Thursday's analyst upgrades and downgrades

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

Though FirstService Corp. (FSV-Q, FSV-T) reported "strong" third-quarter results, RBC Dominion Securities analyst Michael Smith sees "a more gradual ascent in the share price in the near-term."

Accordingly, he downgraded his rating for the Toronto-based property services provider to "sector perform" from "outperform."

On Wednesday, FirstService reported quarterly revenues of $457-million, slightly below Mr. Smith's $460-million estimate but representing a 12-per-cent increase year over year, due largely to revenue growth of 30 per cent from its brands division and a 5-per-cent rise in its residential segment. Adjusted EBITDA was $53-million, up 14 per cent from last year and $2-million less than the analyst's projection.

Adjusted earnings per share of 74 cents were in line with Mr. Smith's 75-cent expectation but up a "healthy" 19 per cent from a year ago.

"Revenue growth of 12 per cent was below the 17-per-cent trend-line pace set over the past four quarters, as external growth slowed to 7 per cent as the Company begins lapping its Century Fire acquisition in Q2/16," said Mr. Smith. "Internal growth remains healthy at 5 per cent, but down slightly from the 7-per-cent average set over the past three years. In its press release, Management commented that "the positive themes driving our businesses remain intact and we expect a strong finish to the year." In our view, FirstService is on-track to meet or exceed its 2017 guidance for overall revenue growth of 10 per cent with margins of 9 per cent plus. Importantly, the Company is trending well towards achieving its five-year plan to more than double the size of the business."

"Overall, we believe the dynamics in the housing sector remain positive for both FirstService Residential and FirstService Brands. In particular, we note that approximately 20-35 per cent of organic growth in the Residential division is attributable to winning contracts on new developments, while FirstService Brands remains a beneficiary of on-going tailwinds in the U.S. home renovation market. That being said, we note that the primary growth driver for FirstService Residential remains market share growth through new contract wins."

In reaction to the results, Mr. Smith lowered his 2017 and 2018 adjusted EBITDA estimates by $2.6-million and $5.6-million, respectively, to $156.0-million and $179.4-million, which implies growth of 20 per cent and 15 per cent, respectively. His EPS projections fell to $1.96 and $2.36, respectively, from $1.97 and $2.42.

He did, however, increase his target for the stock to $75 (U.S.) from $71. The analyst consensus price target is $70.61, according to Bloomberg data.

"We believe FirstService remains on track to deliver on its five-year plan, which aims to more than double the size of the business by 2020," said Mr. Smith. "Moreover, our positive fundamental view has not changed. That being said, we are moving to Sector Perform from Outperform following 50% share appreciation year-to-date and the less compelling implied returns to our new Price Target. Despite the rating change, we still see attractive risk-adjusted returns for long-term investors and point to our five-year DCF value of $83. The risk to our rating change is persistently elevated multiples, perhaps reflecting the potential for U.S. tax reform."

Elsewhere, Scotia Capital analyst Anthony Zicha downgraded FirstService to "sector perform" from "sector outperform" with a target of $91 (Canadian), up from $89.

CIBC World Markets analyst Stephanie Price kept a "neutral" rating, raising her target to $73 (U.S.) from $64.

Ms. Price said: "FirstService continues to execute to its model, delivering double-digit revenue growth with solid margin. We see FirstService as well positioned to continue its tuck-in M&A strategy and are increasing our M&A expectations for 2018 ($40-million from $18-million)."

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It's "time to take a pause" on Barrick Gold Corp. (ABX-N, ABX-T), according to Credit Suisse analyst Anita Soni.

In the wake of Wednesday's release of the company's third-quarter financial results, Ms. Soni downgraded the company's stock to "neutral" from "outperform."

"We believe the momentum on the re-rating story is decelerating given that the heavy lifting on asset sales and balance sheet repair has been completed," she said. "We now believe that the focus will shift to the weaker operational results in 2017 year-to-date (Veladero spill, Turquoise Ridge ore issues and lower PV throughput due to sulfur in ore in Q3), value loss at Acacia and ABX's relative production profile versus peers over the next three years.

"As a result we are reducing our target NAV [net asset value] multiple to 1.70 times from 2.00 times (peer average is 1.85 times)."

Barrick reported quarterly earnings per share of 1-cent (U.S.) loss, adjusted for a $143-million Tanzania tax payment and $101-million in debt repayment costs. Adjusted EBITDA of $899-million fell below Ms. Soni's $978-million projection, due largely to higher operating costs and other expenses.

With the downgrade, Ms. Soni lowered her target for the stock to $19 (U.S.) from $22. The analyst average target is $19.62.

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Ms. Soni raised her rating for Detour Gold Corp. (DGC-T) based on both near-term catalysts and the expectations of a weakening of the loonie.

Also noting a valuation disparity versus its peers and on a Canadian dollar gold price basis, the analyst moved the stock to "outperform" from "neutral" in a research report on Wednesday prior to the release of its third-quarter financial results.

"We had downgraded the stock to Neutral a month ago, based on our FX team's long-term $1.15 CAD/USD rate," she said. "Today, our FX team has called for a near-term USD rally, in addition, the BoC has held rates firm vs. an expectation of a rate hike causing weakening in the CAD."

"DGC has underperformed the peer group by 8 per cent over the past month and is currently trading at a 29-per-cent discount to peers on a spot basis. Commodity prices and operations are key risks."

Her target for the stock remains $16. Consensus is $21.21.

"Given the recent challenges in the senior space on operational execution, production growth pipelines and project returns, we see DGC increasingly becoming a part of the M&A conversation, particularly after a couple of quarters of strong performance," she said. "The key hold back in the stock has been 2019 and 2020 stripping on negative FCF which a senior producer could potentially reconfigure."

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Air Canada (AC-T) is currently possessing a "winning formula" of meeting expectations and a "cheap valuation," said Beacon Securities analyst Ahmad Shaath.

On Wednesday, the airline reported revenue and EBITDAR of $4.9-billion and $1.38-billion, respectively, for the third quarter. Both were in line with the Street's expectations of $4.9-billion and $1.39-billion, which Mr. Shaath deemed "highly-set."

"The company maintained its guidance for FY17E (EBITDAR margin of 17-19 per cent, FCF of $600-$900 million), with marginal adjustment to the lower end of adjusted CASM [cost per available seat mile] guidance (from down by 3-5 per cent to down by 3-4 per cent) on non-operational costs related to valuation of stock-based compensation on higher share price," the analyst said. "However, fuel guidance for Q4/FY17 was not well received, due to the street's (us included) aggressively-set fuel expectations."

Based on the results, Mr. Shaath raised his revenue estimates for 2017 and 2018 to $16.136-billion and $17.078-billion, respectively, from $16.029-billion and $16.910-billion. However, his 2017 fully diluted earnings per share expectation fell by 4 cents to $3.82, while his 2018 projection moved down by a penny to $4.74.

"The impetus behind our revision is improvement in domestic yields and demand environment versus our previous expectations, which is slightly offset by worse-than-expected results from the transborder and pacific markets," he said. "Cost wise, we have reflected a slightly higher fuel price, which is offset by benefits from continued FX tailwinds."

He maintained a "buy" rating for the stock, increasing his target to $36 from $31. The analyst average is $33.20.

"As Air Canada shares continued to gain momentum, expectations followed and an in-line Q3/FY17 results were simply not enough. In our view this represents an excellent entry point for investors," he said. "We continue to view Air Canada as North America's elite airline, with a premium offering, an expanding network and a top-notch fleet. Consequently, we believe its valuation vs. its legacy peers should be closer to the lower end of its historical valuation (i.e. a 1.0-times turn discount to the legacy peer average). U.S. legacy peers (AAL, DAL, UAL) currently trade at 5.7 times estimated fiscal 2018 EBITDAR."

Elsewhere, CIBC World Markets analyst Kevin Chiang kept his "outperformer" rating and raised his target to $36 from $34.

"AC reported a generally in-line Q3, but one that was supportive of our long-term positive thesis," said Mr. Chiang. "We see AC as being undervalued benefiting from both earnings/cash flow and valuation upside. Q3 results again highlighted why AC should no longer trade at a discount to its U.S. peers.

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Raymond James analyst Kenric S Tyghe downgraded Sleep Country Canada Holdings Inc. (ZZZ-T) to "market perform" from "outperform" ahead of the release of its third-quarter financial results on Nov. 1 after market close.

"Our rating change reflects our valuation concerns in the context of: (i) recent retail sales data, (ii) the disruption in 4Q17E of Sears' liquidation sales, and (iii) uncertainty on how the interest rate driven slowing of household spending on big ticket items evolves through 2018," said Mr. Tyghe.

He left his $40 target unchanged. The average target is $43.14.

"We continue to believe that Sleep Country is a best-in-class retailer that should continue to deliver strong earnings growth (on material further share gains) through our forecast window. We are pausing as we struggle to make a case for much further multiple expansion or earnings growth acceleration (given demanding expectations)," said Mr. Tyghe.

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Lear Corp.'s (LEA-N) growth is "underappreciated" by the market, said RBC Dominion Securities analyst Joseph Spak.

He raised his rating for Michigan-based automotive seating and electrical systems supplier to "outperform" from "sector perform."

"LEA has outgrown industry production during the recovery (2016 excluded), but we've been more focused on its margin expansion (320 basis points since 2013)," said Mr. Spak. "The margin expansion story may be in the later innings, but 3Q17 results should give greater confidence into the resiliency of margins. 3Q17 NA production was down 10 per cent year over year (classifies as mild downturn) and further some key high content programs such as K2XX were down nearly as much, but margins were fine as decrementals were manageable. Meanwhile, topline growth continues and the story transitions towards topline growth with sustainable margins.

"To that end, backlog is coming in better and growing, and management is confident in 5-per-cent outgrowth over coming years. This is not considered in consensus, leading to the potential for continued positive earnings revisions, in our view. RBC is not fully there either, but our 2018/19E EPS are already 11 per cent/7 per cent above consensus. Further, LEA is in earlier stages of highlighting capabilities and content opportunity amid an industry shift to higher power electrical architectures and connected vehicles. This drives backlog and revenue growth which could lead the market to greater appreciate LEA's opportunity and result in a higher multiple for its growth."

Touting "secular" growth opportunities driven by its e-systems portfolio as well as projected increases to its seating CPV (content per vehicle), Mr. Spak said Lear has shown, through its third-quarter financial results, "resiliency through a downturn."

He raised his target for the stock to $213 (U.S.) from $183. The analyst average is $178.35.

Elsewhere, Guggenheim Securities analyst Emmanuel Rosner downgraded Lear to "neutral" from "buy" with an unchanged target of $188 (U.S.), expressing concern growth could slow in the next couple of years.

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Citing slower near-term loan growth and "continued" disappointment on operating expenses, BMO Nesbitt Burns analyst Lana Chan downgraded Huntington Bancshares Inc. (HBAN-Q) to "market perform" from "outperform."

"The stock is not as cheap as it used to be (now at 13.2 times our 2018 estimate versus 13.9 times for regional peers) given its outperformance relative to peers (KRX) on both a year-to-date and one-year time frame," said Ms. Chan.

Her target fell to $14.50 (U.S.) from $15. Consensus is $15.09.

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CIBC World Markets analyst Hamit Patel said he can "get behind" Canfor Corp.'s (CFP-T) capacity growth strategy.

"While the trade dispute looks set to drag on for several years, our W. SPF [Western spruce-pine-fur] lumber forecast for next year ($395 U.S. per thousand board feet) implies a near full pass-through of duties to U.S. consumers," said Mr. Patel. "At the same time, strong Chinese demand is fueling improved realizations for both Canfor's sizable lumber export business and pulp operations."

On Tuesday, Canfor reported third-quarter adjusted EBITDA of $164-million, meeting Mr. Patel's Street-high forecast and $8-million above the consensus.

"We believe CFP's approach to capacity growth (focused on organic initiatives and potentially a greenfield) is the right one given lofty valuations being asked for Southern sawmills," said the analyst. "CFP's recently announced $125-million (U.S.) capital investment program in the South is expected to increase the company's Southern lumber capacity by 350 mmfbm per year (up 22 per cent) by the end of 2019, resulting in a 6-per-cent increase in the company's total lumber capacity. The capacity cost ($357 per mfbm) is cheaper than recent M&A transaction values. Canfor also recently disclosed that it is conducting a study to evaluate the viability of a greenfield sawmill (250 mmfbm per year.) at one of several potential locations in the U.S. Southeast (likely close to tidewater for long-term export opportunities).

"If pursued, this greenfield (in conjunction with the other capital investments) would result in a combined 10-per-cent increase to the company's total sawmilling capacity, and a 40-per-cent increase to its capacity in the South alone. Canfor expects to update the market on whether it will proceed with this project after the study is completed at the end of January. We suspect costs will be similar to the $100-million greenfield Georgia-Pacific is building in Alabama."

Mr. Patel raised his 2018 and 2019 EBITDA forecasts to $643-million and $597-million (from $603-million and $574-million), respectively, which he said is "largely to reflect better mix assumptions for lumber and pulp, as well as higher forecasted lumber shipments."

With a "neutral" rating, his target price for the stock rose to $27 from $25. Consensus is $25.88.

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In other analyst actions:

National Bank Financial analyst Michael Parkin upgraded Goldcorp Inc. (G-T) to "outperform" from "sector perform." His target for the stock remains $24, while the average target on the Street is $21.37.

Roth Capital Partners initiated coverage of GoldMining Inc. (GOLD-X) with a "buy" rating and $4.50 target. The average is $4.43.

Mackie Research Capital Corp. initiated coverage of Pulse Oil Corp. (PUL-X) with a "speculative buy" rating and 50-cent target.

Independent Research GmbH analyst Laura Cherdron upgraded McDonald's Corp. (MCD-N) to "hold" from "sell" with a target price of $175 (U.S.), rising from $118. The average target is $175.52.

Buckingham Research Group analyst Kelly Halsor downgraded L. Brands Inc. (LB-N) to "neutral" from "buy" with a target of $40 (U.S.), down from $43. Consensus is $45.13.