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.
Credit Suisse analyst Kevin Choquette said it is currently the best buying opportunity in the Canadian banking sector since February of 2009.
"We would be aggressively buying the group," he said. "We expect a significant rally in bank stocks as the market gets greater clarity on the Canadian economy as it adjust once again to the commodity cycle."
Mr. Choquette called the banks' 2015 stock performance "dismal," noting the sector's drop of 9 per cent for the seventh-worst performance in a calendar year in the last 50.
"Banks managed to outperform the even-worse-performing TSX, which declined 11 per cent," he said. "Banks have outperformed seven out of the past eight years, with bank weights on the TSX reaching an all-time high in 2015. Short interest also hit a new all-time high in 2015."
He said 2016 performance is also off to "an ugly start," with a 4-per-cent drop "reflecting market panic in our view, including China geopolitical risk as opposed to underlying fundamentals."
"Bank stocks we continue to believe are overly discounting the pending credit cycle related to the weak economic outlook for the Canadian economy on low energy prices and concerns about a slowdown in the housing market," he said. "We believe bank stocks are discounting a 21-per-cent decline in earnings with our severe credit stress test (U.S. recession) resulting in a 13-per-cent decline in earnings."
Mr. Choquette reduced his target price for bank stocks "on heightened equity market risk including China geopolitical risk which is expected to delay the timing and magnitude of the decline in risk premiums. Return on revenue is still attractive at 25 per cent with huge risk premiums built in."
His target change declines averaged 8 per cent. They were:
Bank of Montreal (BMO-T, outperform) to $90 from $97. Consensus: $82.33.
Bank of Nova Scotia (BNS-T, neutral) to $62 from $68. Consensus: $65.81.
Canadian Imperial Bank of Commerce (CM-T, underperform) to $100 from $110. Consensus: $101.75.
National Bank of Canada (NA-T, outperform) to $48 from $52. Consensus: $47.21
Royal Bank of Canada (RY-T, outperform) to $90 from $95. Consensus: $82.63.
Toronto Dominion Bank (TD-T, neutral) to $62 from $66. Consensus: $58.75.
Canadian Western Bank (CWB-T, underperform) to $23 from $25. Consensus: $26.11
Laurentian Bank of Canada (LB-T, underperform) to $50 from $55. Consensus: $53.33.
"Our stock selection in 2016 continues to be biased towards banks with [U.S. dollar] earnings exposure and sound strategic positioning, especially in Capital Markets and Wealth Management," he said. "RY remains our top pick with a small valuation premium, above average return on equity, superior strategic positioning in Capital Markets and Wealth Management, including a solid U.S. presence in these businesses as well as best in class in Canadian banking along with TD."
With its role in a consortium purchasing a 57.6-per-cent stake in Columbian power generator Isagen SA for $2.8-billion, Brookfield Renewable Energy Partners LP (BEP.UN-T) is adding "more quality hydro assets," said Desjardins Capital markets analyst Bill Cabel.
He upgraded his rating for Brookfield to "buy" from "hold."
"BEP.UN and its partners are buying into a portfolio of relatively new (average age of 18 years), high-quality (low capex requirement), predominantly large hydro assets in Colombia at an attractive 10 times enterprise value to EBITDA multiple," the analyst said. "Further, through a tendering process (to be completed in 2016), BEP.UN could raise its ownership stake to 25 per cent. The equity requirement ($240-million U.S. at current exchange rates) is modest and covered by existing liquidity ($1.2-billion). If the ownership increases to 25 per cent, BEP.UN has the liquidity in place and does not need to issue equity. Further, the acquisition gives BEP.UN access to [approximately] 3.8 gigawatts of prospective projects (some large hydro) that provide future upside."
In the deal, Brookfield will hold a 9-per-cent stake in Isagen, and, depending on its final ownership interest, Mr. Cabel estimates its proportionate EBITDA could range from $40-120-million (U.S.). He also projects funds from operations from the assets of $25-million to $75-million, or 9 to 27 cents per share.
"The incremental cash flows from this acquisition, which does not require incremental equity issuance, has a positive impact on our discounted cash-flow-based valuation," he said. "We currently assume a 57.6-per-cent ownership position — based on that ownership, we see $1.25 (Canadian) per unit of incremental value. If we were to assume that the consortium secures a 100-per-cent interest, we would add an incremental $1.50 per unit on top of the $1.25 per unit we have incorporated into our valuation."
Mr. Cabel raised his target price for the stock to $40.50 from $39. The analyst average target price is $40.89, according to Bloomberg.
"While we acknowledge there are some potential near-term headwinds (eg. FX, Brazilian hydrology conditions), we believe they are transient and we firmly believe longer-term investors seeking a growing distribution (not to mention an attractive 7.2-per-cent yield at current levels) should take advantage of the current unit price weakness," he said. "Further, we anticipate the next distribution increase to come with fourth-quarter results in early February — we conservatively assume a 5-per-cent increase, but believe this acquisition and other growth initiatives could provide the company with the comfort to increase the distribution closer to the mid-point (7 per cent) of its stated growth target of 5–9 per cent."
Raymond James analyst Ben Cherniavsky said he's taking a "cautious" view of Canadian airline stocks, noting they continue to underperform the broader market as well as notable U.S. competitors.
In a research note ahead of the release of fourth-quarter results, Mr. Cherniavsky also said he is maintaining his "fundamentally negative bias" toward the expansionary strategy and heavy capital expenditure commitments of Air Canada (AC-T). Accordingly, he downgraded his rating for the stock to "underperform" from "market perform."
"We have lowered our 2016 forecasts for both Air Canada and WestJet to levels that make both stocks look very discounted, but we are mindful that earnings visibility is quite low in the current macro environment," the analyst said. "In particular, an oil price spike and/or further pressure on the economy in 2016 imply additional downside to earnings. This is especially true in the context of prevailing industry available seat mile (ASM) growth and pricing trends … By using a westcoast trans-border route to California as a 'case study' for what we believe may be unfolding across the network, we conclude once again that there is too much capacity in Canada.
"Furthermore, we remind investors that airlines have never been an effective place to hide in a 'risk-off' environment where recessions may loom (and they always look inexpensive at the top of the market). Finally, the fact that Canadian airline stocks are trading at lower multiples than their U.S. peers makes perfect sense to us considering the more severe supply-demand imbalance that persists north of the border."
He added: "For the first three quarters of 2015 we repeatedly emphasized that the earnings growth both Air Canada and WestJet reported was exclusively a function of lower fuel price. Even though oil prices fell further in 4Q15 — resulting in additional fuel savings — we do not expect WestJet to generate earnings growth this time around. Specifically, we forecast 4Q15 EPS of $0.59, down from $0.76 for 4Q14. For Air Canada, we project 4Q15 EPS of $0.23, roughly in line with adjusted 4Q14. But we recall that last year's fourth quarter report was a sizeable miss for the airline, implying that the bar is set lower for year-over-year comps."
Mr. Cherniavsky moved his 2015 and 2016 EPS projections for WestJet Airlines Ltd. (WJA-T) to $2.95 and $2.26 from $2.94 and $2.80, respectively. Maintaining his "market perform" rating for the stock, he lowered his target price to $20 from $26. Consensus is $27.93, according to Thomson Reuters.
"Although we maintain a positive bias towards WestJet's cost and balance sheet advantages and see some long-term value in the stock at its currently depressed level, we affirm our market perform rating because we do not expect a sustainable upward trend in the share price to be established until earnings growth resumes," he said. "This, in our view, will require the industry to reduce ASMs meaningfully and/or the economy to pick up slack."
For Air Canada, his EPS estimates for 2015 and 2016 fell to $4.03 and $2.74 from $4.04 and $3.15. His target price fell to $7 from $12. Consensus is $17.20.
Corus Entertainment Inc.'s (CJR.B-T) deal to buy Shaw Media Inc. for $2.65-billion could stablize its near-term outlook following a "challenging few years" and a decline in share price through 2015, said Canaccord Genuity analyst Aravinda Galappatthige.
"This transaction more significantly exposes the company to the structural headwinds facing the broadcast sector in Canada," said Mr. Galappatthige, who raised his rating for Corus to "hold" from "sell."
The analyst said the earnings per share and free cash flow implications from the deal are "very substantial," given its structure largely through debt and given the cost synergies of $40-million to $50-million. His FCF estimate for 2017 rose to $1.88 per share from $1.24. On an EPS basis, he said accretion from the deal amounts to 42 per cent for 2017.
"While Corus always had decent dividend cover, given the underperformance through 2015 we were constantly revising down our FCF estimates. Pre-first quarter of 2016 our 2016 estimate stood at $1.38 per share, falling to $1.24 per share in 2017 (partly due to sale of PayTV assets)," he said. "Hence there was some concern of pressure on the dividend, further down the line. The transaction creates a lot more room for the dividend and may serve to ease concerns among investors on that front. This is particularly important considering the compelling 10.6-per-cent dividend yield."
Mr. Galappatthige pointed to leverage as the chief downside of the deal, pointing to the "structural challenges" facing speciality television and the broadcast sector.
"As per our estimates at the point of closing in third-quarter 2016, pro forma net debt/EBITDA would be 4x falling to 3.9x by 2017," he said. "In our view, considering the overall downturn in specialty TV advertising we have been seeing since 2014, softening subscriber trends, the implementation of the pick and pay rules in 2016, there is an element of downside risk to the revenue base. Moreover with the Global assets, Corus' revenue mix would have 26-per-cent exposure to conventional TV, a sector which has been facing secular decline. The combination of high debt and structurally challenged media assets have empirically been a bad combination."
He did not change his target price for Corus stock, remaining at $10.50. The analyst average is $13.
"We now use 6.75x enterprise value to 2017 EBITDA to value Corus," he said. "This is slightly lower than the 7x we previously used. This is to reflect the increased risk, reflective of a levered balance sheet. However with the share price having fallen to our target price we are upgrading the stock to a hold from sell. While we believe that the combination of high debt and industry pressures create an elevated risk profile, on the other hand we believe that investors will be drawn to the compelling FCF yield and low PE multiples. Moreover, near term, we believe underlying earnings growth (organic) is likely to remain robust as substantial synergies from the transaction are realized."
Though he expects solid earnings per share growth for Toromont Industries Ltd. (TIH-T), Canaccord Genuity analyst David Tyerman said he believes it is "mostly discounted" by the company's current share price.
Assuming coverage of the stock, Mr. Tyerman downgraded its rating to "hold" from "buy."
"We expect TIH to continue its recent track record of moderate sales growth and modest margin expansion," he said. "TIH has averaged 6.6-per-cent annual revenue growth in the past 3 years, driven by the company's diversified franchise. TIH's principal operating territory of Eastern Canada provides it with a diverse group of end markets, which mitigates weakness in specific areas such as mining. We project mid-single-digit sales growth to take into account slower mining industry growth and the weak Canadian economy. TIH EBIT margins have improved 0.9 per cent to 11.4 per cent over the past 3 years. Margins are benefiting from mix improvements (e.g., more product support business) and strong execution. We forecast additional modest margin expansion from the same factors. Overall, we expect solid sales growth plus modest margin expansion and share repurchases from free cash to generate 10.1-per-cent average annual EPS growth from 2015-17, in line with the 10.0 per cent that TIH has averaged over the past 3 years."
Mr. Tyerman said he expects Toromont, a company that delivers specialized equipment and other products, to benefit from the Canadian government's pledge to increase infrastructure spending by an average of $6-billion annually over the next 10 years. He added that Ontario is also pursuing an infrastructure agenda.
"These plans could boost TIH's growth potential, but there is a lot of uncertainty about these pronouncements," he said.
He lowered his price target for the stock to $33 from $37, noting the target is below his discounted cash flow value of $37.16 and suggests "modest upside valuation potential if TIH's performance is sustained or if Canadian infrastructure spending accelerates meaningfully." The analyst consensus is $35.80.
In a research note on the oilfield services and equipment sector, CIBC World Markets analyst Jon Morrison said he does not expect any "meaningful" increase in North American activity levels until the fourth quarter of 2016 at the earliest, "with 2017 being the most likely scenario."
In conjunction with commodity price deck changes, Mr. Morrison lowered his 2016 exploration and production spending forecasts by 5-20 per cent and Canadian conventional capital expenditure contraction by approximately 20 per cent year over year.
While adjusting his forecasts and targets, he upgraded Mullen Group Inc. (MTL-T) to "sector performer" from "sector underperformer" following its recent negative share price performance and suggesting upside potential for its stock price over the coming 12-18 months.
"There is no other way of saying it – the macro environment is terrible," said Mr. Morrison. "Oil prices continue to slide and visibility for the North American oilfield services sector is near a three-decade low. And while there are endless reasons to be positive about where commodity prices will head in 2017 and how the operating environment should improve over the next 12-18 months, today the outlook looks opaque at best and downright scary at worst. With this said, therein lies the opportunity. Great investments in the oilfield services sector are rarely made by initiating new positons mid-cycle following a bullish run in stocks and while the outlook is still glowing. We have long stated that in order to make adequate risk-adjusted returns within the sector, investors need to be positioned near the bottom of the cycle when the outlook is terrible (or worse), proceed to hold the names through the market malaise and then be prepared to sell equities and reduce sector weighting once the health of the industry is widely accepted and forward upside potential is compelling. As it sits, we feel like we are near point one in that that three-stage cycle. While there are lots of reasons as to why high-quality names could slide further and provide incremental negative short-term beta, we view the bottom as being near and believe now is the time for investors to do their homework and start selectively adding exposure to the space.
"At current levels, the majority of our coverage universe is exhibiting positive signs of deep value opportunities, with all names now trading below historical five- and 10-year tangible book value multiples and more than half of our coverage universe below TBV. With that said, we believe investors should be prepared to see book values deteriorate in the coming period. In addition to the impact of negative earnings, we believe investors should be prepared to see idle assets continue to be written down in 2016 and accelerate in 2017. Although these impairments will vary by company, we wouldn't be surprised to see select names write-down an additional 10-20 per cent of book value in the coming quarters."
For Mullen, he maintained a price target of $16. Consensus is $17.08.
"Over the past 10 months, the company's shares have declined by greater than 40 per cent and we believe represent a more fair value," he said. "We also believe incremental value will likely arise in the coming year as Kriska Holdings (Private) contemplates a possible initial public offering (IPO), of which Mullen holds a 30-per-cent equity stake in the company."
In other analyst actions:
Agnico Eagle Mines Ltd (AEM-N) was raised to "overweight" from "equal-weight" at Barclays by equity analyst Farooq Hamed. The target price is $36.00 per share.
Atmel Corp (ATML-Q) was downgraded to "market perform" from "strong buy" at Raymond James by equity analyst Hans Mosesmann.
Yamana Gold Inc (AUY-N) was downgraded to "equal-weight" from "overweight" at Barclays by equity analyst Farooq Hamed. The target price is $2.50 (U.S.) per share.
BankUnited Inc (BKU-N) was raised to "outperform" from "market perform" at BMO Capital Markets by equity analyst Lana Chan. The target price is $40 (U.S.) per share.
CSX Corp (CSX-N) was raised to "buy" from "hold" at BB&T Capital by equity analyst Mark Levin. The 12-month target price is $27 (U.S.) per share.
Diamondback Energy Inc (FANG-Q) was raised to "outperform" from "market perform" at Cowen by equity analyst Ryan Oatman. The 12-month target price is $74 (U.S.) per share.
F5 Networks Inc (FFIV-Q) was downgraded to "underweight" from "equal- weight" at Barclays by equity analyst Mark Moskowitz. The target price is $98 (U.S.) per share.
Franco-Nevada Corp (FNV-N) was raised to "Equal-weight" from "Underweight" at Barclays by equity analyst Farooq Hamed. The target price is $50 (U.S.) per share.
HudBay Minerals Inc (HBM-T) was downgraded to "underweight" from "overweight" at Barclays by equity analyst Farooq Hamed. The target price is $4 (Canadian) per share.
Lundin Mining Corp (LUN-T) was downgraded to "equal-weight" from "overweight" at Barclays by equity analyst Farooq Hamed. The target price is $4 (Canadian) per share.
MetLife Inc (MET-N) was raised to "outperform" from "neutral" at Macquarie by equity analyst Sean Dargan. The 12-month target price is $55 (U.S.) per share.
NVIDIA Corp (NVDA-Q) was downgraded to "underweight" from "equal-weight" at Barclays by equity analyst Blayne Curtis. The target price is $25 (U.S.) per share.
PacWest Bancorp (PACW-Q) was downgraded to "market perform" from "outperform" at BMO Capital Markets by equity analyst Lana Chan. The target price is $41 (U.S.) per share.
Spirit Airlines Inc (SAVE-Q) was rated new "overweight" at JPMorgan by equity analyst Jamie Baker. The 12-month target price is $52 (U.S.) per share.
Teck Resources Ltd (TCK.B-T) was downgraded to "underweight" from "equal-weight" at Barclays by equity analyst Farooq Hamed. The target price is $4 (Canadian) per share.
Ubiquiti Networks Inc (UBNT-Q) was downgraded to "market perform" from "outperform" at Bernstein by equity analyst Pierre Ferragu. The 12-month target price is $30 (U.S.) per share.
Virgin America Inc (VA-Q) was rated new "underweight" at JPMorgan by equity analyst Jamie Baker. The 12-month target price is $31 (U.S.) per share.
Ventas Inc (VTR-N) was downgraded to "market perform" from "outperform" at BMO Capital Markets by equity analyst John Kim. The target price is $58 (U.S.) per share.
Western Gas Partners LP (WES-N) was rated new "overweight" at Capital One Securities by equity analyst Charles Marshall. The 12-month target price is $55 (U.S.) per share.
Western Gas Equity Partners LP (WGP-N) was rated new "equal-weight" at Capital One Securities by equity analyst Charles Marshall. The 12-month target price is $47 (U.S.) per share.
Yelp Inc (YELP-N) was downgraded to "sell" from "neutral" at B. Riley by equity analyst Sameet Sinha. The 12-month target price is $15 (U.S.) per share.
With files from Bloomberg News