Thursday’s analyst upgrades and downgrades

Share

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

Tesla Inc.'s stock (TSLA-Q) appears to fairly discount the opportunity that lies ahead, according to RBC Dominion Securities analyst Joseph Spak.

"What TSLA has accomplished is extremely impressive, but stock discounts that a lot goes perfectly and smoothly for a very long time," he said. "Near-term we would put wide error bands on forecasts and watch for self-funding. Mid-to-long term success depends on TSLA maintaining great brand which increasingly depends on autonomous, not electrification."

On Wednesday after market close, the electric car maker reported quarterly revenue of $2.79-billion (U.S.), exceeding both Mr. Spak's projection of $2.24-billion and the consensus estimate of $2.04-billion. Earnings per share of a $1.33 loss was also better than the expectations of both (losses of $2.24 and $1.88, respectively).

"TSLA expects to produce just over 1,500 Model 3s in 3Q17 (in line with our view, we still model 1,000 deliveries), and still expects 5,000 per week by year-end 2017 and 10,000 per week at 'some point' in 2018 (also no change to our ramp)," the analyst said. "Models S/X deliveries to be higher in the second half versus the first half. 3Q17 gross margins to dip below 20 per cent in 3Q17 on Model S/X mix and Model 3 ramp. We expected a decline, this was a little worse than us, but well below consensus that stood at 25.5 per cent. GMs should improve in 4Q17. Capex guided to $2-billion in 2H17 which we had, but as mentioned earlier 1H came in a little lighter which we attribute to timing."

He added: "What the bulls will like: 1) Model 3 averaging 1,800 net reservations per day since launch last week. Net reservations up to 455,000 (518,000 gross). 2) Very confident in Model 3 production rate hitting 10,000 per week towards end of 2018 and that Model 3 gross margins can approach 25 per cent. 3) Management's own Model S/X cannibalization fears may have been overdone as orders increasing. 4) Liquidity sufficient for Model 3 ramp, not considering equity raise but are thinking about debt. 5) Model Y (CUV) will not be on entirely new platform as previously indicated but will use substantial Model 3 carryover and bring Model Y to market quicker. 6) 2H opex flat with 1H so opex leverage begins."

With the results, Mr. Spak lowered his full-year 2017 EPS projection to a loss of $7.08 from a loss of $7.54. His 2018 estimate is now a $2.32 loss, down from a $4.69 deficit.

Maintaining a "sector perform" rating for the stock, his target jumped to $345 (U.S.) from $314. The analyst consensus price target is $298.59.

"Our Sector Perform rating is based on our view that while Tesla is a very innovative and disruptive company with strong growth ahead via disrupting large addressable markets; it is also a classic story stock that is difficult to value given that the investment decision is often qualitative rather than quantitative," the analyst said. "Thus, near- to medium-term performance is likely to be determined by expectations and delivering on targets. While we are positive on the long-term opportunity, the stock appears to fairly balance medium-term assumptions with execution risk.

"To that end, we believe that Tesla is essentially learning how to become a manufacturing company on the fly. While we don't have meaningful reason to doubt that Tesla can eventually achieve its targets, doing so in a timely manner without some growing pains could prove challenging. Failure to hit near-term objectives may not impact the long-term view but could hold back the stock or provide a more favorable risk/reward entry point."

=====

Canaccord Genuity analyst Scott Chan downgraded his rating for Alaris Royalty Corp. (AD-T) in reaction to Wednesday's announcement that its partner Sequel Youth and Family Services has entered into a merger agreement with a third party.

In the deal, Sequel will redeem all of Alaris' units for a price of approximately $96-million (U.S.). Sequel distributions are among the largest of Alaris's investments (approximately 18 per cent in the second quarter).

"This follows Sequel's attempt to merge with an U.S. SPAC in January, which would have resulted in a partial redemption (i.e. 33 per cent) of Alaris' investment," said Mr. Chan. "The initial proposed transaction agreement was terminated in June while Sequel was looking into other options. Recall, the Sequel investment of $66-million was made in June of 2013 and a follow-on investment of $7.5-million in July of 2014. Over the years, Sequel has been one of the best performing partners for Alaris, with strong positive resets (2.5 per cent to 5 per cent) each year and consistent earnings coverage ratio (1.0-1.5 times) since Q1/14."

As a result of the deal, Mr. Chan's 2018 revenue and EPS estimates fell to $91-million and $1.64, respectively, from $102-million and $1.70.

Moving his rating to "hold" from "buy," his target fell to $22.50 from $24. Consensus is $24.89.

"We believe the main concern from investors relates to resumption of growth (i.e. net investments)," he said. "Pro-forma, our 2017 net investment estimate is negative $20-million. We would get more positive on the stock once the growth traction resumes, which might take some time."

=====

The current valuation for Trinidad Drilling Ltd. (TDG-T)  is "too cheap to ignore," according to BMO Nesbitt Burns analyst Michael Mazar.

Despite "soft" second-quarter results, he raised his rating for the Calgary-based company to "outperform" from "market perform."

"While company-specific catalysts are scarce, TDG is trading at 3.8 times 2018 EBITDA and more than a 70-per-cent discount to replacement value, which represent trough levels," said Mr. Mazar. "In addition, the drillers have a bit of catching up to do relative to the pumpers. During the recent crude rally, the Canadian pumpers moved up an average of 14 per cent while the drillers fell 5 per cent, led by TDG with an 11-per-cent drop."
 
On Tuesday, Trinidad Drilling reported quarterly adjusted EBITDA of $14.7-million, well below Mr. Mazar's projection of $25.2-million and the consensus of $21.9-million. Sales met the analyst's expectations, however margins did not due to over $4-million in reactivation and rig move costs.

"TDG expects additional costs to hit its bottom line in Q3 as the company is moving two rigs from Canada and North Dakota to the Permian," the analyst said. "While these costs have weighed on TDG's margins, they do signal activity levels are rising and, we expect, should result in better margin performance."

Based on the results, Mr. Mazar lowered his 2017 EBITDA estimate to $120-million from $140-million prior. His 2018 projection declined slowly to $182-million from $186-million.

He maintained a target price for the stock of $3. Consensus is $3.27.

=====

Citing positive iron ore tailwinds, Credit Suisse analyst Robert Reynolds upgraded Labrador Iron Ore Royalty Corp. (LIF-T) to "outperform" from "underperform."

On Wednesday, the Toronto-based company reported second-quarter earnings per share of 50 cents, in line with Mr. Reynolds's projection (51 cents) and ahead of the consensus of 46 cents.

Mr. Reynolds said: "We upgrade LIF to Outperform as (i) we believe the shares have yet to reflect the recent rally in iron ore (62-per-cent CFR) prices to greater-than $70 (U.S.) per ton (CS house view is $70 per ton  for Q3); (ii) pellet premium strength has continued (65 per cent to China averaging $37.52 U.S. in Q3 to date versus $35.79 per ton in Q2 and $28.04 per ton in Q1) and we expect will remain strong until Samarco restarts, which we now expect in H2/18 based on recent newsflow versus prior potential for a 2017 re-start; (iii) Q3 sales will be boosted by unsold concentrate from Q2; and (iv) a potential Bloom Lake re-start could provide IOC with infrastructure revenue upside starting in 2018 which we have not reflected."

The analyst raised his target price for the stock to $20 from $16.50. Consensus is $19.33.

"Our TP is based on a 9-per-cent target yield on our estimated annualized total dividend payment of $1.82 per share over H2/17 and 2018," he said. "This approach is revised from our prior 7-per-cent target yield on the $1.00 per share base distribution (plus $2.29 per share in value for the 15.1-per-cent equity interest in IOC [Iron Ore Company of Canada]) to reflect our view that special distributions on top of the 25 cents per quarter base will be sustained until at least year end 2018."

=====

CIBC World Markets analyst Stephanie Price sees a "more balanced" risk-reward proposition for Altus Group Ltd. (AIF-T).

Accordingly, following the release of the Toronto-based company's second-quarter results, she raised her rating for the stock to "neutral" from "underperformer."

On Wednesday, Altus, which provides independent advisory services, software and data solutions, reported quarterly revenue of $128.8-million and adjusted earnings per share of 41 cents, both well ahead of the consensus projections of $113.5-million and 23 cents.  EBITDA margins of 19.4 per cent also exceeding the Street's expectation (14.3 per cent).

"After several weak quarters, Altus had strong Analytics growth in Q2 (up 29 per cent constant currency), partially driven by conversions ahead of the June 30 end-of-life for DCF," said Mr. Price. "With the AE conversion cycle complete, we believe growth will now be tougher - driven by: 1) greenfield sales in Europe; and, 2) upsell/cross sell. While the UK's ValCap conversion cycle is ongoing, it represents only 15-20 per cent the size of the AE conversion cycle. Expect Reinvestments in Analytics: Analytics margins (35 per cent) were solid in Q2 given strong license sales. However, we expect some of these excess profits will be reinvested in the business, with management looking to expand development capabilities and cloud solutions. We are forecasting 2017 margins of 30 per cent."

Ms. Price maintained her $28 target for the stock. Consensus is $35.

Elsewhere, Canaccord Genuity analyst Yuri Lynk raised his target to $36 from $34 with a "buy" rating.

"Altus continues to have a strong balance sheet with a net debt-to-trailing 12 month EBITDA ratio of just 1.2 times," he said. "We continue to expect the company to acquire tax firms in the US/UK and invest in early stage technology companies."

BMO Nesbitt Burns analyst Stephen MacLeod kept a $37 target and "outperform" rating.

He said: "The beat was largely due to very strong performance at Altus Analytics (robust, broad-based license sales) and Property Tax (growth in North America offsetting U.K. weakness). The tone of the call was positive, with much discussion around the long tail of growth for Altus Analytics. The stock weakened coming into the quarter, which we believe presents an attractive buying opportunity."

=====

CIBC World Markets analyst Robert Catellier downgraded Fortis Inc. (FTS-T) to "neutral" from "outperformer" based on share price appreciation.

"We resume coverage following B.C. Hydro's surprising exercise of its right of first offer (ROFO) to acquire Teck's two-thirds interest in the Waneta Dam, ending Fortis' attempted acquisition," he said. "Consequently, Teck will pay Fortis a break fee of $28-million. While not in our previous price target, we view this as a modest disappointment as opportunities to make a credit-positive investment of $1.2-billion in hydro assets in an existing jurisdiction do not come along often. Our price target receives a modest bump based on reported earnings and the rate case filed for Central Hudson. Recent price appreciation causes us to lower our rating, despite positive fundamentals."

His target rose by a loonie to $48. Consensus is $49.33.

=====

Though its second-quarter financial results shocked investors, the long-term outlook for Cineplex Inc. (CGX-T) "remains solid," according to Canaccord Genuity analyst Aravinda Galappatthige.

"The stock took an uncharacteristic 8.2-per-cent hit [Wednesday], the steepest single day decline we have seen for CGX since March 30, 2009 when Onex sold its 22.6-per-cent share in Cineplex Galaxy Income Fund," he said. "The reality is that while much of the Q2 variances appear to be transient in nature, they have in fact driven meaningful estimate revisions (8.7-per-cent EBITDA cut in 2018). This is due to the fact that the miss forces us to take a more conservative approach to the more variable components of the model. For instance our 2018 cinema advertising growth projection is 7 per cent off soft comps in 2016 and 2015. Ordinarily we would have projected a healthier rebound, however in the backdrop of soft results in 2016 and H1/17, this would not be prudent. The same holds true for digital place-based media. Then there are the cluster of little 'paper cut' variances in occupancy costs, REC Room pre-opening costs, etc., which all add up. Hence, while Q2 does not derail the longer-term outlook, it does have a meaningful impact on near-term projections."

On Wednesday, the Toronto-based company reported second-quarter adjusted earnings before interest, taxes, depreciation and amortization of $38.1-million, a drop of 11 per cent year over year and "sharply" below Mr. Galappatthige's projection of $55.2-million as well as the $61.3-million consensus. Revenues rose 7.7 per cent to $364.1-million, missing the analyst's expectation of $375.2-million and the $389-million consensus.

"The revenue growth was due to the Amusement segment which grew 86 per cent partly due to acquisitions (TriCorp, Saw, Dandy)," the analyst said. "We narrow down the variance in results to the three following reasons. First, box office revenue growth was surprisingly (and unusually) lower than the national industry growth number, coming in at 2.4 per cent versus 6.3 per cent for the industry. This was due to Quebec (where Cineplex has relatively lower share) sharply over-indexing. Second, Media revenues fell 9 per cent versus our growth expectations, primarily due to digital signage which fell 9.5 per cent. This appears to be due to certain delays in project installations which accounted for about a $2-million hit to EBITDA. Third, OPEX was higher due to 'other operating expenses' related to REC Room pre-opening costs, higher G&A ($1.4-million variance) and higher Occupancy costs ($1.4-million). All this was slightly offset by lower film costs."

With the results, Mr. Galappatthige dropped his 2017 and 2018 EPS projections to $1.22 and $1.53, respectively, from $1.69 and $1.91.

He kept a "buy" rating for the stock, but his target price fell to $51 from $59. Consensus is $54.50.

"Despite the more cautious approach to forecasting, we believe the thesis that Cineplex is transitioning to a genuine high-growth story remains intact," he said. "We note, key theatre parameters – BPP [Box office revenues per patron] growth, CPP (food services), etc., remained solid, coming in ahead of expectations in Q2. Moreover, there is little to suggest that cinema advertising would face a sustained downswing; in fact, quarterly fluctuations here have been common.

"We expect a return to growth by Q4/17. We see a number of other growth drivers for Cineplex going forward: • With respect to digital place-based media, core service revenue growth is likely to see high double-digit growth based on the contracts that have been signed as well as upside longer term from the US market. Recall, the DQ contract was sizable and marked a breakthrough into the US market. • The REC Room revenues, albeit early, are coming in ahead of expectations. We see this as a meaningful contributor to EBITDA growth going forward. • P1AG [Player One Amusement Group ] remains an attractive space, particularly with Cineplex now building a national, coast-to-coast presence in the U.S. with recent acquisitions. • The recent announcement around Topgolf indicates that Cineplex has no plans of resting in terms of new initiatives. There are likely more drivers of growth in the outer years as Cineplex looks to further diversify its revenue mix beyond theatre operations. Management's goal is to transition to a 1/3, 1/3, 1/3 mix between Theatre ops, Amusement & Leisure and Media over time. While we see the higher growth profile and its positive implications, we also recognize that this is likely to come with lower FCF generation in the near to medium term. Capex has been revised up successively and we doubt there would be an easing in capex in 2018. In our view, this is a natural part of the transition to a growth story."

Elsewhere, Raymond James analyst Kenric Tyghe lowered his target price for Cineplex stock to $52 from $58 with an unchanged "outperform" rating.

Mr. Tyghe said: "We believe that the transformation from exhibition to entertainment play is proving more nuanced than initially appreciated, and have revised our margin assumptions to better reflect this reality. With the rolling pre-opening expenses relating the Rec Room rollouts (and the Top Golf overlay), we believe that our more conservative approach is prudent. While we believe that margins will track higher through our forecast window (and exit reflecting normalized Cineplex margins), the installed revenue base at the Rec Room will need to have scaled further to better absorb the pre-opening expenses. We believe that our positive thesis on Cineplex is well-supported by: (i) the strong upcoming film slate (as detailed in Exhibit 1), (ii) continued increase in premium penetration (ongoing rollouts of recliners and premium formats), and (iii) the strategic imperative and traction (the Toronto location of The Rec Room generated $2.5-million in revenues in its first 5-weeks) of the diversification efforts."

Echelon Wealth Partners analyst Rob Goff lowered his target to $56 from $60 with a "buy" rating.

"We remain bullish on CGX shares and see their recent declines as an attractive buying window although box office momentum may await a stronger Q417 line-up," he said. "We rarely see ourselves forecasting a 20-per-cent-plus return on CGX shares. Investors should also consider the 8.2-per-cent decline in CGX shares within the context of negative guidance (overleaf) from AMC (AMC-N) leading the shares of AMC and Regal (RGC-N) to decline by 26.9 per cent and 4.7 per cent. We would expect the peer moves to moderate and prolong our expected recovery in CGX shares."

BMO Nesbitt Burns analyst Tim Casey dropped his target to $48 from $58.

Mr. Casey said: "Despite a big Q2 miss, we maintain our Outperform on Cineplex. We continue to believe the company will successfully transition to a diversified entertainment company with growth investments in digital signage, advertising, The Rec Room, gaming, and in time, Topgolf and eSports. We believe exhibition will remain a stable, profitable business. That said, we are lowering our target multiple to reflect a contraction in relative valuation multiples among the exhibition peer group and have lowered our target price."

=====

Spin Master Corp.'s (TOY-T) impressive second-quarter results displayed strength across its entire portfolio, said Raymond James analyst Kenric Tyghe.

On Tuesday, the Toronto-based toy company reported earnings per share of 22 cents (U.S.), exceeding the consensus projection of 15 cents. Adjusted EBITDA of $43.7-million also easily beat the Street's expectation of $31.6-million, which the analyst attributed to "stable gross margins and significant SG&A leverage."

"The EPS beat … reflected significantly higher than expected sales fueled by the Hatchimals CollEGGtibles launch and continued strong sales of Paw Patrol, strong organic gross margin expansion, and solid expense leverage," said Mr. Tyghe. "We believe that the big raise reflects a high level of confidence across the broader portfolio, with particularly high conviction around the Hatchimals and Paw Patrol properties.

"In terms of Hatchimals CollEGGtibles, our channel checks proved consistent with the global experience (demand is such that they can be hard to find, which is a very nice problem to have), while the Paw Patrol Sea Patrol special received the highest ratings of any Paw Patrol episode or special in 2-plus years (a good leading indicator on Sea Patrol toy sales), and as such management's conviction level appears well supported in our opinion. The Swimways integration is tracking to plan and candidly its' weathering of the cool wet start to summer (later pool openings) was quite impressive in our view. The drag in Boys Action, reflected the roll-off of very tough licensing comps on The Secret Life of Pets et al (as Meccano sales actually increased), and as such we believe investors should look through the segment weakness."

Mr. Tyghe called the company's gross product sales growth of 52.2 per cent "impressive" and said it was underpinned by "robust" organic growth of 34.2 per cent as well as contributions from Swimways Corp., acquired in 2016.

"The successful launch of Hatchimals CollEGGtibles demonstrated the strength of the brand and Spin Master's ability to leverage its 36-month product innovation process," he said.

"The strong pipeline of new toy launches, in both North America and international markets, is supportive of continued sales momentum through 2018E. Upcoming releases include Rusty Rivets toys (in August), a new Hatchimals product on Oct. 6 (the second Hatch Day), and the launch of Paw Patrol and Hatchimals' toys in China."

Mr. Tyghe hiked his 2017 and 2018 full-year EPS estimates to $1.67 and $1.90, respectively, from $1.37 and $1.52. He also introduced a 2019 projection of $2.14.

With an "outperform" rating, his target jumped to $52 (Canadian) from $48. Consensus is $51.01.

"Our new target price of $52.00 is based on the average of our DCF and EV/EBITDA (which applies a 13.0 times target multiple to our 2018E EBITDA) valuations," he said. "Our target multiple is at a premium to the peer average of 11.6 times. We believe the premium multiple is warranted given Spin Master's industry-leading growth profile."

=====

In conjunction with Credit Suisse's reduction in its long-term WTI forecast, analysts David Hewitt and Robert Loebach lowered their cash flow projections for Canadian small and mid cap (SMID) energy exploration and production companies.

"Whilst OPEC (and friends) compliance has been laudable in 1H17, Nigeria and Libya production surprised to the upside and demand growth hit a speed bump in Q1, muting the pace of US inventory draw thus far," the analysts said. "We anticipate a modest draw thru the remainder of 2017 as DUC completions and outspend continue to drive shale growth, projecting a 120Mbbl OECD inventory surplus at end Q118; hence we see limited near term price upside and update our 2H17 WTI forecast to $48 (U.S.) per barrel (was $60).

"We assume that OPEC extends its ceiling until U.S. inventories move to the top of the 5-year average (Q3/18 in our forecast), with broadly similar (to current) levels of adherence. We also slightly lower our US onshore growth assumption – moving from a slight acceleration to slight deceleration YoY, given lower prices and, thus far, less hedging heading into 2018. Our revised 2018 WTI forecast was reduced to S$50.50 (was $65), with 2019 following through with the rebalancing view – averaging $55.8 per barrel (was $65)."

The analysts' 2017 and 2018 cash flow declined by a universe median of 10 per cent and 20 per cent, respectively.

"Given the ongoing buildout of natural gas infrastructure and shale growth in the US, we continue to believe that natural gas prices will face additional structural challenges in western Canada," they said. "We believe these Canadian centric challenges are likely owing to the relatively slower pace of infrastructure growth, further proximity to end markets and an increasingly uncertain path to LNG exports off of the Canadian west coast."

Those changes impacted target prices for stocks in their coverage universe.

They lowered targets for the following stocks:

Advantage Oil & Gas Ltd. (AAV-T, "outperform") to $10.75 from $11.50. Consensus: $10.70.
Bellatrix Exploration Ltd. (BXE-T, "neutral) to $3.25 from $5. Consensus: $5.20.
Birchcliff Energy Ltd. (BIR-T, "neutral") to $7.25 from $7.75. Consensus: $10.03.
Bonavista Energy Corp. (BNP-T, "neutral") to $3.25 from $3.75. Consensus: $3.75.
Crew Energy Inc. (CR-T, "neutral") to $5 from $6.50. Consensus: $6.41.
NuVista Energy Ltd. (NVA-T, "outperform") to $8 from $8.50. Consensus: $8.55.
Painted Pony Petroleum Ltd. (PONY-T, "underperform") to $4.50 from $5. Consensus: $7.57.
Peyto Exploration & Development Corp. (PEY-T, "neutral") to $25 from $28. Consensus: $30.27.
Seven Generations Energy Ltd. (VII-T, "outperform") to $29 from $34. Consensus: $31.60.
Tourmaline Oil Corp. (TOU-T, "outperform") to $35 from $40. Consensus: $36.45.

They raised his target for:

Kelt Exploration Ltd. (KEL-T, "neutral") to $7.25 from $7. Consensus: $8.21.
Paramount Resources Ltd. (POU-T, "neutral") to $23 from $17. Consensus: $25.
Trilogy Energy Corp. (TET-T, "neutral") to $6 from $5.75. Consensus: $6.09.