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
Despite lowering her estimates for Kinder Morgan Inc. (KMI-N) following a rating downgrade from Moody's, RBC Dominion Securities analyst Elvira Scotto feels the company's dividend is secure.
On Monday, Kinder Morgan announced it had agreed to acquire an additional 30-per-cent stake in Natural Gas Pipeline Company of America LLC (NGPL) for $136-million (U.S.). Ms. Scotto estimated the deal should provide incremental earnings before interest, taxes, depreciation and amortization of $95-million. However, concerns have been raised given NGPL has debt of nearly $3-billion, and, accordingly, Ms. Scotto estimates that high debt burden will reduce the annual discounted cash flow (DCF) contribution to nearly $25-million.
"While our understanding is that NGPL debt is non-recourse to KMI and will not be consolidated, Moody's changed KMI's outlook to negative from stable, which raised investor concerns and, consequently, KMI's cost of capital," said Ms. Scotto.
She added: "We have incorporated the acquisition into our model, which increases our EBITDA estimates. In addition, we have increased our cost of debt and equity capital. We model zero sequential dividend growth in 2016 and 2017, versus KMI's 6-10-per-cent growth target in 2016, as we do not believe investors are rewarding companies for growth in the current environment. We estimate that holding dividends flat for two years would save [approximately] $700-million in cash, which KMI could use to fund growth projects or pay down debt."
The analyst lowered her DCF-per-share estimates for 2015, 2016 and 2017 to $2.11, $2.15 and $2.29 from $2.13, $2.19 and $2.37. Her EBITDA projections also fell.
Ms. Scotto maintained her "outperform" rating for the stock, but she admitted she does not see a catalyst for it before the end of the year.
"We do not foresee a near-term driver of stock performance, with the possible exception of 2016 guidance," she said. "Historically, KMI provides high level guidance in early December (dividend growth, growth capital, and EBDA), although KMI may postpone guidance. We expect KMI to report fourth-quarter 2015 results on Jan. 20 (although likely a non-event), followed by KMI's analyst conference which should provide more detail on 2016 guidance."
She lowered her price target to $29 (U.S.) from $36. The analyst average, according to Bloomberg, is $34.62.
"We believe a robust multibillion-dollar organic growth project backlog will drive visible cash flow and dividend growth potential longer term, despite near-term challenges," she said. "Moreover, we view KMI's current dividend as secure and believe it provides investors with an attractive yield."
Meanwhile, Argus Research analyst Michael Burke downgraded his rating for the stock to "hold" from "buy."
Tuesday's Investor Day for Algonquin Power & Utilities Corp. (AQN-T) "clearly" outlined a continued path for dividend growth, according to Desjardins Securities analyst Bill Cabel.
He also noted the recently announced $150-million common equity raise was in line with his expectations, supporting "robust 2016 growth plans."
"At the investor day, AQN again did an excellent job outlining its growth initiatives which continue to increase (now $4.1-billion versus $2.8-billion a year ago), and new initiatives that fit with its existing expertise and strategy. Overall, AQN reaffirmed its path to significant growth in EBITDA/cash flows and, ultimately, dividends."
He added: "Overall, the key focus of the investor day was on AQN's impressive multi-faceted growth prospects. There are strong organic and potential M&A opportunities on the power and utility sides of the business. Additionally, AQN once again showed it can find new growth opportunities within its existing operating footprint and through disciplined, logical extensions or step-outs into complementary asset classes, like natural gas pipelines and efforts in liquefied natural gas (LNG) facilities. Further, we like that these new initiatives are sometimes done with established players such as Kinder Morgan and are at a measured scale, where AQN can gain valuable experience without stretching itself (financially and operationally) while still achieving strong returns. Moreover, these new initiatives often complement AQN's other businesses."
Mr. Cabel said Algonquin has "substantially grown the tangible growth pipeline" laid out at its 2014 Investor Day, rising from $2.8-billion to $4.1-billion. He said its growth is now comprised of $1.8-billion of contracted power projects, $1.6-billion in organic and acquisition-related growth for the utility distribution segment and the potential for almost $0.7-billion in natural gas pipelines and electric transmission growth in the utility segment.
"This does not include any additional M&A activities and alone fulfills management's financial growth expectations for (1) 15-per-cent annual growth in assets, (2) [approximately] 15-per-cent annual growth in adjusted EBITDA, and (3) greater-than-10-per-cent annual growth in adjusted EPS. Given the strong growth, we believe AQN can achieve its goal of 10-per-cent annual dividend growth over the next several years without pressuring the payout ratio."
Maintaining his "buy" rating for the stock, Mr. Cabel raised his price target to $12 from $11.75, which is in line with the analyst consensus.
"The investor day reaffirmed our positive investment thesis," he said. "We believe Algonquin has the potential to deliver strong, sector-leading returns and we view it as one of our preferred names. It offers long-term stable operations combined with significant relatively low-risk growth, strong likelihood for continued annual dividend increases to fuel further share price appreciation and the potential to make accretive acquisition."
Elsewhere, BMO Nesbitt Burns analyst Ben Pham raised his target to $12.50 from $11.50, noting the Investor Day reaffirmed "significant upside potential."
"AQN remains one of our best ideas in power and utility," said Mr. Pham, who maintained his "outperform" rating.
Enbridge Income Fund Holdings Inc. (ENF-T) provides shareholders "with a stable and predictable cash flow stream," said BMO Nesbitt Burns analyst Ben Pham.
He initiated coverage of the company with an "outperform" rating, emphasizing it is a vehicle for Enbridge Income Partners LP, "where all of the low-risk, long-lived energy infrastructure assets reside."
"ENF has historically grown dividends at a rate of 5 per cent, largely driven by drop-down acquisitions from its sponsor and parent Enbridge Inc. (ENB-T; ENB-N)," said Mr. Pham. "ENB provided further support to ENF in September, 2015, with a large-scale $30-billion Canadian liquids pipeline drop-down, which resulted in a doubling of the dividend growth profile to 10 per cent without sacrificing the long-standing focus on contracted, non-commodity-sensitive cash flows.
"While we recognize that an expected future need for significant equity capital could cause stock price friction in the coming years ($600-800-million per annum through at least 2018 by estimation), the attractive visible multi-year growth profile secured by $12-billion of contracted pipeline opportunities more than offsets, in our view."
Mr. Pham projects earnings per share for 2015, 2016 and 2017 of $1.95, $2.15 and $2.29 and available cash flow from operations of $729-million, $1.858-billion and $1.963-billion, which he said is driven by a $12-billion backlog of contracted pipeline projects.
The analyst set a price target of $35 for the stock. The analyst consensus is $39.05.
"Today, ENF trades at a modest premium to our broader energy infrastructure group (8.4 per cent 2016 adjusted funds from operation yield versus coverage of 8.8 per cent), and we believe a premium will likely persist due to above-average dividend-growth rates, a low-risk business model and proven strong support from its deep-pocketed sponsor," he said.
After a third-quarter revenue miss and decrease in the fourth-quarter guidance, Credit Suisse analyst Michael Nemeroff said he's "moving to the sidelines" on Verint Systems Inc. (VRNT-Q).
He downgraded his rating for the software company to "neutral" from "outperform."
On Wednesday, Verint reported quarterly revenue of $285.3-million (U.S.), an increase of 1.1 per cent year over year but below the consensus estimate of $298.8-million. Earnings per share of 78 cents missed the Street's projection by a penny.
Mr. Nemeroff expressed concern over 2017 revenue growth guidance of 5 per cent year over year, "well below" the 9-per-cent expectation, "due to persistent macro headwinds and expectations for weaker pipeline conversions over the near to medium term."
He said: "Our previous (incorrect) view stemmed from our belief that VRNT's current challenges were more macro-driven (cyclical) and that the elongation in sales cycles were temporary."
"Our neutral rating reflects our belief that VRNT's current challenges appear to be more structural (or at least longer term) in nature, as management cited several reasons for the weaker outlook, including (1) challenging approval cycles for large transformational deployments causing VRNT to pivot to smaller entry-level packages; (2) customer preference to purchase individual point solutions initially, which is somewhat contrary to VRNT's integrated suite strategy, and (3) general pressure on gov't budgets from macro headwinds in emerging markets," said Mr. Nemeroff. "As such, we believe it could take several quarters for the company to rework its product mix and go-to-market strategy."
The analyst also lowered his price target to $45 (U.S.) from $60. The analyst average is $53.86.
Given the track record of Avago Technologies Ltd. (AVGO-Q) in integrating acquisitions, Canaccord Genuity analyst T. Michael Walkley expects the $37-billion (U.S.) acquisition of rival chipmaker Broadcom Corp. (BRCM-Q) to be followed by "strong execution in meeting to achieve synergy targets."
"We believe the acquisition significantly expands Avago's [total addressable market or TAM] and creates a leading global diversified semiconductor company with a broad portfolio of category-leading products and a leading customer base addressing the wireless and wired infrastructure, enterprise and data-centre networking and storage, IP traffic routing, home/Internet of things and industrial verticals," he said. "This acquisition is consistent with our thesis Avago's proprietary technologies, strong IP, and diverse customer base in several growth markets position the company for solid long-term sales and earnings growth with industry-leading margins."
He added: "While the combination of Avago and Broadcom will address multiple similar end markets and customers, we believe the companies have complementary but distinct product portfolios and anticipate minimal near-term revenue synergies. However, we anticipate significant cost synergies and management anticipates achieving a $750-million annual cost savings run rate within 18 months from the transaction closing. Given Avago's track record, we believe the company could also divest certain acquired low-margin businesses, and this, combined with the cost synergies, could help the company meet and potentially exceed its new long-term combined company target operating model of 60-per-cent gross and 40-per-cent operating margins."
Mr. Walkley called Avago's fourth-quarter results "solid," with pro-form earnings per share of $2.51, beating both his estimate of $2.41 and the consensus projection of $2.38. A gross margin of 62 per cent beat his 60.7-per-cent estimate, and overall sales of $1.85-billion were in line with expectations.
"Avago issued first-quarter 2016 revenue guidance below our above-consensus estimates due to an anticipated low-teen sequential decline in wireless sales," he said. "However, due to strong operating expense controls and continued strong gross-margin trends, implied non-generally accepted accounting principle (GAAP) EPS guidance of $2.35 was consistent with our above-consensus estimates. Despite the softer-than-anticipated Q1/F16 wireless-division guidance, we were encouraged management indicated its confidence in strong growth trends for its FBAR sales to support its planned 50-per-cent capacity increase over the next year."
Mr. Walkley kept his "buy" rating for the stock while raising his price target to $179 (U.S.) from $165. The analyst average is $171.48.
Though visibility for growth "remains imperfect" for TransAlta Renewables Inc. (RNW-T), CIBC World Markets analyst Paul Lechem said "the company has started to put together a track record of accretive transactions that have underpinned cumulative 17-per-cent dividend growth since its IPO in mid-2013."
Following another drop-down and a 5-per-cent dividend increase, Mr. Lechem upgraded his rating for the stock to "sector outperformer" from "sector performer."
On Wednesday, TransAlta Renewables announced it has entered into an agreement with TransAlta (TA-T) to acquire a $540-million portfolio of contracted power assets. To fund the purchase, it issued $172.5-million in common shares at $9.75 per share. The analyst said the drop-down "goes part way to meeting TA's funding needs, although more work still remains." He suggested further drop-downs may come in 2016.
It also raised its annual dividend upon closing of the deal to 88 cents from 84 cents. That move comes after a 9-per-cent increase (77 cents to 84 cents) in May.
"Given this growth profile, combined with a lower-risk business model (fully contracted assets, no price risk, no development risk, etc.), we view RNW's current discounted valuation versus the group as overdone," Mr. Lechem said. "The stock's sell-off has reflected general investor discontent with the 'yieldco' model (whereby a parent operating company drops assets to a high-yielding subsidiary), as well as certain company-specific issues (overhang of financings for drop-downs, disconnect of gas plants being acquired by a "renewables" company).
"Nevertheless, even after taking all these factors into consideration, we believe the company's 8.3-per-cent dividend yield (89 per cent 2016 estimate payout ratio on cash available for distribution) is overly generous – at the high end of the range of comparables, and well above the 6.3 per-cent group average, ex-outliers."
He left his $13 price target for the stock unchanged. Consensus is $13.30.
"With almost a 36-per-cent total shareholder return from the current level, we believe RNW presents compelling value," the analyst said.
In other analyst actions:
Black Diamond Group Ltd. (BDI-T) was raised to "market perform" from "underperform" at FirstEnergy Capital by equity analyst Ian Gillies. The 12-month target price is $7 (Canadian) per share.
Ball Corp. (BLL-N) was raised to "outperform" from "market perform" at Wells Fargo by equity analyst Christopher Manuel.
Bluedrop Performance Learning Inc. (BPL-X) was rated new "speculative buy" at Beacon Secs by equity analyst Gabriel Leung. The 12-month target price is 35 cents (Canadian) per share.
Concordia Healthcare Corp. (CXRX-Q) was downgraded to "hold" from "speculative buy" at Mackie Research Capital by equity analyst Andre Uddin. The target price is $42.50 (U.S.) per share.
DBV Technologies SA (DBVT-Q) was rated new "overweight" at Barclays by equity analyst Geoffrey Meacham. The target price is $58 (U.S.) per share.
Envision Healthcare Holdings Inc. (EVHC-N) was rated new "neutral" at Mizuho Securities USA by equity analyst Ann Hynes. The 12-month target price is $30 (U.S.) per share.
Himax Technologies Inc. (HIMX-Q) was raised to "outperform" from "market perform" at Northland Securities by equity analyst Thomas Sepenzis. The 12-month target price is $10 (U.S.) per share.
Hilton Worldwide Holdings Inc. (HLT-N) was raised to "outperform" from "neutral" at Macquarie by equity analyst Chad Beynon. The 12-month target price is $30 (U.S.) per share.
Pandora Media Inc. (P-N) was raised to "outperform" from "market perform" at Raymond James by equity analyst Aaron Kessler. The 12-month target price is $17 (U.S.) per share. It was rated new "market perform" at BMO Capital Markets by equity analyst Daniel Salmon with a target price of $14 per share.
Square Inc. (SQ-N) was rated new "buy" at Monness Crespi by equity analyst Alexander Veytsman. The 12-month target price is $15 (U.S.) per share.
Starwood Property Trust Inc. (STWD-N) was raised to "buy" from "neutral" at Compass Point by equity analyst Frederick Small. The 12-month target price is $23 (U.S.) per share.
Team Health Holdings Inc. (TMH-N) was rated new "neutral" at Mizuho Securities USA by equity analyst Ann Hynes. The 12-month target price is $59.00 per share.
With files from Bloomberg News