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.

In reacting to the "crude reality," Credit Suisse analyst Andrew Kuske said it's time to reset expectations for Canadian infrastructure companies.

"Companies with considerable direct and indirect exposure to crude oil on a fundamental basis have faced the greatest adjustments in our new framework," he said. "Simply, with Credit Suisse's energy commodity forecasts and the forward curve, we anticipate slowing growth rates beyond 2017 or 2018 and weaker valuations."

Accordingly, Mr. Kuske downgraded his ratings for a trio of companies to "neutral" from "outperform." They are:

1. Canadian Utilities Ltd. (CU-T).
   
   He said: “We believe Canadian Utilities will face weaker prospects after the completion of the existing capital program in the current commodity, economic and regulatory environment. A view of slowing growth along with Alberta's power market uncertainty underpin our downgrade.”
    
2. Enbridge Inc. (ENB-T)
   
   He said: “Over an extended duration, we viewed Enbridge Inc. as having an advantaged asset position possessing very high quality visible growth. In the current crude oil market, the legacy history and benefit of very favourable asset positioning generating high quality growth look somewhat questionable beyond 2018. With this view and other factors, we downgrade ENB.”
    
3. Enbridge Income Fund Holdings (ENF-T)
   
   He said: “We continue to believe Enbridge Income Fund holds an enviable set of assets with a historically attractive valuation and dividend growth at the higher end of the comparables for the next few years. All of these factors are positive, however, two issues weigh upon the stock in our view: (1) the funding situation; and, (2) the prospects for longer-term growth in the current commodity environment. Accordingly, in a manner relatively consistent with our updated Enbridge Inc. views and other crude contagion stocks, we downgrade ENF.”

He also made several target price changes. They are:

- Canadian Utilities to $38 from $43.51. Consensus: $37.42.
- Enbridge to $54 from $70. Consensus: $60.
- Enbridge Income Fund to $32 from $40. Consensus: $35.35.
- Brookfield Asset Management (BAM-N, neutral) to $36 (U.S.) from $38. Consensus: $37.82.
- Capital Power Corp. (CPX-T, neutral) to $20 (Canadian) from $24. Consensus: $20.63.
- Emera Inc. (EMA-T, outperform) to $54 from $50. Consensus: $50.
- Fortis Inc. (FTS-T, outperform) to $46 from $44. Consensus: $43.81.
- Keyera Corp. (KEY-T, neutral) to $42 from $44. Consensus: $46.40.
- TransCanada Corp. (TRP-T, outperform) to $64 from $68. Consensus: $54.68.

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It is a good environment to be a buyer of Brookfield Infrastructure Partners LP (BIP-N, BIP.UN-T), said RBC Dominion Securities analyst Robert Kwan, who said he remains confident about his positive thesis on the stock in the wake of in-line fourth-quarter 2015 results.

"Outside of FX headwinds, the core business remains strong and BIP is well-positioned to take advantage of opportunities to acquire assets, particularly due to the Brookfield relationship and specifically the access to large pools of private capital," said Mr. Kwan.

The company reported funds from operations (FFO) of 89 cents (U.S.) per share, in line with the analyst's projections and a 3-cent improvement year over year.

It also raised its distribution by 7.5 per cent to $2.28 per unit annually from $2.12. Mr. Kwan called it a "conservative" increase, "leaving the door open to a further uptick later this year."

"Management commented that it is committed to a total of 11-13 per cent total distribution growth in 2016 subject to securing Asciano or deploying an equivalent amount of capital in transactions with similar returns this year," he said. "While the new distribution was below our forecast of $2.38/unit, the more conservative strategy is in line with our commentary."

He added: "BIP took time to address the recent sell-off in its unit price and highlighted that the negative market sentiment relating to factors such as the slowing of economic activity in China, the fall in commodity prices, rising interest rates, and the forced liquidation of various U.S. credit mutual funds had led to a correction in the overall stock market. While BIP acknowledged that the correction was justified for some energy infrastructure companies in North America given their volume and rate exposures, the company emphasized that for other non-energy related infrastructure assets classes `the story is different' and from a fundamental perspective, the investment thesis remains intact. Management also noted that while public securities investors are pursuing risk-off strategies and reducing exposure to the equity markets, private investors are steadily increasing their allocations to the infrastructure sector and that the ability to attract institutional capital to invest alongside the company "has never been greater". BIP estimates that private market valuations currently exceed the public equity valuations by 30-40 per cent, and management sees BIP's units as being undervalued relative to its view of intrinsic net asset value by a similar amount."

Mr. Kwan lowered his 2016 and 2017 FFO per unit estimates to $3.91 and $4.13, respectively, from $4.12 and $4.44. He also lowered our 2016 and 2017 distribution per unit estimates to $2.28 and $2.45, respectively, from $2.38 and $2.62, which he said "reflects the just-announced distribution increase for 2016 and a more conservative 7.5-per-cent increase for 2017 (down from 10 per cent). We see upside to both our cash flow and distribution forecasts if BIP is able to execute on various growth initiatives that have not yet come to fruition."

Maintaining his "outperform" rating, he lowered his price target to $47 (U.S.) from $50. The analyst average target price is $45.32, according to Bloomberg.

Elsewhere, Scotia Capital analyst Benoit Laprade upgraded his rating to "sector outperform" from "sector perform." He lowered his target to $44.25 from $50.

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Not expecting bids from Home Depot Inc. (HD-N) or Canadian Tire Corp. Ltd. (CTC.A-T) to compete with Lowe's Companies Inc. (LOW-N), Desjardins Securities analyst Keith Howlett downgraded his rating for Rona Inc. (RON-T) to "hold" from "buy."

Mr. Howlett said he also does not see approval of the U.S. home improvement chain's $3.2-billion deal to acquire Quebec-based Rona from Investment Canada and the Competition Bureau as an obstacle.

"We consider the all-cash consideration offered by Lowe's to be compelling from a financial perspective," he said. "There is likely to be one more 4-cent (Canadian) dividend paid on the RONA common shares (in mid-March) before closing. Given the tangible commitments made by Lowe's to adopt and build upon RONA's considerable legacy, and to maintain the RONA store formats and banners, the transaction also appears to us, on balance, to have sufficient social and political support to close as scheduled."

He raised his target to $24, the bid price, from $18. The average is $21.36.

"Our view is that the appliance business expertise and digital/online expertise of Lowe's will add substantial value to RONA," said Mr. Howlett. "We expect the expertise of RONA in operating multiple store formats and tailoring stores to the community will benefit Lowe's. We expect the deal to close."

Elsewhere, Barclays analyst James Durran upgraded the stock to "equalweight" from "underweight" with his target rising to $23 from $13.

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It was a "hard landing" for WestJet Airlines Ltd. (WJA-T) in 2015, said Raymond James analyst Ben Cherniavsky.

On Tuesday, the airline reported fourth-quarter 2015 earnings per share of 51 cents, below both Mr. Cherniavsky's 59-cent forecast and the consensus projection of 63 cents. It was 25 cents lower than the same period in 2014.

"While non-fuel cost per available seat mile (CASM) rose 9 per cent year over year and matched our forecast, the main source of the earnings miss was due to declining yields, which fell 4 per cent year over year," the analyst said. "Combined with a 2 per cent drop in loads, revenue per available seat mile (RASM) fell 6 per cent year over year (PRASM fell 9 per cent adjusted for stage length). Given the pricing trends (discounting) we continue to see in the market, the source of the miss comes as little surprise to us."

He added: "WestJet's near term outlook indicated that RASM will continue to decline into the first quarter of 2016 (approximately 10-12 per cent) due to ongoing pricing pressures and weak demand (no full year RASM guidance was provided but we assume it will continue to fall for as long as supply continues to outstrip demand)," he said. "On the cost side, 1Q16 non-fuel CASM is set to rise 7.5-8 per cent (annual guidance 0-2 per cent). Therefore, despite lower fuel costs, we forecast another year-over-year decline in quarterly earnings."

The analyst lowered his 2016 earnings per share projection to $2.15 from $2.26. He introduced his 2017 estimate at $1.95. His 2016 revenue and EBITDAR estimates were adjusted to $4.084-billion and $971-million, respectively, from $4.124-billion and $944-million.

"All of this takes us right back to where we started with our long-standing thesis of too much capacity in the market," said Mr. Cheniavksy. "And although we still like the long-term economics for WestJet based on its expanding network, strong balance sheet, and formidable cost advantage, we need to see the supply/demand situation correct before taking a more constructive stance on the stock."

He did not change his "market perform" rating for the stock, but his target price fell to $17.50 from $20. The analyst average target price is $21.63.

Elsewhere, Cowen analyst Helane Becker lowered the stock to "underperform" from "market perform" with a target price drop to $18 from $27.

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BMO Nesbitt Burns analyst Randy Ollenberger lowered his financial projections for Suncor Energy Inc. (SU-T, SU-N) following fourth-quarter 2015 results that did not meet expectations.

On Wednesday, the Calgary-based energy company reported an operating loss of 2 cents per share for the quarter, below both Mr. Ollenberger's estimate of earnings of 18 cents and the consensus of 2 cents based largely on weakness in its oil sand segment. That segment reported an operating loss of 3 cents, versus Mr. Ollenberger's 6-cent estimate "due to higher operating costs, lower realized pricing and higher product purchase expenses." Cash flow per share of 90 cents also missed both the analyst's projection ($1.11) and the consensus (99 cents).

Based on the earnings and the company's guidance update, Mr. Ollenberger lowered his 2016 earnings estimate to 58 cents per share from 67 cents. His 2017 projection went to $1.73 from $1.85.

"Suncor remains our top defensive investment recommendation based on the combination of its valuation and compelling investment attributes: predictable, organic production growth with limited investment; visibility to free cash flow in a low oil price environment, best-in-class downstream business that provides significant free cash flow, and a strong balance sheet," he said. "At current prices, Suncor is trading at a 2016 estimated enterprise value to EBITDA multiple of 7.9 times, which is among the most attractive among its peers."

Maintaining his "outperform" rating, he lowered his target for the stock to $40 from $42. The average is $38.31.

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In an industry note looking at companies that have significant exposure to the "softening" economic conditions in Western Canada, CIBC World Markets analyst Kevin Chiang downgraded his rating for Transat AT Inc. (TRZ-T)  "to reflect the intensifying competition as the scheduled carriers shift capacity from Alberta into Eastern Canada."

Noting he also sees the impact of the loonie's struggles, a potential pilot strike at Air Transat and the Zika virus impacting the booking curve, he lowered his rating to "sector underperformer" from "sector performer."

"WestJet noted that it is reducing its Alberta exposure with capacity growth in this region shifting from plus 12 per cent year over year in the first quarter of 2016 to minus 5 per cent year over year growth in the third quarter of 2015, a 17-point shift," the analyst said. "The airline noted that it is reallocating capacity to Eastern Canada and we have seen increased flights originating from Toronto. Similarly, we know that Air Canada has also been shifting capacity away from Alberta. So while Transat's direct exposure to Alberta is relatively small (approximately 9 per cent of total origin travelers), we expect it to be facing increasing competition from scheduled carriers as they reallocate their network. More importantly, we believe the more robust network of Air Canada and WestJet allow it to more quickly adjust to changing demand fundamentals versus Transat."

He adjusted his financial estimates to "reflect increasing competition from Air Canada and WestJet as well as the headwinds from a weaker Canadian dollar." His 2016 and 2017 EBITDA projects declined to $93-million and $107-million from $111-million and $116-million, respectively.

He also lowered his price target to $7 from $8, noting he expects "a lower relative rate of return versus the other airline names we cover." Consensus is $11.

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Citi analyst Mark May said he sees the risk-reward for Yahoo! Inc. (YHOO-Q) as favourable at current levels.

Accordingly, Mr. May upgraded his rating for the tech giant's stock to "buy" from "neutral."

He pointed to six reasons for the upgraded: ": 1) the stock is down 21 per cent since Yahoo! suspended its plan to spin out its BABA stake and now trades 12 per cent below our previous $31 (U.S.) target; 2) our analysis suggests that, even after heavily discounting its stakes in BABA and Yahoo Japan, the implied value for core Yahoo! could be negative at current levels; 3) we had previously cited the [approximately] 20-per-cent risk to consensus estimates for calendar year 2016 adjusted EBITDA, but after the 4Q15 report consensus estimates have now been revised down 12 per cent and risk to near-term estimates appear less material given the announced cost reductions; 4) the disappointing guidance and financial outlook likely increases the pressure on management and the Board to seriously consider 'strategic alternatives'; 5) the announced restructuring and willingness to explore other value-creation opportunities is a positive development; and, 6) our updated valuation analysis suggests – assuming no change in the price of BABA (i.e., hedging that exposure) – upside to $32 and limited downside at the current BABA share price."

Mr. May raised his target price to $32 (U.S.) from $31. The average is $37.82.

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In other analyst actions:

ATS Automation Tooling Systems Inc (ATA-T) was downgraded to "sell" from "buy" at Paradigm Capital by equity analyst Daniel Kim. The 12-month target price is $8 (Canadian) per share.

Cadence Design Systems Inc (CDNS-Q) was raised to "buy" from "neutral" at DA Davidson by equity analyst Thomas Diffely. The target price is $25 (U.S.) per share.

CERF Inc (CFL-X) was downgraded to "hold" from "speculative buy" at Industrial Alliance by equity analyst Elias Foscolos. The 12-month target price is $1.10 (Canadian) per share.

CH Robinson Worldwide Inc (CHRW-Q) was raised to "outperform" from "market perform" at Raymond James by equity analyst Patrick Brown. The 12-month target price is $73 (U.S.) per share.

Echelon Financial Holdings Inc (EFH-T) was raised to "buy" from "hold" at Industrial Alliance by equity analyst Dylan Steuart. The 12-month target price is $16 (Canadian) per share.

GoPro Inc (GPRO-Q) was downgraded to "neutral" from "buy" at Sterne Agee CRT by equity analyst Robert Cihra. The 12-month target price is $10 (U.S.) per share.

K-Bro Linen Inc (KBL-T) was downgraded to "hold" from "buy" at Laurentian Bank by equity analyst Michael Glen. The 12-month target price is $55 (Canadian) per share.

Mattel Inc (MAT-Q) was raised to "buy" from "sell" at Argus by equity analyst John Staszak. The target price is $38 (U.S.) per share.

Petroleo Brasileiro SA (PBR-N) was downgraded to "underweight" from "neutral" at JPMorgan by equity analyst Marcos Severine.

Petroleo Brasileiro SA (PBR.A-N) was downgraded to "underweight" from "neutral" at JPMorgan by equity analyst Marcos Severine.

Red Hat Inc (RHT-N) was raised to "outperform" from "market perform" at Cowen by equity analyst Gregg Moskowitz. The 12-month target price is $86 (U.S.) per share.

Wesdome Gold Mines Ltd (WDO-T) was rated new "speculative buy" at Euro Pacific Canada by equity analyst Ryan Walker. The 12-month target price is $1.70 (Canadian) per share.

VCA Inc (WOOF-Q) was rated new "outperform" at Credit Suisse by equity analyst Erin Wilson. The target price is $63 (U.S.) per share.

Zoetis Inc (ZTS-N) was rated new "outperform" at Credit Suisse by equity analyst Erin Wilson. The target price is $58 (U.S.) per share.

With files from Bloomberg News