Thursday’s analyst upgrades and downgrades

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

Canadian National Railway Co.'s (CNR-T) recent performance presents investors with a buying opportunity, according to CIBC World Markets analyst Kevin Chiang.

He upgraded his rating for its shares to "outperform" from "neutral."

"Despite some transient cost and service issues facing CN, our long-term positive thesis on the company is unchanged," said the analyst. "Its strong balance sheet, management depth, tri-coast network, and balanced product portfolio provide good long-term earnings visibility. In addition, the company continues to have a robust shareholder return program. We recommend investors take advantage of the recent share price underperformance."

Mr. Chiang pointed to a trio of factors in justifying his rating change. They are:

1. CN's current valuation presents a "good" risk-reward proposition.

"With CN's share price having underperformed, its forward price-to-earnings is now at 18.2 times our 2018 EPS  estimate and is trading at a one standard deviation negative spread to its Class 1 peers," he said. "Looking back over the past four years, this has been a good floor value. In addition, CN is trading at a one standard deviation negative spread to the S&P 500. This signals a good risk/reward set up."

2. His belief that negative operating leverage is a "transient issue"

"CN's share price weakness has reflected the negative volume leverage it has seen this year, with its [revenue ton miles or RTMs] up 14 per cent but operating income up 9 per cent," he said. "We view this as a transient issue. The company is making the necessary investments currently to rectify this and expects more 'CN-like' incremental margins in H2/18."

3. CN now possesses a lower-risk growth profile

"CN is making the necessary long-term investments to allow the company to handle the volume growth it expects over the next five years while continuing to average 10 per cent annual EPS growth," he said. "CN laid out its top-line growth opportunities at its recent investor day and hosted a tour of Prince Rupert, while highlighting the company's lower risk growth profile. It has a structural advantage in driving move volumes onto its network"

Mr. Chiang maintained a target for CN shares of $110. The average target on the Street is $109.37, according to Bloomberg data.

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Expressing growing confidence in its focus on near-term targets and the expected delivery on its 2017 goals, CIBC World Markets analyst David Haughton raised his rating for Goldcorp Inc. (GG-N, G-T) to "outperformer" from "neutral."

"Goldcorp appears to have recently heard the message that delivery on operational improvements and its organic growth pipeline without M&A distractions is required to achieve a turnaround," he said.

Mr. Haughton maintained a target price for its shares of $17.50 (U.S.). The analyst average is $16.79.

"Goldcorp has underperformed most of its senior gold peers and the Philadelphia Gold & Silver Index for 2017," the analyst said. "The unexpected acquisition of Cerro Casale and Exeter in March 2017 was one of the key catalysts for investor concern. The reiterated corporate strategy of focusing on the organic pipeline helps to address investor unease with the potential for unexpected M&A by Goldcorp. The stock trades at a discount to senior gold peers, with a price-to-net present value of 1.5 times versus the peer average of 1.7 times (using spot at 5 per cent) and a 2018 estimated price-to-cash flow of 8.8 times versus 9.2 times for peers (using spot)."

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Despite an "improving" portfolio and strategy, AltaCorp Capital Inc. analyst Nicholas Lupick believes near-term upside is limited for Cenovus Energy Inc. (CVE-T).

He downgraded his rating to "sector perform" from "outperform."

"Our recent rationale for owning Cenovus as an outperformer in one's portfolio has been predicated on the thesis of a combination of the company's increased exposure to crude oil (largely through increased leverage and our structurally bullish commodity outlook) and rapidly falling leverage through the sale of Legacy assets," said Mr. Lupick. "With the majority of these asset sales now completed (with Weyburn being the last remaining property), the stock's sizable outperformance relative to its large cap peer group leaves it with diminished upside relative to our target price of $15.75 per share."

"One of the reasons to own CVE in the near term has been the Company's increased Beta as of late (resulting from the elevated leverage following the acquisition of COP Canada). Unfortunately, this upside potential has been materially diminished through the Company's aggressive hedging program, in order to protect CVE from downside commodity risk. While there is still the potential to see commodity prices fall back to the low-$50 per barrel mark (or even into the $40s per barrel) the recent run in the commodity leaves the Company with limited upside in current commodity prices ... At current Strip CVE will see its H1/18 cash flows hindered by realized hedging losses of $420-million in addition to $320-million in Q4/17."

Mr. Lupick maintained his $15.75 target for Cenovus shares. The average is $14.57.

"Although we continue to believe that Cenovus is going to be a very strong E&P with an envious asset base (with significant short cycle growth opportunities in the Deep Basin coupled with best in class Oil Sands operations) we believe that further upside in the equity valuation supported by any additional rise in the commodity price will be materially hindered in the near term given the company's potential hedging losses over the next three quarters," he said. "Acknowledging that our concerns are short term in nature, we continue to believe that investors who have a long term investing horizon (3-plus years), and are structurally bullish on crude oil fundamentals, may find strong return by owning Cenovus long term. In the near term, however, we believe that there are (temporary) financial headwinds to achieving additional upside in the equity price today. "

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Expressing increased optimism following another strong quarter, Canaccord Genuity analyst Jenny Ma raised her rating for Northview Apartment REIT (NVU.UN-T) to "hold" from "sell"

"With very healthy rental market fundamentals, we expect the REIT's Ontario and Quebec portfolios to drive continued internal growth," said Ms. Ma. "Moreover, while we were cautious on Northview owing to its exposure to the weaker resource-focused Western Canadian secondary and tertiary markets, we are pleased to see the operating improvements achieved by management over the past several quarters. We now have greater confidence that rental apartment fundamentals in the resource-focused markets in Western Canada are stabilizing.

"Though we now have a more positive outlook for Northview, its comparatively higher leverage (57 per cent as at Sept. 30, 2017, including convertible debentures as debt) and higher AFFO [adjusted funds from operations] payout ratio (101 per cent on 2018 estimate) would need to improve to justify a more optimistic view on the REIT. With its units trading at a 6.3-per-cent premium to our higher NAV estimate, we believe Northview is fairly valued at current levels."

On Tuesday, the Calgary-based REIT reported third-quarter funds from operations (FFO) per diluted unit of 59 cents, a drop of 8 per cent from 64 cents in the same period ago (which included a 4-cents per unit receipt from insurance proceeds related to the Fort McMurray wildfires). The result was ahead of Ms. Ma's estimate of 57 cents and in line with the Street's expectation.

Despite that slight year-over-year decline, Northview reported same-property net operating income growth of 6.8 per cent, which Ms. Ma called a "welcome reversal" from a seven consecutive quarter decline experienced from the third quarter of 2015 through the first quarter of 2017. Overall, she called the growth, which increased year over year across all its segments, "strong."

"We are raising our estimates materially for Northview following better than expected Q3/17 results and a more optimistic outlook for its rental apartment portfolio," the analyst said. "While we are not expecting outsized growth from Northview's Western Canada rental apartment portfolio, it appears the regional economy has stabilized and improved from trough levels, which has supported occupancy and modest rental rate improvements. This, combined with very strong rental apartment fundamentals in Ontario and Quebec, and management's success in achieving operating cost efficiencies, should support a higher NOI margin in the 57-58-per-cent range, a meaningful improvement from 55 per cent in 2016. These factors drive our higher cash flow per unit estimates for 2017 and 2018, and continued growth in 2019.

"For 2018, we have modeled $40-million of acquisitions. We have also modeled a $70-million equity offering, with the view that management may seek to further reduce the REIT's leverage (currently at 57%, including convertible debentures as debt) and bring it closer to the long-term target of 50-55 per cent. We are also introducing our 2019 cash flow per unit estimates. For 2019 we assume modest same-property NOI growth and $40-million in acquisitions."

Ms. Ma raised her target for Northview units to $24 from $20. The analyst average target is currently $24.86, according to Bloomberg data.

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In the wake of a third-quarter earnings beat, Credit Suisse analyst Nick Stogdill upgraded Industrial Alliance Insurance & Financial Services Inc. (IAG-T) to "neutral" from "underperform."

On Wednesday, Quebec City-based IAG reported core earnings per share of $1.35, exceeding the $1.27 estimate of both Mr. Stogdill and the Street. It was an increase of 5 per cent from the previous year.

"Better-than-expected results reflect: (1) Strong expected profit growth (up 16 per cent year over year), driven by Individual Insurance and Individual Wealth (partly due to HollisWealth); and (2) Higher earnings on surplus, including real estate gains (4 cents) and better results at IA Auto & Home," the analyst said. "This was partly offset by an elevated tax rate of 23% per cent (versus 20-22-per-cent guidance) reducing EPS by 2 cents."

Based on "stronger-than-expected results in Individual Insurance and our view that recent acquisitions will support earnings growth in Wealth and Group Insurance," Mr. Stogdill increased his 2018 and 2019 EPS estimates to $5.40 and $5.70, respectively, from $5.25 and $5.67.

His target for IAG shares rose to $63 from $60. The average is $62.56.

"We are also reducing our price-to-earnings valuation discount to 10 per cent from 13 per cent to reflect the stronger growth outlook and our TP increases to $63 from $60," the analyst said. "With a total return of 8-per-cent inline with our other Neutral-rated Lifecos we are upgrading IAG to Neutral. Interest rates and equity markets are a key risk to our estimates."

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TeraGo Inc.'s (TGO-T) connectivity business continues to weaken, prompting Desjardins Securities analyst Maher Yaghi to downgrade his rating for the Thornhill, Ont.-based tech company to "hold" from "buy."

"While we support management's initiatives to focus on client retention though price concessions, we have limited visibility on future revenue trends," said Mr. Yaghi. "We believe a more cautious view on the shares is warranted until we see clear signs of top-line improvement."

On Tuesday, TeraGo reported third-quarter results that he deemed "underwhelming" and emphasizing the impact of declining revenue in its connectivity segment on consolidated results. Revenue of $13.7-million for the quarter was down 7 per cent from the previous year and below the Street's expectation of $14.2-million. EBITDA of $2.8-million also missed the projections of both Mr. Yaghi ($3.5-million) and the consensus ($3.7-million).

"What was disappointing in the quarter was not the continued decline in the connectivity business but the fact that the rate of decline continued to amplify versus prior quarters," the analyst said. "Until there is a clear change of trajectory in this segment's revenue trends, it will be hard for the company to return to growth overall. At this point, given the low level of visibility we have into the inner workings of this business, it is difficult for us to forecast when this inflection point is going to occur."

Following the results, Mr. Yaghi is now projection an earnings per share loss of 27 cents in 2017, falling 4 cents from his previous estimate. His 2018 expectation is a 17-cent loss, also down 4 cents.

"We have reduced our expected connectivity revenue for 2017 and 2018 as the rate of decline in the latest quarter was steeper than we had expected," he said. "Due to this lower revenue outlook, and because of the operational leverage of the business, we have made larger reductions to our EPS and EBITDA forecasts. Overall, we now see revenue declining by 6 per cent year over year in 2017 and by 1 per cent year over year in 2018."

His target for the stock declined to $5.25 from $5.50. Consensus is $4.98.

"TGO now operates within a very competitive environment in western Canada," said Mr. Yaghi. "Management's focus on reducing churn and increasing bundling should help improve revenue metrics; however, it will likely take a few quarters before these efforts impact reported results. We believe a more neutral position is warranted at this point until we see clear improvement in the prospects of the connectivity business."

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Calling its third-quarter "issues" temporary, Laurentian Bank Securities analyst John Chu said he's encouraged by Agrium Inc.'s (AGU-N, AGU-T) outlook for both retail and nitrogen.

On Wednesday, the Calgary-based company reported a quarterly loss per share of 23 cents (U.S.), missing Mr. Chu's projection of a 7-cent loss.

"A Q3 miss in what is a seasonally weak quarter was driven mainly by the Wholesale division and in particular prolonged scheduled maintenance turnarounds (nitrogen and phosphate)," said Mr. Chu. "The plants are all up and running well now. As such, the Q3 issues appear to be temporary. 2017 guidance was revised downward to reflect the issues from Q3. Retail and wholesale potash were the only two segments to produce year-over-year EBITDA improvement. The company also provided an encouraging outlook for the next couple of quarters and for 2018 for nitrogen and Retail."

Mr. Chu said the company's retail performance was "solid" for the quarter despite weather headwinds, and he expects the fall application season to be strong in both Canada and the United States.

"Agrium feels it is in a position with respect to its channel inventories as competitors likely have low inventory levels given recent market volatility; this should translate to improving margins in Q4 and Q1 and should carry on into the spring as indicated by AGU's order bookings," he said. "Retail remains active with M&A and is on a similar pace to last year's record level. The M&A pipeline remains full with hopes of announcing some medium-sized transactions soon; valuation multiples have not changed much (6.5 times EBITDA range) but may inch higher by 0.5 times to reflect soft industry margins."

Also emphasizing an "encouraging" nitrogen outlook, he added: "On the back of tight markets driving up prices greater-than 50 per cent recently, AGU expects the tight market to continue for the rest of 2017 and through 2018. Retailer pipelines are low and need to be restocked; China, a major producer and exporter, has not increased production much despite higher prices, which has helped keep markets tight. AGU expects global demand to grow at 2 per cent per annum (similar to historical growth rates) and for nitrogen to have the best prospects of the main nutrients for the foreseeable future. We will note Agrium's outlook is more bullish vs. peers who have forecasted continued volatility for 2018 and/or the next 18-24 months."

With a "buy" rating for the stock (unchanged), Mr. Chu raised his target for the stock to $125 (U.S.) from $120. The analyst average is $111.95.

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Citing the expectation for delayed earnings accretion following a weaker-than-anticipated quarter, Industrial Alliance Securities analyst Dylan Steuart downgraded Chesswood Group Ltd. (CHW-T) to "speculative buy" from "buy."

On Wednesday, Chesswood, a Toronto-based commercial equipment finance provider for small and medium-sized businesses, reported third-quarter earnings per share of 22 cents, missing Mr. Steuart's projection of 22 cents.

"The main variance from our estimate was the revenue line," he said. "Total revenues of $23.4-million were below our $25.0-million estimate, and essentially flat from a year ago. The main reason for the shortfall was due to the run-down of the Windset portfolio (high margin working capital loans in the U.S.). The loss of the Windset portfolio lowered revenues by $2.8-million compared to a year ago."

"While the core leasing business in the U.S. continues to grow impressively, the squeezing of margins is evident. Adjusting for $0.4-million of negative F/X impact, we calculate that [Pawnee Leasing Corp.'s] net operating income was down $0.2-million compared to a year ago, despite the loan book increasing 42 per cent year over year on a constant currency basis. The shortfall from Pawnee was offset by continued profitability expansion at Blue Chip [Leasing Corp.] (up $0.5-million year over year).

Mr. Steuart lowered his target for Chesswood shares to $14 from the $16. The average on the Street is $13.33.

"We continue to see upside to valuation particularly with continued growth expansion opportunities paired with potential earnings upside if the U.S. government is able to lower corporate tax rates in the near future," he said. "However, lower margin development combined with potential noise with the introduction of IFRS 9 in 2018 (which will likely increase non-cash credit provisions), does increase the risk profile on near-term valuation. As such, we are lowering our target price to $14.00 while reducing our recommendation to Speculative Buy. Our target price is derived by applying an 11.5 times multiple to our revised 2018 EPS estimate of $1.20."

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A pair of analysts downgraded their ratings for Black Diamond Group Ltd. (BDI-T) in reaction to its third-quarter financial results.

Clarus Securities' Stephen Kammermayer lowered the Calgary-based company  to "hold" from "buy" with a target of $2.75, falling from $3.50. Cormark Securities Inc.'s Jason Zhang moved his rating to "buy" from "top pick" with a $3.50 target, down from $4.

The average target on the Street is $2.63.

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In other analyst actions:

Cormark Securities Inc. analyst David McFadgen upgraded Spin Master Corp. (TOY-T) to "buy" from "market perform" and raised his target to $58 from $52. The consensus average is $55.78.

RBC Dominion Securities analyst Shailender Randhawa downgraded Tamarack Valley Energy Ltd. (TVE-T) to "underperform" from "sector perform" with a target of $2.75, rising from $2.50. The consensus is $3.80.

TD Securities analyst Aaron MacNeil downgraded Trinidad Drilling Ltd. (TDG-T) to "hold" from "buy" with a $2 target, down from $2.25. The consensus target is $2.71.

Macquarie analyst Brian Kristjansen downgraded Peyto Exploration & Development Corp. (PEY-T) to "neutral" from "outperform" and dropped his target to $20 from $30. The average is $23.94.

Cormark Securities Inc. analyst David McFadgen upgraded NYX Gaming Group Ltd. (NYX-X) to "reduce" from "tender" with a $2.40 target. The average is $2.32.

TD Securities analyst Timothy James downgraded Chorus Aviation Inc. (CHR-T) to "hold" from "buy" with a $10 target, rising from $9.50. The average is $10.21.

GMP analyst Stephen Boland downgraded his rating for Intact Financial Corp. (IFC-T) to "hold" from "buy" with a target of $107.50 (unchanged). The average is $108.88.

Cormark Securities Inc. analyst Jason Zhang upgraded Step Energy Services Ltd. (STEP-T) to "top pick" from "buy" and hiked his target to $22 from $17. The Street's target is $18.72.