Thursday’s analyst upgrades and downgrades

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

Desjardins Securities analyst Doug Young said he was surprised National Bank of Canada's (NA-T) third-quarter capital markets results missed expectations, given the strong performance of its peers.

"While we tend not to get fussed by variability in capital markets earnings, the earnings trajectory was very different versus peers," he said.

The bank reported earnings of $171-million from the division, lower than both Mr. Young's estimate of $177-million and the consensus of $182-million. It was a decline of 14 per cent from the previous year, compared to an average increase of 18 per cent from the Big 5 banks.

"To be fair, NA had very strong capital markets earnings the year before (one of its strongest ever), but we would argue so did many of its peers," the analyst said. "Trading revenues were $181-million versus our $220-million estimate and $206-million last year. The 12-per-cent year-over-year decline in trading revenues was driven by a 33-per-cent decline in equities, largely attributed to equity derivatives. In equity derivatives, NA was positioned for higher volatility, which did not transpire as expected. Management is taking actions to reduce the weighting of equity derivatives. Otherwise, fixed income trading revenues increased 42-per-cent year over year, banking services revenues increased 12 per cent year over year and Credigy revenues increased 11 per cent year over year. NIX (and NIX ratio) was in line with our estimate."

Overall, the bank reported adjusted cash earnings per share of $1.21, in line with Mr. Young's projection and a cent higher than the consensus. He noted, similar to its peers, Canadian personal and commercial banking topped expectations, due largely to higher net interest margins and lower provisions for credit losses, adding: "we would argue this is a higher-valuation-multiple business versus capital markets."

In response to the results, Mr. Young made minor tweaks to his financial model for the bank, raising his 2016 cash EPS projection by a penny to $4.16 and his 2017 estimate by a nickel to $4.90.

He maintained his "hold" rating for the stock, but he raised his 12-month target price by a loonie to $46. The analyst average price target is $48.45, according to Bloomberg.

"NA offers higher relative exposure to Québec, a province with strong export ties to the U.S., and should benefit from a weaker Canadian dollar and a strengthening U.S. economy," he said. "The sectoral provision taken in 2Q FY16 should alleviate near-term PCL pressures related to its direct O&G loan exposure. However, NA had a few bumps in early FY16, we struggle with its international bank investment strategy, and given it generates a larger share of earnings from capital markets (which are volatile), we believe it deserves a discounted valuation multiple relative to Canadian banking peers."

Elsewhere, BMO Nesbitt Burns analyst Sohrab Movahedi called the results "unspectacular" though he raised his target to $49 from $45 with a "market perform" rating (unchanged).

"We have a guarded view of NA's capital management discipline," he said. "The bank benefits from the duopoly in Quebec, which is offset by a higher proportion of earnings coming from less predictable and therefore lower multiple wholesale earnings. NA's international expansion strategy, while likely to help with earnings growth, does come with additional risks."

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BofAML analyst Gabe Moreen said TransCanada Corp.'s (TRP-T) financial optionality and organic growth are currently underappreciated.

Adding he believes its acquisition of Columbia Pipeline Group Inc. provides a material growth platform, he initiated coverage with a "buy" rating and $68 target. The average is $66.

Mr. Moreen also initiated coverage of Enbridge Inc. (ENB-T) with a "neutral" rating, calling it a "defensive" name in the current commodity price environment and emphasized its average growth profile and increasingly diversified business model.

He set a target of $56, versus the average of $58.

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The transformation of Laurentian Bank of Canada (LB-T) is continuing to move forward as it awaits the closing of its acquisition of the Canadian arm of CIT Group Inc., according to Desjardins Securities analyst Doug Young.

On Wednesday, Laurentian reported cash earnings per share of $1.45, adjusted for a one-time charge, versus Mr. Young's projection of $1.37 and the $1.40 consensus. Mr. Young pointed to lower-than-expected provisions for credit losses, "good" loan growth and "good" expense management.

"The continued low interest rate environment and elevated liquidity being held ahead of the closing of the CIT acquisition weighed on NIMs [net interest margins] in 3Q FY16 (down 2 basis points sequentially and 16 bps year over year)," he said. "NIMs are expected to remain under pressure, but the deployment of excess capital and the closing of the CIT transaction could help mitigate some of the impacts (built into our estimates)."

Mr. Young raised his 2016 and 2017 cash EPS forecasts to $5.68 and $5.90, respectively, from $5.59 and $5.86.

He kept his "hold" rating for the stock and $52 target. The average is $52.44.

"LB has no direct O&G loan exposure, a positive differentiator versus Canadian banking peers," he said. "The pending close of the CIT acquisition is a sign of positive momentum early on in the bank's seven-year transformation plan. That said, a normalization of PCLs [provisions for credit losses] and further compression of NIMs could weigh on cash EPS near-term. In addition, there could be a few bumps over the next few years as LB embarks on its transformation journey (eg cost pressures, complexity of a new core banking system, conversion to IRB), and the bank is now faced with integration risk related to the newly acquired assets."

Elsewhere, CIBC World Markets analyst Robert Sedran raised his 12-18-month target for the stock by a loonie to $53 with a "sector performer" rating in response to the results.

"The result this quarter was a decent one, largely helped by lower expenses (6-cents-per-share benefit to our forecast) and good credit quality (2 cents per share)," said Mr. Sedran. "That said, though revenue (excluding capital markets related revenues) was generally in line with our forecast, growth was relatively stagnant. We had expected to see better revenue growth this year, which has largely failed to materialize. Margin pressure was again a notable headwind ... one that we do not expect to subside. On the other hand, we expect credit quality to continue to be a positive catalyst at this bank, given its insulation from the energy-related issues plaguing its peers.

"From a strategic perspective, management made progress on its stated initiatives, including reducing the size and scope of corporate functions (it signed an agreement with IBM to manage infrastructure and storage operations, which is expected to generate cost savings in future years), growing business services within the business mix and growing its residential mortgage portfolio."

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RBC Dominion Securities analyst Irene Nattel expects Casey's General Stores Inc. (CASY-Q) to display "solid and industry-leading" performance metrics when it reports first-quarter 2017 earnings on Sept. 6.

Ms. Nattel is forecasting 15-per-cent earnings per share growth for the retailer to $1.80 (U.S.), a cent below the consensus.

"Forecasted EBITDA growth for CASY leads the peer set, driven by strategic initiatives and benefits from the opening of the second distribution centre Terre Haute, Ind., in February," she said. "Current valuation relative to peers is attractive and we reiterate our constructive view on the stock."

Ms. Nattel raised her full-year 2017 and 2017 EPS estimates to $6.12 and $7.28, respectively, from $6.02 and $6.96. She noted growth forecasts are reinforced by the benefits of consistent store count growth as well as strategic initiatives.

"Against the backdrop of stretched M&A valuations over the past couple of years and compelling returns on NTI [new-to-industry] stores, CASY has stepped up its new unit growth pipeline, providing greater visibility and predictability of growth," she said. "New stores generate attractive low to mid-teen after-tax returns within 2-3 years of opening and the addition of the DC in Terre Haute is already facilitating growth in new markets."

"CASY also has considerable runway on the roll-out of strategic initiatives. Pizza delivery is currently available in only 22 per cent of stores, to be extended by approximately 5 per cent in F17, with major remodels representing similar current levels/growth in F17, while 24-hour stores represent about half of the store base. Given that conversion to 24-hours typically leads to a 20-30-per-cent lift in inside sales while pizza delivery typically adds 25-30 per cent to prepared food sales and major remodels lead to 10-20-per-cent lift to inside sales, CASY should continue to deliver sector-leading inside sale metrics."

Keeping an "outperform" rating for the stock, she raised her target price to $145 from $139. The analyst consensus price target is $142.31, according to Thomson Reuters.

"We maintain our valuation multiples of 9.0 time and 20.0 times fiscal 2018 estimated EBITDA and EPS, respectively," said Ms. Nattel. "In our view, the i) systematic roll out of initiatives that have demonstrated a substantial lift to inside sales, ii) unit growth runway, iii) potential for accelerating growth, and iv) benefit to opex from the recent opening of the second DC should sustain CASY's trading multiples."

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Mid-year "slippage" for Salesforce.com Inc. (CRM-N) means a larger fourth quarter is likely, according to RBC Dominion Securities analyst Ross MacMillan.

On Wednesday, the San Francisco-based provider of enterprise cloud computing solutions reported second-quarter 2017 results which fell below Mr. MacMillan's expectations, including earnings per share of 22 cents (U.S.) falling 2 cents below his projection.

The analyst pointed to calculated billings of $1.85-billion rising 15 per cent year over year and 17 per cent on a constant currency basis, noting he has seen that rate since the 2010 fiscal year.

Mr. MacMillan said the company's decision to reduce third-quarter guidance implies a "big" fourth-quarter ramp.

"Guidance for F3Q17 implies 11–12-per-cent growth (we think similar on an organic CC basis)," said Mr. MacMillan. "To get to 20–21-per-cent CFFO [cash flow from operations] growth for the year, F4Q17 billings have to re-accelerate to greater-than 20 per cent on an organic CC basis. Not impossible (especially if we get some help on the shift to annualized billings at Demandware), but the F4Q17 hurdle just got higher. However, we continue to believe the company has a large opportunity set, can expand margins meaningfully, and has scope to grow FCF [free cash flow] meaningfully."

He added: "We think the company has taken a sensible approach to investment, and the CAC [customer acquisition cost] ratio suggests that productivity per sales and marketing dollar have been relatively consistent over recent years. If growth slows, we think the company would need to slow the rate of investment to drive incrementally higher operating margins and cash flows. To us, a more dangerous path would be to invest in an attempt to drive growth. If unsuccessful, the resulting growth deceleration coupled with deteriorating margin and cash flows could be very negative for the stock."

With an "outperform" rating, he lowered his target price for the stock to $85 from $91. The average is $94.61.

"We think that Salesforce continues to grow billings in the 20-per-cent range and that there are many avenues to sustain growth, including service and marketing, the platform, and international and future initiatives," said Mr. MacMillan. "While deceleration is inevitable, we think Salesforce can continue to drive premium growth for its size and it remains an important strategic asset."

Likewise, BMO Nesbitt Burns analyst Keith Bachman called the results "not so good" and lowered his target to $86 from $96 with an "outperform" rating (unchanged).

"We thought salesforce.com's upside this quarter would be less than historical trends and that there might be some disappointment in guidance," he said. "However, the billings results for the July quarter were weaker than we thought, at 15-per-cent year-over-year growth versus our expectation of 20-per-cent year-over-year growth. Further, billings guidance of about 12 per cent to 14 per cent seems disappointing, though billings will have a lot of moving parts this quarter, including FX and Demandware."

He added: "First, we believe CRM will benefit by offering an integrated set of cloud suites. Second, we believe CRM's scale provides brand, sales, and cost advantages versus other SaaS vendors."

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Walgreens Boot Alliance Inc. (WBA-Q)  is "on the corner of happy and healthy," said Credit Suisse analyst Robert Willoughby.

The stock was added to Credit Suisse's focus list and considered to be one of the top investment ideas of the firm's investment policy committee.

"The successful closing of the Rite Aid acquisition in 2H16 brings meaningful revenue growth, cost cutting, and cash flow opportunities to drive WBA's shares materially higher," he said. "Downside from the deal not closing as expected is limited, in our view, given new and potentially more preferred pharmacy network agreements with the leading PBMs [pharmacy benefit managers], contributions sooner than expected from the early AmerisourceBergen warrant exercise, and ongoing capital deployment."

Mr. Willoughby maintained a "outperform" rating for the stock and a target price of $95 (U.S.). Consensus is $91.98.

"WBA stands to benefit near term from continuing cost and working capital management opportunities, imminent clarity on the Rite Aid deal close, and further expansion of its payor relationships," the analyst said. "Potential risks to our call are reimbursement challenges, weak front-end sales trends, and a failure to close the Rite Aid acquisition successfully."

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In other analyst actions:

Marathon Gold Corp. (MOZ-T) was rated new "speculative buy" at Paradigm Capital by analyst Don Maclean with a 12-month target price of $1.35. The average is 95 cents.

Boston Scientific Corp. (BSX-N) was raised to "buy" from "hold" by Argus analyst David Toung with a price target of $33 (U.S.). The average is $27.09.

Hovde Group analyst Joseph Fenech downgraded BankUnited Inc. (BKU-N) to "underperform" from "market perform" and lowered his target to $28 (U.S.) from $30. The average is $34.17.