Thursday’s analyst upgrades and downgrades

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

Maple Leaf Foods Inc. (MFI-T) is "gaining sustainability," said CIBC World Markets analyst Mark Petrie.

In the wake of "strong" first-quarter 2016 results, he upgraded his rating for the stock to "sector outperformer" from "sector performer."

On Wednesday, the company reported earnings before interest, taxes, depreciation and amortization of $81.4-million, beating Mr. Petrie's estimate of $73.9-million. Its earnings per share of 28 cents was also ahead of the analyst's projection (24 cents). Mr. Petrie also noted revenues "modestly" topped expectations based on lower volumes in prepared meats following price increases.

He emphasized the importance of EBITDA margins hitting 10 per cent for the first time.

"The achievement of the 10-per-cent EBITDA margin target is years in the making, and marks a huge accomplishment for the company," he said. "After investing roughly $1-billion in the business, Maple Leaf has undoubtedly reshaped itself into a more profitable and stable company.

"The Heritage facility is a substantial piece of this, and the single element that offers the most upside from here (100 basis points of efficiencies are still there to be had in coming quarters), but it is the sustainability of earnings that has concerned us in the past, and has us more optimistic today. Reformulations mean production is simplified across the board; SAP installed and utilized mean greater efficiency; scaled up distribution means more consistent customer service. Perhaps most importantly, the company has taken material costs out of its business and redeployed much of these savings into marketing and promotion. In short, the company is stronger, and on more solid footing than ever before. This shift in spending serves as a pillar to support another key improvement in the business - the product portfolio shifting towards growth. While we do not expect Maple Leaf to reposition itself as a company with massive organic growth opportunities, it is making strides in pushing its offering into higher-growth categories such as sustainable consumption, lean proteins and snacking. Raised Without Antibiotics (RWA) is the most notable, and one that we believe still has significant legs. The momentum of RWA (and food sustainability and animal welfare) in food service is supporting evidence of consumer preferences, and while in time this niche will become increasingly competitive and commoditized, MFI has a good lead on its competition. As distribution increases and the product portfolio expands, utilizations will improve with significant potential benefits to the bottom line."

Mr. Petrie said Maple Leaf's balance sheet and improved cash flow allow for additional opportunities to create value going forward. He said "a balanced approach is most likely," suggesting capex projects, "steady" dividend increases, share buybacks and "opportunistic" M&A.

He raised his EPS projections for 2016 and 2017 to $1.27 and $1.43 from $1.22 and $1.34. His EBITDA margin estimates moved to 10.4 per cent and 10.7 per cent from 10.1 per cent and 10.4 per cent.

Noting the stock's 18-per-cent upside, he increased his target price to $33 from $27. The analyst average is $31.50, according to Bloomberg.

"Valuations in the protein space have increased, most notably among the producers where conditions are more favourable than they have been in some time," said Mr. Petrie. "Though we continue to be cautious about the impact of MFI's production assets on its consolidated results in trough periods, the outlook here is decent, and if growth continues, RWA could evolve this to more of a strategic asset. Even with volatility in that segment, the company is demonstrating strong earnings power with potential for more."

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Following the release of first-quarter 2016 financial results that "reflect severe margin pressures," Canaccord Genuity analyst John Bereznicki downgraded his rating for Essential Energy Services Ltd. (ESN-T) to "hold" from "buy."

On Wednesday, the Calgary-based oilfield services provider reported earnings before interest, taxes, depreciation and amortization (EBITDA) of a loss of $800,000, excluding $1.7-million in severance costs. The result fell short of the analyst's forecast of $3.2-million.

The company also suspended its dividend and reaffirmed a commitment to cost containment, citing "further deterioration in industry fundamentals and the weak industry outlook."

"Despite these efforts, Essential's negative Q1/16 EBITDA performance suggests to us it is facing severe cyclical headwinds and structural challenges in its well servicing operation," said Mr. Bereznicki. "We believe this may delay the company's participation in a fundamental recovery."

Mr. Bereznicki reduced his target price for the stock to 75 cents from 85 cents. The analyst average target price is 92 cents, according to Bloomberg.

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Though he is concerned about execution issues from Loblaw Companies Ltd. (L-T), Credit Suisse analyst David Hartley said he remains confident in its "long-term story."

Loblaw reported first-quarter 2016 earnings per share of 82 cents, in line with Mr. Hartley's expectation and a cent below the consensus. He pointed to higher-than-projected SG&A, though those results were a 1-per-cent improvement year over year. Adjusted EBITDA missed projections.

"[Loblaw] is best-positioned amongst direct peers for current consumer shift to discount from conventional," he said. "Unfortunately, L did not execute on discount promotional programs until midway through Q1. Sales growth trends have also decelerated. The result was lost tonnage and market share. The potential impact on sales/profitability owing to evolving sales mix/price gaps between discount and conventional formats may also become a concern.

"We are taking a more cautious stance and have lowered forecasts. Despite above concerns, we believe the long-term story is intact: 1) substantial efficiency gains to the bottom line; 2) leveraging of SC [Shoppers Drug Mart] platform to grow food/PC brand sales; and 3) buybacks/dividend increases with growth, lower cash needs."

He revised his EPS projections for 2016, 2017 and 2018 to fully diluted $3.98, $4.56 and $5.20, respectively, from basic $4.14, $4.76, $5.28.

Maintaining his "outperform" rating and its status as a focus list stock, Mr. Hartley reduced his target price to $77 from $80 based on lower earnings. The average is $78.08.

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With its first-quarter results, Brookfield Renewable Energy Partners LP (BEP-N, BEP.UN-T) saw "a welcome return to long-term average regeneration," said Raymond James analyst Frederic Bastien.

It reported funds from operations (FFO) per unit of 68 cents (U.S.), above the consensus of 63 cents and Mr. Bastien's 62-cent projection. It was an increase of 12 cents year over year.

"The positive variance to our FFO forecast stemmed from the North American hydroelectric portfolio, which benefited from particularly strong inflows and active reservoir management," said the analyst. "Hydrology in Brazil also continued to improve from the drought conditions affecting past quarters, while BREP's spinning assets matched our target as well as the long-term average. The solid quarterly performance was all the more impressive considering the weakened Canadian dollar and depressed merchant prices for electricity both acted as a drag on results."

He said the momentum from the quarter is continuing, adding: "Brookfield Renewable's reservoirs are roughly 30 per cent above normal levels for this time of year, which bodes well for generation heading into the summer. In view of this, we assume the Canadian hydro assets will continue to punch above their weight and contribute an incremental 4 cents to FFO per share in 2Q16. Also of help will be the up-financings just completed for certain hydro facilities in Ontario and the wind portfolio in Portugal."

Mr. Bastien raised his FFO per share projections for 2016 to $2.45 from $2.35. His 2017 estimate of $2.65 did not change.

He kept his "outperform" rating and bumped his target to $33 from $29 "to reflect the partnership's improved FFO growth prospects and the renewed investor interest in renewable stocks." Consensus is $30.73.

"We remain attracted to Brookfield Renewable for its predominantly hydroelectric focus, conservative financial profile and strong cash flow generation across market cycles," said Mr. Bastien.

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TD Securities analyst Michael Van Aelst boosted his target price for Rogers Sugar Inc. (RSI-T) based on an "improved outlook" in reaction to second-quarter 2016 results.

The Vancouver-based company reported earnings per share of 8 cents, a 2-cent improvement year over year and ahead of the analyst and consensus projection of 6 cents. EBITDA of $1.9-million also topped expectations.

"The weaker Canadian dollar has prompted some industrial customers to repatriate volume back to Canada," said Mr. Van Aelst, who also highlighted a $10 per tonne beat for gross margins based on plant efficiencies, a rise in by-product revenues and lower beet costs.

Mr. Van Aelst raised his 2016 earnings per share projection by 4 cents and 2017 by 8 cents.

"For H2/F16, we now expect about 5-per-cent EBITDA growth (on a comparable-week basis)," he said. "Slightly lower gross margins are expected to be more than offset by lower y/y distribution and admin and selling expenses (partially from lapping one-time costs). For 2017, an incremental 35,000 tonnes (from two new customer wins), along with additional volume efficiency gains and better profitability at Taber, are now expected to drive 4-per-cent EBITDA growth."

"The incremental volumes and better profitability in the coming years should push RSI's payout ratio down to the mid- to low-80-per-cent range, and gives us confidence that the company will be able to maintain its dividend over the forecast horizon."

He maintained a "hold" rating for the stock while raising his target to $5.50 from $4.25. He justified the move by noting "a higher earnings base means that a dividend-cut is no longer a midterm threat."

The analyst average target price is $5.25.

"We will delay judgement on the company's increased efforts to grow via acquisition (most likely in North America) until specific information on targets are available; we remain a little cautious on this prospect," he said.

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Agnico Eagle Mines Ltd. (AEM-N, AEM-T) "continues to create shareholder value through exploration and its pipeline of organic growth prospects," said RBC Dominion Securities analyst Stephen Walker.

Mr. Walker said the Toronto-based gold producer's current organic growth projects are built on a "solid" operating base.

"We forecast Agnico to produce an average of 1.61 Moz [million ounces] of gold over the next three years from its current operating assets, with total cash costs of $560/oz and AISC [all-in sustaining costs]  of $815/oz," he said. "We forecast AEM to deliver above 2016 production guidance at 1.59 Moz and at the low end of AISC guidance at $860/oz.

"Organic growth is expected from La Ronde, Goldex, Kittila and Pinos Altos over the next three years that should help offset declining production from Lapa and Meadowbank. New contributions from Amaruq (2019), Meliadine (2020) and El Barqueno (2022) would result in production of 1.9 Moz in 2020 and  over 2 Moz in 2021 with AISC in the $700/oz range."

Mr. Walker said he expects the company's share to continue to outperform its peers based on steady production in low-risk regions, its growth potential, reserve replacement and "fine" liquidity.

Keeping his "outperform" rating, he raised his target price to $46 (U.S.) from $42. The analyst consensus is $43.57.

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In other analyst actions:

Advance Auto Parts Inc. (AAP-N) was downgraded to "market perform" from "strong buy" at Raymond James by equity analyst Daniel Wewer.

Ambev SA (ABEV-N) was downgraded to "neutral" from "overweight" at JPMorgan by equity analyst Andrea Teixeira. The target price is $5 (U.S.) per share.

Bird Construction Inc. (BDT-T) was rated new "outperform" at National Bank by equity analyst Maxim Sytchev. The 12-month target price is $15 (Canadian) per share.

Continental Resources Inc. (CLR-N) was raised to "strong buy" from "outperform" at Raymond James by equity analyst John Freeman. The 12-month target price is $50 (U.S.) per share.

Encana Corp. (ECA-N) was raised to "market perform" from "underperform" at FirstEnergy Capital by equity analyst Michael Dunn. The 12-month target price is $5.50 (U.S.) per share.

Essex Property Trust Inc. (ESS-N) was raised to "outperform" from "market perform" at Raymond James by equity analyst Buck Horne. The 18-month target price is $250 (U.S.) per share.

Finning International Inc. (FTT-T) was rated new "underperform" at National Bank by equity analyst Maxim Sytchev. The 12-month target price is $20 (Canadian) per share.

IBI Group Inc. (IBG-T) was rated new "outperform" at National Bank by equity analyst Maxim Sytchev. The 12-month target price is $5 (Canadian) per share.

IAMGOLD Corp. (IMG-T) was raised to "neutral" from "underperform" at Macquarie by equity analyst Michael Siperco. The 12-month target price is $4.25 (Canadian) per share.

Imperial Oil Ltd. (IMO-T) was raised to "buy" from "hold" at TD Securities by equity analyst Menno Hulshof. The 12-month target price is $51 (Canadian) per share.

Magellan Midstream Partners LP (MMP-N) was downgraded to "hold" from "buy" at Stifel by equity analyst Selman Akyol.

North American Energy Partners Inc. (NOA-T) was rated new "outperform" at National Bank by equity analyst Maxim Sytchev. The 12-month target price is $5 (Canadian) per share.

ONEOK Partners LP (OKS-N) was raised to "neutral" from "underperform" at Credit Suisse by equity analyst John Edwards. The target price is $40 (U.S.) per share.

Parsley Energy Inc. (PE-N) was raised to "strong buy" from "outperform" at Raymond James by equity analyst John Freeman. The 12-month target price is $33 (U.S.) per share.

PHX Energy Services Corp. (PHX-T) was downgraded to "market perform" from "buy" at Cormark Securities by equity analyst Jason Zhang. The 12-month target price is $2.75 (Canadian) per share.

Petrowest Corp. (PRW-T) was rated new "sector perform" at National Bank by equity analyst Maxim Sytchev. The 12-month target price is 50 cents (Canadian) per share.

Toromont Industries Ltd. (TIH-T) was rated new "sector perform" at National Bank by equity analyst Maxim Sytchev. The 12-month target price is $38 (Canadian) per share.

With files from Bloomberg News