Thursday’s analyst upgrades and downgrades

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

Raymond James analyst Jeremy McCrea downgraded Painted Pony Energy Ltd. (PONY-T) in reaction to its decision to "prudently" reduce its capital expenditure plans.

On Wednesday, the Calgary-based company announced its had dropped its capex budget for 2017 by $33-million with a $39-million decline in 2018, citing the current commodity price outlook and the desire to maintain its "strong" financial position. Chief executive officer Patrick Ward said the move will "maintain our financial flexibility and still result in top-decile production growth."

Painted Pony also made revisions to its production guidance for 2017 with its midpoint now sitting at 44,750 barrels of oil equivalent per day, falling from 48,400 boe/d. For 2018, its projection now sits at 70,250 boe/d (down from 84,800).

"The volatility with AECO and Station 2 prices seems to be a never-ending theme that finally has the company slowing its growth plans (PPS growth now 40 per cent for 2017 and 36 per cent for 2018)," said Mr. McCrea. "Although PONY still has some of the highest growth in the sector, our concern remains the company's leverage profile now at 2.5 times (versus 2.1 times previously) under our $2.35 per thousand cubic feet AECO assumption for 2018. We had expected the company's strong type-curves and growth profile to help manage the balance sheet however given its cash margins, and the market not rewarding growth, the company has taken the prudent step in terms of lowering capex spending by 15 per cent over the next 18 months. Although there are signs that local pricing differentials could improve heading into winter (with no planned major maintenance on the NOVA system, and limited spudding activity in B.C.), the increased balance sheet risk has us lowering our rating."

In reaction to the move, Mr. McCrea lowered his 2017 and 2018 cash flow per share estimates to 80 cents and $1.12, respectively, from 87 cents and $1.39.

His rating for the stock was reduced to "market perform" from "outperform," while his target price fell by a loonie to $6. The analyst average target price is $6.68, according to Bloomberg data.

Meanwhile, BMO Nesbitt Burns analyst Joe Levesque lowered his target to $4.50 from $6 with a "market perform" rating.

"We are cautious on the shares given the company's elevated funding gap in our forecast period and the significant take-or-pay obligations when coupled with pricing risk associated with NGTL capacity issues in 2017," said Mr. Levesque.

TD Securities analyst Juan Jarrah did not alter his "buy" rating and $9 target, saying: "On Aug. 23, we published a note that suggested that companies which cut capex and production simultaneously are likely to be rewarded by the market. Although estimates have been reduced on the back of this announcement, we have maintained our target price as we believe that a capex-cut in an environment of weak AECO is the right strategic move."

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National Bank of Canada's (NA-T) "stronger" capital position provides it with more flexibility, said Canaccord Genuity analyst Scott Chan.

On Wednesday, the bank reported third-quarter cash earnings per share of $1.39, topping the Street's expectation of $1.32.

"Last quarter, NA provided one of the strongest outlooks and they delivered with an EPS surprise of 5 per cent. Earnings growth was solid across all segments," said Mr. Chan. "The firm's outlook remains positive based on strong fundamentals in Quebec and Canada."

He noted its Canadian personal and commercial banking segment sits ahead of its peers in the current earnings period thus far, rising 21 per cent year over year.

"Management stated the outlook for this province remains strong, citing a focus on Quebec mortgages," said Mr. Chan. "The volume outlook is good with a slowdown in mortgages that should be offset by better commercial. The latter lagged slightly this quarter, up 6 per cent year over year. NA generated strong sequential NIM [net interest margin] of 3 basis points quarter over quarter driven by product mix. While management projected a slight decline in Q4, NA's NIM is likely to benefit next year from further BOC rate hikes. Similar to LB, total provisions (PCL rate of 14 basis points; excluding Credigy) remain at industry lows. Overall, we have forecasted 2018 NIM of 24 basis points (i.e. reflecting higher growth at U.S./International), which is at the high end of their near-term guidance of 15-25 basis points."

"This quarter, NA generated the largest sequential capital increase (up 41 basis points) now reflecting a CET 1 ratio of 11.2 per cent (only behind BNS). Last quarter, management stated they would hold back acquisition capital in their International segment. With a stronger capital position, we have incorporated share buybacks into our model. In early June, NA began a NCIB for 6 million shares (2 per cent of outstanding) and during the quarter repurchased 500,000. Over the NTM, we have modelled greater than 3 million in share buybacks … We forecast NA's dividend payout ratio to be at the low-end vs. peers (i.e. 42 per cent versus 40-50-per-cent targeted range from all Banks; except for CWB), supporting our view that NA's dividend growth will outpace peers (we model up 7 per cent)."

Mr. Chan raised his 2018 EPS projection for National Bank to $5.78 from $5.70 to reflect share buybacks and a higher NIM trend supported by the expectation for rate hikes.

With an unchanged "buy" rating for the stock, his target rose to $62 from $60. The analyst average is $61.60.

"We have slightly lowered our NA target price/earnings multiple discount to 9 per cent (from 10 per cent) and this compares to its historical discount of 12 per cent," said Mr. Chan. "This implies a P/ E target multiple of 10.7 times. We believe continued positive results would support further narrowing of its valuation discount."

Elsewhere, Desjardins Securities analyst Doug Young raised his target to $60 from $58, maintaining a "hold" rating.

"We are encouraged by NA's higher CET1 ratio, progress on expense-efficiency initiatives and stable credit trends," said Mr. Young. "However, we struggle with its international banking expansion strategy, and with a larger share of earnings from capital markets, a lower-valuationmultiple business, we believe it deserves to trade at a discount to peers."

BMO Nesbitt Burns analyst Sohrab Movahedi increased his target by a loonie to $61 with a "market perform" rating (unchanged).

"NA's earnings profile benefits from its duopoly in Quebec somewhat offset by contribution from less predictable and lower-multiple sources such as Credigy and Financial Markets," he said. "Its international strategy, while likely to help with earnings growth, comes with additional risks; International capital deployment is on hold, which we find as an encouraging sign of capital discipline at the bank."

CIBC World Markets analyst Robert Sedran moved his target to $62 from $62 with a "neutral" rating.

Mr. Sedran said: "Wow. Those were some big numbers posted by this bank this quarter. Revenue and earnings growth were strong and took our estimates higher. The CET1 accretion (to 11.2 per cent from 10.8 per cent) was impressive and positions this bank well to accelerate the buyback that it has been so anxious to deploy for so long. At the close on Aug. 30, the shares traded at 10.1 times our fiscal  2018 EPS estimate, compared with the peer average of 10.9 times. Though we give the bank the gold medal this quarter, so did the market and so after the performance on earnings day, we think the valuation reflects the improved performance."

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There's "still more upside to come" for Transat A.T. Inc. (TRZ-T) given market conditions remain favourable, according to Desjardins Securities analyst Benoit Poirier.

On Aug. 21, the Montreal-based tour operator raised its third-quarter outlook, citing a solid transatlantic pricing environment. It now expects quarterly income to file in line with its third quarter of 2015 ($26.9-million), which would represent a significant improvement over last year's result ($2.5-million)

"Favourable pricing environment and Canadian dollar appreciation are key tailwinds," said Mr. Poirier in a research note previewing the quarterly results, which are scheduled to be released on Sept. 7.

"Current industry pricing is responsible for most of the outperformance in 3Q FY17. In our view, it testifies to the potential value creation of the tour operator business … Appreciation of the Canadian dollar is also expected to positively impact the sun destination operations in 1H FY18, and we are raising our estimates accordingly."

Mr. Poirier raised his adjusted net income estimate to $25.8-million from $2.8-million, which is slightly below the consensus of $26.5-million.

His full-year 2017 earnings per share projection jumped from a 48-cent loss to a profit of 41 cents, while his 2018 estimate moved from a 28-cent gain to $1.15.

"We also expect transatlantic market conditions to remain positive for TRZ, which should positively impact second half fiscal 2018 results," the analyst said. "Overall, these effects should improve FY18 tour EPS. As a result, we are increasing our FY18 adjusted EPS forecast to $1.15 (from 28 cents). Recall that in the past, TRZ was able to generate adjusted EPS above $1.50 for three consecutive years (FY06–08). We remain confident that TRZ's management can deliver strong results given the above-mentioned tailwinds."

With a "buy" rating (unchanged), his target for the stock jumped to $14 from $9. The analyst average is $10.81.

"While we are still awaiting details on the company's hotel strategy, the strong performance in the tour operator business reinforces our confidence in the name, especially with potential upside from Canadian dollar appreciation and the downside protection provided by the $350-million cash surplus."

He added: "The story continues to fly higher―we still derive a value of $26 in the long term. We recently published a comment on the potential value that can be extracted in the long term for TRZ shareholders from (1) the tour operating business, (2) the impact of Canadian dollar appreciation on the upcoming winter season, (3) the hotel strategy, and (4) the cash reserve that could eventually be deployed. Furthermore, recent improvement in the tour operator business reinforces our thesis on the name as we still see long-term value creation of up to $26 per share."

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Though it came at a more expensive takeout multiple than its other purchases, Descartes Systems Group Inc.'s (DSGX-Q, DSG-T) $107-million (U.S.) acquisition of Macropoint Llc is likely to contribute stronger organic growth, said RBC Dominion Securities analyst Paul Treiber.

In a research note previewing the company's second-quarter financial results, which are scheduled to be released on Sept. 6, Mr. Treiber raised his estimates for Descartes in reaction to the deal for Macropoint, a U.S.-based electronic transportation network providing location-based truck tracking and predictive freight capacity data content, which was announced Aug. 15.

"Our outlook assumes that MacroPoint grows 50 per cent organically calendar 2018 (down from 100 per cent, historically) and profitability aligns with Descartes' target for 32-37-per-cent adjusted EBITDA margins," said Mr. Treiber. "Regarding FX, we now estimate FX is a $4.7-million tailwind to FTM [forward 12 month] revenue, compared to our prior estimates for $0.4-million headwind to FTM revenue)."

Mr. Treiber's 2018 and 2019 revenue estimates are now $238-million and $278-million, respectively, rising from $228-million and $258-million. His adjusted EBITDA projections are $84-million and $100-million, up from $80-million and $93-million.

"Descartes is expected to provide more details on the $107-million acquisition of MacroPoint [with the release of its quarterly results]," he said. "Specifically, we would like to have a better understanding of organic growth prospects, potential revenue and cost synergies, and historical and future profitability. Our revised outlook implies that the acquisition of MacroPoint is 2-3 cents (2-3 per cent) accretive to CY18E adj. EPS. Stronger organic growth represents potential upside to our accretion estimates."

For the second quarter, he expects revenue of $56.5-million, up 12 per cent from a year ago and in line with the Street consensus of $56.2-million. His adjusted EBITDA estimate of $19.6-million also falls in sync with Street ($19.5-million).

Maintaining an "outperform" rating for the stock, Mr. Treiber increased his target to $32 (U.S.) from $27. The analyst consensus is $28.39.

"We believe the network effects inherent in Descartes' business model are unique among the consolidators in our universe," he said. "Descartes has delivered 1250 basis points margin expansion between FY07 and FY17 on economies of scale as the company has deployed capital on acquisitions. Our Outperform thesis is based on: 1) strategic acquisitions fuel network effects; 2) consistent margin expansion and FCF growth; and 3) large, untapped acquisition opportunity."

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Given the current energy industry backdrop, the past "bounce trade" utilized by Keyera Corp. (KEY-T) investors following quarterly earnings misses is unlikely to be effective this time around, according to Credit Suisse analyst Andrew Kuske.

On Aug. 9, Calgary-based Keyera reported second-quarter adjusted EBITDA of $133-million, missing Mr. Kuske's $147-million estimate and the Street's expectation of $154-million.

Its stock has fallen 5 per cent in price since then.

"Rather notably, KEY's quarterly results have missed the Street consensus for the last six quarters," he said. "Four of these six quarters witnessed a rebound in KEY's stock value 1 week after results and 3 of 5 quarters one month after the results.

"When the 'bounce trade' delivers positive returns, the average share price performance in the one week following a miss has been 3 per cent and one month after 5 per cent. Given the number of misses and the nature of part of KEY's businesses, there have been ample opportunities to play this 'bounce trade.' With the outsized decline in KEY's value since the quarterly results – 6 per cent in the week that followed versus the typical average of negative 0.3 per cent and the current 5 per cent down."

However, Mr. Kuske said "some specific Albertan centric fundamentals" are likely to prove to be a headwind in the near term.

"During the Q2 results season, some significant commentary and results impact showed evidence of margin compression for processing, fractionation and marketing activities in Alberta," he said. "This situation is fluid and subject to regional influences, but the capacity reality in sub-regions looks to persist and likely weighs on stocks like KEY."

Mr. Kuske lowered his 2017, 2018 and 2019 EBITDA estimates to $602-million, $695-million and $717-million, respectively, from $668-million, $717-million and $815-million.

He kept a "neutral" rating for the stock and dropped his target to $38 from $42, due largely to "magnitude of the declines in our financial forecasts and our re-assessment of valuation." Consensus is $44.17.

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In other analyst actions:

RBC Dominion Securities analyst Paul Treiber upgraded Enghouse Systems Ltd. (ENGH-T) to "outperform" from "sector perform." Mr. Treiber lowered his target price to $62 from $64, versus the consensus average of $64.25.

Scotia Capital analyst Ian Grundy initiated coverage of Sierra Metals Inc. (SMT-T) with a "sector outperform" rating and $4 target. The average is $4.08.

RBC Dominion Securities analyst Brian Tunick said Abercrombie & Fitch Co.'s (ANF-N) turnaround efforts "are yielding results faster than anticipated." Accordingly, he raised his rating for the U.S. retailer to "sector perform" from "underperform" and increased his target to $14 from $12. The analyst average target price is $11.08.

Capital One Securities, Inc. analyst Joseph Gibney upgraded Transocean Ltd. (RIG-N) to "overweight" from "equalweight" with a $12 (U.S.) target. The average is $10.87.

RBC Dominion Securities analyst Tyler Broda reduced BHP Billiton PLC (BLT-LSE) to "underperform" from "sector perform" with a target of 1,325 GBX, falling from 1,375. Consensus is 1,414.81.

"BHP's decision to exit the U.S. onshore business is a positive," he said. "We estimate $6.2-billion in proceeds. This will snap the balance sheet back inline with peers. However, BHP's mature asset base, especially in petroleum creates medium-term pressure on profitability. We forecast EBITDA per Cu Eq/t to decline vs. peers, compounding our view that BHP should not trade at a premium. "