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Expansion work at Cenovus's Christina Lake operations in northern Alberta.

CENOVUS ENERGY INC.

Inside the Market's roundup of some of today's key analyst actions

Toromont Industries Ltd.(TIH-T) is likely to continue to outperform its peers going forward, said Raymond James analyst Ben Cherniavsky.

However, he said the company's results have already been accounted for in its current share price. Accordingly, he downgraded his rating to "market perform" from "outperform."

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Mr. Cherniavsky noted the company was able to log 20-per-cent year-over-year earnings per share growth in the first quarter "at a time when so many other industrial companies in Canada are suffering from all kinds of headwinds." The result topped both his projection and the consensus expectation "by a wide margin."

"We believe Toromont's Equipment Group (EG) has benefited from some relatively resilient end markets," the analyst said. "For example, it has favourable exposure to housing, infrastructure, and gold, with no exposure to energy. Nevertheless, many of the problems plaguing the machinery industry — such as excess inventories and margin pressure — remain universal and continue to weigh on Toromont's operations (despite a stable mix of aftermarket revenues, 1Q16 gross margins fell 100 basis points). As a result, we see execution as the main ingredient in Toromont's outperformance.

"In particular, we believe EG is defending market share, capitalizing on aftermarket opportunities, and controlling costs very well. This is reflected in its 1Q16 EBIT [earnings before interest and taxes] margin of 9.7 per cent. The other important, but often overlooked, part of the equation is CIMCO. It reported 15-per-cent 1Q16 top-line growth, improved margins and a record backlog. Even though the refrigeration business is still dwarfed by EG's revenue, CIMCO generated 30 per cent of the company's incremental 1Q16 profit."

Mr. Cherniavsky raised his 2016 and 2016 revenue projections to $1.901-billion and $2.047-billion from $1.791-billion and $1.927-billion, respectively. His EPS estimates rose to $2 and $2.19 from $1.83 and $2, respectively.

He also bumped his target price for the stock to $40.50 from $32. The analyst consensus price target is $36.31, according to Thomson Reuters.

"Given Toromont's strong execution, great balance sheet, and favourable end market exposure, we believe its results will continue to outperform those of its peers," he said. "The only problem we have is that much of this looks baked into the company's share price. Indeed, the stock has run up 20 per cent (versus a TSX decline of 6 per cent) since our June 11, 2015, upgrade … This is a function of both strong EPS growth and sharp multiple expansion. The P/E [price to earnings] is now stretched towards the upper end of its historical range and continues to command a premium to many peers. While we believe this is justified, it leaves little room for further 'rational' multiple expansion, and even less room for error: By rolling forward our valuation to 2017, assuming the 'peak' P/E multiple is sustained and that EPS growth remains steady (in a low-growth environment), we are left with a $40.50 target price that limits upside from here. As much as we like this company and its stock, we would prefer to buy it with a better risk-reward profile."

Elsewhere, BMO Nesbitt Burns analyst Bert Powell downgraded Toromont to "market perform" from "outperform," saying the stock is ahead of fundamentals.

"We continue to believe that TIH is a great business to own. It has an enviable track record, balance sheet and M&A optionality," said Mr. Powell. "The stock reacted very positively to the quarter, but we believe that the 8-per-cent move was more related to short covering than fundamental buying. We have updated our numbers to reflect better-than-expected execution and find the valuation stretched. We're reticent to make near-term 'trading calls' and we are cognizant of missing an M&A event, but we find ourselves reaching on valuation and believe the stock will settle down as covering subsides. We are lowering our rating to Market Perform, but would look to revisit that quickly if the price warranted."

Mr. Powell raised his target to $37.50 from $34.50.

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Citing the closing of a lumber producer valuation gap, Raymond James analyst Daryl Swetlishoff downgraded Canfor Corp. (CFP-T) to "outperform" from "strong buy."

"Our constructive stance on Canfor is a function of higher expected second half 2016 and 2017 lumber pricing, the company's growing U.S. South footprint, declining lumber conversion costs, and robust expected pulp segment results," said Mr. Swetlishoff. "Our outlook is tempered somewhat by B.C. Interior log cost inflation, as well as a narrowing valuation spread versus comp West Fraser [WFT-T]."

On Wednesday, Canfor reported first-quarter 2016 earnings before interest, taxes, depreciation and amortization (EBITDA) of $125.7-million, ahead of Mr. Swetlishoff's projection of $110-million as well as the $108-million consensus. The result was an improvement from $94.9-million in the previous quarter, which the analyst attributed to the company's lumber segment results benefiting from higher Western Spruce-Pine-Fir (WSPF) and Southern Yellow Pine (SYP) prices as well as improved productivity and contributions from the recently acquired Anthony Forest Products assets in Arkansas.

However, he did emphasize the company's "muted" near-term outlook.

"In the near term, while producers and traders remain constructive on markets, we don't expect a sustainable lumber rally until after the seasonally slower summer months," said Mr. Swetlishoff. "That said, we highlight the potential for an early start to the forest fire season, as well as a negotiated settlement to the Softwood Lumber Negotiations. Each maintain the potential for a supply shock to send lumber prices higher."

Mr. Swetlishoff lowered his 2016 and 2017 earnings per share estimates to $1.03 and $1.53 from $1.38 and $1.65, respectively, to account for higher log costs.

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He also reduced his target price to $19 from $22. The analyst consensus price target is $21.

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CIBC World Markets analyst Alex Avery said Brookfield Canada Office Properties (BOX.UN-T)'s narrowing discount to its peers could persist, reflecting the challenges currently faced by Calgary's office market.

Citing price appreciation and that discount, he downgraded the Toronto-based real estate investment trust to "sector performer" from "sector outperformer."

"Brookfield Canada Office Properties REIT owns a large portfolio of premium-quality office towers in Canada's largest office markets (Toronto, Calgary and Ottawa)," said Mr. Avery. "With high-credit-quality tenants and long-term leases, the REIT is set to deliver consistent operating/financial performance over the short, medium and long term.

"Despite its high-quality portfolio and contractually stable outlook (long lease terms and high-credit tenants), we expect the units could continue to trade at a wider discount to NAV [net asset value] relative to the average of Canadian REITs, reflecting the 30 per cent of its asset value attributable to Calgary office properties. While BOX's Calgary portfolio accounts for 40 per cent of the REIT's total NOI [net operating income], it is very defensively positioned in that market with an average lease term of 10 years (1.9 per cent of BOX's total GLA [gross leasable area] set to expire in 2016 and 0.4 per cent in 2017). These long-term leases are important to the REIT, as in-place rents are now 19 per cent above market rents for this portfolio. We continue to expect steady and stable financial and operating performance from the REIT's Calgary portfolio."

Mr. Avery said its portfolio of "premium-quality" office towers is "highly desired" by foreign and institutional investors. He noted the recent sales of the Royal Centre in Vancouver (at a 3.7-per-cent cap rate) and 70 York St. in Toronto (4.2 per cent).

On Tuesday, the REIT reported first-quarter funds from operations (FFO) of 42 cents per unit, an increase of 2 cents from the previous year and a cent below Mr. Avery's projection.

"We rate BOX 'sector performer,' reflecting BOX's premium-quality portfolio (which we expect to deliver highly stable and reliable operating and financial performance), a wide but not unreasonable 14-per-cent discount to NAV [net asset value], and the distinct possibility of M&A, partly offset by below-average trading liquidity and continued investor caution relating to Calgary office market exposure," he said.

He lowered his target price to $31 from $32. Consensus is $30.50.

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Though Leucrotta Exploration Inc. (LXE-X) has had an "excellent" share performance thus far in 2016, Canaccord Genuity analyst Anthony Petrucci is "taking a breather."

He downgraded the oil and natural gas company's  stock to "hold" from "speculative buy."

"LXE has been the top performing stock in 2016 amongst our stocks under coverage, and one of the top performing stocks amongst all Canadian E&P's this year, boasting a return of nearly 90 per cent year to date," said Mr. Petrucci. "As a result, the stock has now surpassed our prior target price of $1.50, and we are therefore changing our target."

"We remain impressed by LXE's early efforts in the Montney in NE B.C., in particular the well results out of the Lower Montney, and the early success in a Montney oil pool. We believe it is this success that has driven the peer-leading share performance this year. With drilling on hold for the time being, and the company targeting July to formulate a program for the back half of the year, investors may have an opportunity to enter the stock closer to the fall."

On Wednesday, Leucrotta reported fourth-quarter results and year-end reserves. Quarterly production of 1,076 barrels of oil equivalent per day (boe/d) exceeded Mr. Petrucci's projection (983 boe/d). He also noted the company has a "significant" cash position of about $45-million, which he expects will be used toward its land in the Montney region of British Columbia.

He raised his target price for the stock to $1.60 from $1.50. Consensus is $1.65.

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The first quarter for Cenovus Energy Inc. (CVE-T, CVE-N) was disappointing, according to BMO Nesbitt Burns analyst Randy Ollenberger, who added "at least it's behind them."

Cenovus reported an operating loss of 51 cents per share, below Mr. Ollenberger's estimate of a 33-cent loss and the consensus of a 41-cent loss. He pointed to lower-than-expected  price realizations and downstream margins as causes of the result. Cash flow from operations came in at 3 cents per share, also below his projection (17 cents) and the consensus (6 cents).

In reaction to the results, Mr. Ollenberger lowered his 2016 earnings per share estimate to a loss of $1.69 from a loss of $1.19. His 2017 estimate fell to a 69-cent loss from a 55-cent loss.

"While the company does have a very strong balance sheet and attractive assets, we believe higher oil prices are required to support further upside," he said.

Maintaining his "market perform" rating, the analyst raised his target price to $19 from $18. The analyst average is $20.23, according to Bloomberg.

Elsewhere, Cormark Securities analyst Amir Arif upgraded the stock to "buy" from "market perform" and raised his target to $22 from $18.

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FirstService Corp. (FSV-Q) is poised to benefit from the momentum shown by the U.S. housing market, according to CIBC World Markets analyst Stephanie Price.

On Wednesday, the Toronto-based property services company reported revenue of $308-million (U.S.) and adjusted earnings per share of 8 cents, both exceeding the consensus of $300-million and 7 cents. Ms. Price said organic growth remains "strong" across both its residential and brand divisions despite a seasonally weak quarter.

"FirstService has been very active on acquisitions year to date versus the year-ago period," she said. "During the quarter, the company completed five acquisitions including the Los Angeles franchise of California Closets. We expect that the company will continue to acquire select California Closets and Paul Davis locations, which drive operational efficiencies over the long term.

"Subsequent to the quarter, FirstService acquired Century Fire Protection, one of the largest full-service fire protection companies in the Southeastern U.S. Century provides end-to-end fire protection solutions. Century has annual revenues of $93-million (U.S.), with margins in the high single digits. We believe Century is growing in the mid- to high single digits organically given increasing fire regulations and compliance and we see Century as a platform to further consolidate this highly fragmented market."

Emphasizing its scale and differentiated service offerings, Ms. Price expects both tuck-ins and "branchising" to continue for FirstService. She said it's well-positioned to take advantage of the "buoyant" U.S. market, which she expects will continue to shine through 2017.

"The market for community associations continues to grow at a steady rate of 2 per cent annually," said the analyst. "Around major metropolitan areas in the U.S., more than 50 per cent of new homes being built fall under some degree of managed community association. In addition, there is a shift from self-managed communities (30 per cent to 40 per cent of total market) towards outsourced professional management. These underlying trends, along with FirstService's leading market position, provide a steady stream of growth opportunities.

"The remodelling market continues to remain robust, with maintenance and repair activities leading minor and major additions and alterations. Backlog and call for bids have exceeded prior highs. The brands division continues to be driven by increase spending on home renovation projects, restoration and maintenance activities. We expect investment in company-owned operations will continue, with 13 locations already company owned. We believe this "branchising" strategy benefits from increase scale and centralized operations driving operational efficiencies. We note that Century Fire Protection will be reported under the brands division. Given the fragmentation of the fire protection market, we see the acquisition as a platform to consolidate this segment given increase regulatory compliance surrounding fire protection. Management noted the acquired business generates a steady stream of revenue with little seasonality with 50 per cent derived from installations and 50 per cent derived from services."

Maintaining her "sector performer" rating for the stock, Ms. Price raised her target to $43.50 (U.S.) from $36. Consensus is $42.50.

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In other analyst actions:

Alere Inc. (ALR-N) was raised to "outperform" from "market perform" at Leerink Partners by equity analyst Daniel Leonard. The 12-month target price is $56 (U.S.) per share.

BOK Financial Corp. (BOKF-Q) was downgraded to "underperform" from "market perform" at Wells Fargo by equity analyst Jared Shaw.

Carlyle Group LP (CG-Q) was downgraded to "market perform" from "outperform" at Keefe Bruyette by equity analyst Robert Lee. The 12-month target price is $19 (U.S.) per share.

Cenovus Energy Inc. (CVE-T) was raised to "buy" from "market perform" at Cormark Securities by equity analyst Amir Arif. The 12-month target price is $22 (Canadian) per share.

FirstEnergy Corp.(FE-N) was downgraded to "sector perform" from "outperform" at RBC Capital by equity analyst Shelby Tucker. The 12-month target price is $33 (U.S.) per share. It was downgraded to "hold" from "buy" at Jefferies by equity analyst Anthony Crowdell with a 12-month target price of $35 per share.

Grenville Strategic Royalty Corp. (GRC-X) was downgraded to "market perform" from "buy" at Cormark Securities by equity analyst Jeff Fenwick. The 12-month target price is 55 cents (Canadian) per share.

Hess Corp. (HES-N) was downgraded to "neutral" from "buy" at UBS by equity analyst William Featherston. The 12-month target price is $65 (U.S.) per share. It was downgraded to "neutral" from "outperform" at Credit Suisse by equity analyst Edward Westlake with a target price of $65 per share.

Hologic Inc. (HOLX-Q) was downgraded to "hold" from "buy" at Needham & Co. by equity analyst Michael Matson.

International Paper Co. (IP-N) was downgraded to "neutral" from "outperform" at Credit Suisse by equity analyst Lars Kjellberg. The target price is $47 (U.S.) per share.

L Brands Inc. (LB-N) was raised to "outperform" from "market perform" at Bernstein by equity analyst Anne-charlotte Windal. The 12-month target price is $91 (U.S.) per share.

Owens Corning (OC-N) was downgraded to "market perform" from "outperform" at FBR Capital Markets by equity analyst Alex Rygiel. The 12-month target price is $53 (U.S.) per share.

Old Dominion Freight Line Inc. (ODFL-Q) was downgraded to "hold" from "buy" at Stifel by equity analyst David Ross.

RPC Inc. (RES-N) was downgraded to "reduce" from "hold" at GMP by equity analyst Brian Uhlmer. The target price is $10 (U.S.) per share.

Service Corp International (SCI-N) was raised to "outperform" from "neutral" at Credit Suisse by equity analyst Robert Willoughby. The target price is $32 (U.S.) per share.

Schlumberger Ltd. (SLB-N) was downgraded to "hold" from "buy" at Societe Generale by equity analyst Edward Muztafago. The 12-month target price is $86 (U.S.) per share.

WEX Inc. (WEX-N) was downgraded to "market perform" from "outperform" at Wells Fargo by equity analyst Timothy Willi.

Whiting Petroleum Corp. (WLL-N) was downgraded to "sector perform" from "outperform" at RBC Capital by equity analyst Scott Hanold. The 12-month target price is $12 (U.S.) per share.

United States Steel Corp. (X-N) was downgraded to "underperform" from "neutral" at Macquarie by equity analyst Aldo Mazzaferro. The 12-month target price is $13 (U.S.) per share.

With files from Bloomberg News

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