF 5TH banners in Canada; accelerated roll-out of Saks OFF 5TH locations in the U.S.; a heightened level of investment at Kaufhof; and ongoing investment in the 'all-channel' initiatives."

"Both HBC and HBS Global Properties could sell additional equity in the [joint venture]. The proceeds of such sales could help further reduce the company's leverage or be directed towards future acquisitions at the JV level (the company has previously indicated its intent to diversify the tenant base for HBS Global Properties). A more diversified tenant base would better position the JV for a potential future public listing, in our view."

Noting shares of the company have "declined meaningfully" in the wake of "soft" third-quarter results and downward guidance of U.S. department store peers, Mr. Khan acknowledged potential headwinds south of the border from a weak retail environment and lower tourist traffic in major cities. However, he emphasized U.S. accounts make up only 44 per cent of the total company sales.

"Furthermore, the Saks OFF 5TH banner, which has reported double-digit comp sales for the trailing six quarters, could also help offset some of the potential weakness at full-line banners," he said.

Mr. Khan did not change his "outperform" rating for the stock, but he did lower his target price to $37 from $39 following the equity sale to reflect its reduced HBS interest and lower retail earnings before interest, taxes, depreciation and amortization because of additional rent expenses. Consensus is $35.05.

"HBC offers investors exposure to a turnaround story that has begun promisingly," he said.

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The quarterly beat for NetApp Inc. (NTAP-Q) was offset by a lower outlook for the next quarters, according to BMO Nesbitt Burns analyst Keith Bachman.

The computer storage and data management company reported earnings per share, excluding items, of 61 cents (U.S.) per share, topping the average analyst estimate of 57 cents. However, net income fell to $114-million, or 39 cents per share, in the second quarter from $160-million, or 49 cents per share, in the same period a year ago. Revenue fell 6.4 per cent to $1.45-billion, narrowly exceeding the estimate of $1.43-billion.

Free cash flow (FCF) of $99-million was a drop from $330-million a year earlier. Mr. Bachman pointed to lower profitability and working capital, including days sales outstanding (DSOs) and days payable outstanding (DPOs).

"For [the second half of the 2016 fiscal year], NTAP expects FCF relative to revenue to be in the mid-teens, which implies FCF of 11-12 per cent of [fiscal year 2016] revenues versus prior guidance in the mid-teens," he said. We are lowering our [fiscal year 2016] FCF estimate from $987-million to $671-million."

He added: "For FY16, management guided total revenue to decline just over 5 per cent, which we think looks optimistic. We assume total revenue declines about 6 per cent in FY16 and 1 per cent in FY17."

Accordingly, he lowered his earnings-per-share estimate for the year to $2.73 from $2.83.

Maintaining his "market perform" rating, he also lowered his target price by a dollar to $36 (U.S.). The analyst average is $33.42.

"Longer term, NTAP hopes to be a data-management company," said Mr. Bachman. "We think this goal, while worthy, will be difficult to realize. We believe that Oracle, Salesforce.com, Workday, SAP and others are much further established data-management companies. As buyers of IT move more toward the cloud, we think storage will hold less value in the future. To bring incremental value to customers, we think NTAP will either have to increase research and development or buy IP. Finally, we do not see NTAP as an acquisition target. We believe that Oracle could be the only interested party (cutting expenses to grow margins/EPS), but we believe that Oracle is focused on growing its cloud business, and NTAP does not advance this cause."

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Investors are starting to figure out a "big story" is unfolding with Prothena Corporation PLC (PRTA-Q), said RBC Dominion Securities analyst Michael Yee.

He said he continues to like the Ireland-based biotechnology company as a two-part story is playing out, adding "each part offers significant upside potential."

He pointed to:

• Orphan amyloidosis data improving and regulatory discussions “getting better” at both the European Medicines Agency (EMA) and U.S. Food and Drug Administration (FDA);
• Its new Parkinson’s drug getting more attention.

"We think PRTA can continue to move higher in 2016: 1) There are catalysts and the data should look good; 2) Stock is undervalued, in our opinion; and 3) We think the stock has been under covered by the sell side – PRTA was a spin-out (not a traditional IPO), so we believe there has been under-ownership," said Mr. Yee. "However, based on our incoming call volume, investor dialogue, and meeting interest, the stock is starting to get more on the radar as an attractive 'antibody platform company.' With a pipeline and more clinical data coming out to talk about (not much data a year ago), we expect the stock to move higher over time.

"We are buyers ahead of these potential catalysts: Q2:16 new Phase II amyloidosis response rate data and H1:16 Phase IB Parkinson's data. At $1.7-billion [enterprise value] with two drugs – even if just the lead orphan drug works in time – we believe the market cap can be well into multibillion-cap potential."

Mr. Yee kept his "outperform" rating for the stock but raised his target price to $95 (U.S.) from $75. Consensus is $77.60.

"We believe the stock's valuation is attractive, especially compared to other orphan drug biotech comparables that trade at 3-5x higher enterprise value," he said.

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"A stable, more meaningful positive growth trajectory may be emerging" at Loblaw Companies Ltd. (L-T), said Credit Suisse analyst David Hartley.

Noting that the company's management is focused on driving the business "and not on fixes," Mr. Hartley said its ability to act on accelerated share buybacks is "in contrast to its peers."

The analyst said Loblaw has reduced its debt since the acquisition of Shoppers Drug Mart Corp. by $1.9-billion, and it announced its 2016 capital expenditure budget will fall by $200-million. Based on that, he estimates the company will have $2-billion in free cash flow to invest in buybacks in 2016. He projects $1-billion in buybacks for the year.

On Wednesday, the company reported third-quarter earnings per share of 99 cents, beating Mr. Hartley's 97-cent estimate and the 95-cent consensus. Earnings before interest, taxes, depreciation and amortization of $1.022-billion missed estimates by $40-million and $30-million, respectively, due partially to new pharmacy reforms in Quebec that brought lower-than-expected revenue.

Calling the 2016 outlook "bright," Mr. Hartley pointed to a number of positive factors going forward, including: optimization of SAP systems benefits going forward; optimization of PC/No Name products at Shoppers; the closing of 52 underperforming stores; reduced costs for restructuring labour agreements and reduced costs through efficiencies.

He kept the stock on his focus list with an "outperform" rating and raised his target by a loonie to $80. The analyst average is $78.50.

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In other analyst actions:

Airgas Inc. (ARG-N) was downgraded to "underperform" from "market perform" at Raymond James by equity analyst Samuel Darkatsh.

Blackbaud Inc. (BLKB-Q) was rated new "buy" at Benchmark by equity analyst Mark Schappel. The 12-month target price is $73 (U.S.) per share.

Chartwell Retirement Residences (CSH.UN-T) was downgraded to "hold" from "buy" at GMP by equity analyst Jimmy Shan. The target price is $15 (Canadian) per share.

SPX FLOW Inc. (FLOW-N) was rated new "market perform" at William Blair by equity analyst Chase Jacobson. The 12-month target price is $34.00 per share.

Orezone Gold Corp. (ORE-T) was downgraded to "hold" from "speculative buy" at Canaccord Genuity by equity analyst Joe Mazumdar. The 12-month target price is 30 cents (Canadian) per share.

Park Lawn Corp. (PLC-X) was rated new "buy" at Mackie Research Capital by equity analyst Russell Stanley. The 12-month target price is $17 (Canadian) per share.

JM Smucker Co. (SJM-N) was rated new "neutral" at Consumer Edge Research by equity analyst Robert Dickerson. The 12-month target price is $125 (U.S.) per share.

Sysco Corp. (SYY-N) was rated new "outperform" at Wells Fargo by equity analyst Zachary Fadem.

With files from Bloomberg News