Thursday's analyst upgrades and downgrades

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

The 2016 earnings for Hudson's Bay Company Co. (HBC-T) are likely to be back-end weighted, said RBC Dominion Securities analyst Sabahat Khan.

"This is expected to be driven by: (i) heightened clearance activity across the retail space in [the first half]; and, (ii) the higher rent expense being paid by HBC this year to the JVs, which has a disproportionate impact on H1 given lower total sales dollars vs. H2," said Mr. Khan, ahead of the release of the company's first-quarter earnings on June 9 after markets close. "Recall that the JVs closed in H2/15."

Though the quarterly results of competitors in the retail sector, particularly south of the border, largely failed to meet analyst expectations, Mr. Khan emphasized HBC pre-announced a 1-per-cent decline in comparable same-store sales (consolidated constant-currency), adding the result was "stronger than the majority of U.S. peers, with strength from Canada and Europe more than offset by weaker trends in the U.S."

"Notable headwinds during the quarter included continued weakness in international tourism-related spending, a highly promotional environment as retailers work through the inventory overhang from Q4 2015, and mixed weather trends," said Mr. Khan.

He expects investor focus to be on HBC's inventory positing exiting the quarter, early second-quarter sales trends across its markets, its outlook for the back-to-school season, updates on its Saks Manhattan flagship store's renovation and Kaufhof.

Mr. Khan forecasted quarterly EBITDA of $87.1-million, an increase of 2.7 per cent year over year, with growth "driven primarily by contribution from HBC Europe, partially offset by lower year-over-year EBITDA margins."

"Although U.S. department stores reported weak Q1/16 results, we note that HBC's geographically diversified platform and the positive translation benefit from converting its U.S. dollar and Euro-denominated earnings into Canadian dollars for reporting purposes should moderate the impact of the trends at U.S. retail," he said. "Pre-released Q1/16 comps indicated that Hudson's Bay in Canada continues to perform well, while comps at HBC Europe were also modestly positive. Q1/16 comps at the Department Store Group … were up 2.3 per cent, likely reflecting strong positive contribution from Hudson's Bay, partially offset by weakness at Lord & Taylor, in our view."

Mr. Khan maintained his "outperform" rating for the stock, but he lowered his price target to $27 from $31 to reflect the "expectation of a softer retail operating environment in the near term."

The analyst consensus price target is $27.55, according to Thomson Reuters.

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The second-quarter results for National Bank of Canada (NA-T) were "ugly and unavoidable," according to BMO Nesbitt Burns Sohrab Movahedi.

On Wednesday, the bank reported second-quarters results which Mr. Movahedi characterized as "mixed." A pre-announced $250-million sectoral provision based on direct lending exposure to the oil and gas sector lowered quarterly earnings per share by 54 cents to 60 cents. Both its provision from credit loss (PCL) and common equity tier 1 (CET1) ratios rose from the previous quarter.

"P&C [personal and commercial] banking earnings were negative as the entire sectoral provision was charged to this segment," he said. "Pre-tax pre-provision results in this segment were up 8 per cent, reflecting solid positive operating leverage, 6-per-cent loan growth year over year somewhat offset by lower NIM [net interest margin]; investors are justified to be skeptical of the growth trajectory given the oil and gas lending experience. Financial Markets earnings were down 4 per cent year over year, primarily hurt by lower fees and negative operating leverage but Wealth delivered steady results."

He lowered his 2016 and 2017 EPS projections to reflect the results, moving his estimates to $4.25 and $4.85, respectively, from $4.30 and $4.95.

Mr. Movahedi maintained his "market perform" rating for the stock, but he did raise his target price by a loonie to $45. The average is $45.

"Capital management has been an area of focus for us at NA," he said. "In our view, long-term winners manage for risk not regulation and the bank's new CET1 ratio target of 10 per cent or better (by no later than end of FY2017) sends us a message that management now believes it needs higher equity to back its strategy. Our valuation and recommendation is in part reflective of our generally lower confidence in NA's capital management discipline."

At the same time,  Scotia analyst Sumit Malhotra said credit quality is not longer an issue for the bank.

Expecting an increase in its CET1 ratio to drive valuation, he upgraded the stock to "sector outperform" from "sector perform" with a target price of $48, an increase of a dollar.

"On a pro forma basis the CET1 ratio of NA currently sits at 9.57 per cent, well-below the next lowest bank (BMO at 10.05 per cent)," he said. "With the energy issue seemingly out of the way, the clear mandate for NA is to bring the capital position closer to the peer group, and we think the bank has both internal (balance sheet optimization) and external (investments in FSZ, Credigy, International) levers it can pull in this regard. Our estimate has the CET1 ratio ending Q2/17 at 10.05 per cent, which implies a build of 12 basis points per quarter over the next year."

He added: "After the increase to our estimates NA shares trade at 8.9 times our 2017 estimate, an 18-per-cent discount to the sector at 10.9x," said Mr. Malhotra. "We have been critical of NA consistently operating 'skinny' on capital; that said, from the current valuation level we think downside is limited, and we expect the relative P/E to improve alongside CET1, which we see climbing above 10.0 per cent by Q2/17. Accordingly, we are moving to rebalance our ratings by upgrading NA."

The stock was also raised to "outperform" from "sector perform" at RBC Capital by equity analyst Darko Mihelic. His 12-month target price moved to $53  from $51.

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Laurentian Bank of Canada (LB-T) is off to a good start with management's seven-year transformation plan, said Desjardins Securities analyst Doug Young in reaction to its second-quarter results.

"That said, we believe cash EPS [earnings per share] could be tempered in [the second half of the 2016 fiscal year] on the back of a normalization of PCLs [provision for credit losses] and further compression of NIMs [net interest margins]," said Mr. Young." In addition, there could be a few bumps over the next few years as it embarks on its transformation journey (eg. cost pressures, complexity of a new core banking system)."

Following the release of its quarterly results on Wednesday, Mr. Young noted the bank's lack of exposure to oil and gas loans is a "positive differentiator" from its peers.

Laurentian reported cash EPS of $1.46, ahead of Mr. Young's projection of $1.40 and the consensus of $1.36. The bank also raised its quarterly dividend by 2 cents to 60 cents, a penny more than the analyst expected.

Mr. Young said the earnings beat was driven largely by "good capital markets results and lower-than-expected PCLs." The bank's PCL rate was 0.08 per cent, topping his 0.15-per-cent estimate. He set that offset lower NIMs (1.71 per cent versus a 1.77 estimate)

"But is this repeatable every quarter? Tough to say," he said.

In reaction to the results, he raised his 2016 and 2017 cash EPS projections to $5.75 and $5.84, respectively, from $5.66 and $5.83.

He maintained his "hold" rating for the stock and raised his target to $52 from $50. The analyst average is $52.44, according to Bloomberg.

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Husky Energy Inc.'s (HSE-T) long-term strategy remains on track, according to Raymond James analyst Chris Cox.

However, Mr. Cox did say concerns about its Liwan gas project in the South China Sea continue to linger.

"Overall, Husky's 2016 Investor Day served as a good update on the longer-term strategy, with the additional Lloydminster Thermal project announcements backfilling the longer-term growth outlook," the analyst said. "However, while management did an excellent job of outlining the longer-term outlook for the company, we believe the Investor Day fell short of adequately addressing some of the nearer-term concerns of investors relating to the Husky story – most notably, the ongoing contract dispute with CNOOC [Chinese National Offshore Oil Corporation] regarding Liwan."

Mr. Cox said the dispute over delivery payments from the offshore project, which it operates and owns a 49-per-cent stake, could weigh on near-term share performance.

CNOOC buys gas from Husky through a take-or-pay contract, which requires it to pay for contracted volumes whether or not they are received. Following a first-quarter pipeline outage, Husky said it received payment for around 150 million cubic feet per day, approximately 50 per cent of contracted volumes.

"Negotiations are currently ongoing and Management suggested a more substantial update would be provided during 4Q16," the analyst said.

He was more encouraged by an update to the company's Sunrise facility near Fort McMurray.

"Given the downtime at Sunrise relating to the recent wildfires, the update on Sunrise was particularly topical," he said. "While production was offline for a number of weeks, steam injection was only offline for a few days, suggesting limited impact to the reservoir from the wildfires. Importantly, the company saw strong ramp-up following the turnaround at Sunrise in March, so the most recent analog would suggest that this downtime from the wildfires will only be a blip in the project's ramp-up curve (management guided to an early-2017 date for full ramp-up). More importantly, the project had been exhibiting very strong performance prior to the wildfires, with production in excess of 30,000 barrels of oil per day (gross); in fact, some of the best wells at the project have recently seen rates in excess of 1,500 bbl/d with a dozen wells in excess of 1,000 bbl/d – this should help address lingering questions as to whether the project can reach design rates of 60,000 bbl/d (gross)."

The analyst maintained his "market perform" rating for the stock while raising his target price by a dollar to $16. The average is $18.38.

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RBC Dominion Securities analyst Ross MacMillan downgraded Demandware Inc. (DWRE-N) following the announcement Salesforce.com Inc. (CRM-N) has entered into a definitive agreement to acquire it for $2.8-billion (U.S.).

Moving his rating to "sector perform" from "outperform," Mr. MacMillan said the cost of $75 per share is "a nice price tag."

"The 7.5-times estimated 2017 calendar year EV [enterprise value]/revenue multiple is the upper quartile for software M&A transactions," the analyst said. "Additionally, the 13-times multiple of the most recent quarter's annualized recurring revenue is well above the median multiple of 7.8 times for quality SaaS assets. Given that Demandware 'spoke to multiple parties' before finding Salesforce as a home, we think the bid is clearly designed to discourage someone coming in over the top."

Given the price, Mr. MacMillan said there is a low probability of another bidder appearing.

"Front end e-commerce software platforms don't grow on trees," he said. "Quick math suggests a player like ADBE [Adobe Systems Inc.] could afford to take on some reasonable level of leverage and come in at a higher price ($85, implies $3.3-billion enterprise value, less-than 1.5-times estimated. FY17 net debt/EBITDA) if they really wanted to stretch. Either way, it's nice to see a buyer with a longer-term horizon look beyond the shorter-term retail struggles and pay what we think is a good price for a quality software asset."

He moved his price target for the stock to $75 from $50 to reflect the transaction. The average is $67.38.

"With e-commerce nicely dovetailing with the other front office applications of digital marketing and CRM [customer relationship management], we think this transaction brings Salesforce's array of application assets further ahead of the competitive pack," said Mr. MacMillan. "With a partner like Salesforce, we believe Demandware will have clear inroads into the largest retailers, and (with integration) be able to utilize CRM's digital marketing assets to (ideally) improve conversion rates. We think this will likely increase competitive pressures on incumbents SAP/Oracle/IBM. We don't expect any antitrust issues to arise."

Elsewhere, Raymond James analyst Terry Tillman downgraded the stock to "market perform" from "outperform" with a $53 target (unchanged).

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In other analyst actions:

Box Inc. (BOX-N) was downgraded to "neutral" from "overweight" at JPMorgan by equity analyst Mark Murphy. The nine-month target price is $14 (U.S.) per share.

Columbia Property Trust Inc. (CXP-N) was raised to "outperform" from "market perform" at BMO Capital Markets by equity analyst John Kim. The target price is $25 (U.S.) per share.

EMC Corp. (EMC-N) was downgraded to "neutral" from "buy" at Sterne Agee CRT by equity analyst Alex Kurtz. The 12-month target price is $28 (U.S.) per share.

Inter Pipeline Ltd. (IPL-T) was downgraded to "market perform" from "outperform" at FirstEnergy Capital by equity analyst Steven Paget. The 12-month target price is $28 (Canadian) per share.

Newmont Mining Corp. (NEM-N) was downgraded to "hold" from "buy" at Jefferies by equity analyst Christopher Lafemina. The 12-month target price is $33 (U.S.) per share.

Trican Well Service Ltd. (TCW-T) was raised to "speculative buy" from "hold" at Canaccord Genuity by equity analyst John Bereznicki. The 12-month target price is $2.25 (Canadian) per share.

With files from Bloomberg News