Thursday’s analyst upgrades and downgrades

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

The Street wasn't impressed by Lundin Mining Corp.'s (LUN-T) three-year guidance with several equity analysts downgrading their rating for the Toronto-based company's stock.

On Wednesday after market close, Lundin released production guidance for the three-year period beginning 2018 as well as a much-anticipated 10-year guidance plan for its Candelaria operation in Chile.

Canaccord Genuity analyst Dalton Baretto called the three-year plan "weak" across the board, citing copper and zinc production expectations that fell well below his expectations and "significantly" higher capital and operating costs.

For Candelaria, its total copper production for the period was 19 per cent above his projections, however its output for the first three years was 10 per cent below his estimates.

"The major decline is expected in 2018, where guidance (100-per-cent basis) of 130-136,000 tons compares to our estimate of 172,000 tons and previous guidance of 164-170,000 tons," said Mr. Baretto. "LUN indicated that the decline is primarily due the need to deal with instability in an area of the pit's east wall (a slide occurred on Oct, 31) as well as pit sequencing changes. C1 cash costs over the 10-year period are in line with our estimates; however, we note that over the first 5 years, average C1 costs of $1.57 per pound are 18 per cent above our forecasts. The 2018 C1 cost guidance of $1.70/lb is well above our estimate of $1.26 per pound. In addition, total capex for the 10-year period is estimated at $2.2-billion, 77 per cent above our estimate of $1.2-billion. The 2018 capex guidance of $510-million is well above our forecast of $170-million.

"We note that the substantially higher capex in the near term is being driven by significantly higher capitalized stripping forecasts, and is expected to result in a throughput increase of just 4,000tpd (5 per cent) ; LUN continues to study a 15-20 per cent throughput increase, but this scenario is not part of the new guidance."

Based on the revised guidance, Mr. Baretto dropped his 2018 earnings per share projection to 25 cents (U.S.) from 47 cents.

That led to a new target price for Lundin shares of $9 (Canadian), down from $10.50. The average analyst target on the Street is currently $10.07, according to Bloomberg data.

Based on that drop, he lowered his rating for the stock to "hold" from "buy."

Elsewhere, BMO Nesbitt Burns analyst Alex Terentiew dropped the stock to "market perform" from "outperform" and lowered his target price to $10 from $11.25.

Mr. Terentiew said: "Lundin remains in our view a strong company with an attractive asset base and balance sheet. The change in the near-term grade and spending profile at Candelaria, however, has moderated our near-term expectations, prompting a downgrade to Market Perform."

TD Securities analyst Greg Barnes also downgraded Lundin to "hold" from "buy" with a target of $9.50 (from $11.50).

Scotia Capital analyst Orest Wowkodaw downgraded it "sector outperform" from "focus stock" with a $9 target, falling from $11.

Industrial Alliance Securities analyst George Topping lowered the stock to "buy" from "strong buy" with a $10.65 target, down from $13.10.

Mr. Topping said: "Their excellent balance sheet ($1-billion U.S. net cash) and low cost production suggests the market reaction will be temporary, particularly as copper prices advance. Lundin Mining remains one of the few high quality base metal companies available to investors."

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Though he remains bullish on its potential moving forward, Raymond James analyst Steven Li downgraded his rating for Descartes Systems Group Inc. (DSGX-Q, DSG-T) based on its current valuation.

"We think there is a lot to like about DSG: 85-per-cent-plus recurring revenue, 35-per-cent-plus EBITDA margins with 90-per-cent-plus cash flow (CF) conversion to boot," said Mr. Li. "Organic growth opportunities (trade content, omnichannel, security filings) are progressing well which, coupled with its M&A strategy, should sustain adjusted EBITDA growth of 15-per-cent-plus CAGR [compound annual growth rate. "That said, we are using a full target valuation multiple and we have already rolled forward to calendar 2019 estimates."

On Wednesday after market close, the Waterloo, Ont.-based company, which provides on-demand, software-as-a-service solutions, reported third-quarter financial results that Mr. Li deemed "solid."

Revenue of $62-million (U.S.) was a rise of 20 per cent year over year and exceeded the Street's $60-million expectation. EBITDA of $20.6-million was a 16-per-cent increase and also ahead of the consensus ($20.4-million). Adjusted EBITDA margin of 33 per cent was a 2-per-cent drop from the last quarter, which he pegged on the recent $107-million acquisition of MacroPoint LLC.

"Organic growth has improved this year," the analyst said. "3Q took a step back (we estimate an increase of 3.3 per cent versus 5 per cent in 2Q). We believe if DSG organic growth can consistently be in the 5-per-cent range, there is room for a better valuation. Some of DSG's recent acquisitions (e.g. MacroPoint) are fast growers, so when they anniversary (second half of fiscal 2019) they should boost DSG organic growth (we estimate MacroPoint alone can add ~2 points of organic growth once it anniversaries)."

Calling MacroPoint a "strategic fit," he added: "MacroPoint runs a network of connected transportation carriers (similar to Descarte s' GLN) and also generates data content in their location vehicles which is very valuable to e.g. brokers who are looking for information on future freight capacity. This is quite similar to DSG's business (i.e. a transportation network business with a data content business). Not cheap, but strong growth. Annualized revenues (mostly recurring) were $12.5-million, we think growth of 40 per cent year over year. Management had previously highlighted it expects MacroPoint to be on their operating model (30-per-cent-plus EBITDA margin) after year 1."

Though he raised his 2019 and 2020 earnings per share projections by 1 cent and 3 cents, respectively, to 98 cents and $1.14, Mr. Li maintained a price target for Descartes shares of $31 (U.S.). The average is $32.32.

His rating for its stock fell to "market perform" from "outperform."

"With the strong price performance over the last few years (up 105 per cent since our Initiation Report on March 24, 2014 versus the TSX up 11 per cent, NASDAQ up 60 per cent) and a 4-per-cent return to target, we are moving to a Market Perform rating. We wait for an improved return profile and/or for organic growth to break out a little more."

Elsewhere, calling the results "solid," BMO Nesbitt Burns analyst Thanos Moschopoulos increased his target to $31 from $29 with a "market perform" rating (unchanged).

"We've raised our target price following Descartes' Q3/18 results, and remain neutral on the stock, which is a valuation call; we believe that Descartes can continue to successfully execute against its strategy, but on a relative basis, prefer other Canadian software consolidators," he said. "Turning to the results, Q3/18 revenue and Q4/18 revenue guidance were both stronger than expected, while adjusted EBITDA and adjusted EBITDA guidance were in line."

Keeping an "outperformer" rating, CIBC World Markets analyst Stephanie Price raised her target to $32.50 from $29.50.

Ms. Price said: "We see Descartes as well positioned, with predictable recurring revenue and strong cash flow funding an active M&A strategy. We see near-term revenue growth accelerating post the MacroPoint acquisition and expect MacroPoint to be on the Descartes margin model within the next year."

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Raymond James' David Quezada added Polaris Infrastructure Inc. (PIF-T) to the firm's "Canadian Analyst Current Favourites" list, replacing DIRTT Environmental Solutions Ltd. (DRT-T).

"Given recent weakness in the share price and the significant 4.0 times discount to the power producer peer group on a 2018E EV/EBITDA basis, we now regard Polaris Infrastructure as among the most attractive risk adjusted returns in our coverage universe," said Mr. Quezada.

He maintained an "outperform" rating and target of $25 for Polaris shares. The analyst average target is $21.50.

"Our constructive stance is a function of potential near-term catalysts such as the ongoing geothermal drilling campaign, M&A related growth, and longer-term opportunities like the binary unit project," said Mr. Quezada. "Over the coming 2-3 months we expect news on the company's drilling campaign will represent an important catalyst and highlight our view of recent drill results indicating an expansion of the San Jacinto steam field to the north, where one production well was recently drilled (capacity estimates expected early 2018) and another will follow. While there is inherent uncertainty with geothermal drilling, we see strong odds of successful results and expect the drilling campaign to contribute to a potential 30-70-per-cent increase in cash flow over the coming 18 months. Meanwhile, we also see potential for the company to add an asset by M&A, providing increased diversification and prompting a trading multiple re-rating."

Mr. Quezada said the move was made to reflect his belief Polaris represents a more "attractive" near-term trade than DIRTT, citing "numerous" potential catalysts over the next three months.

He kept a "strong buy" rating and $10 target for DIRTT. The average target is $8.19.

In a separate move, analyst Ben Cherniavsky removed Rocky Mountain Dealership Inc. (RME-T) from the list.

He said the move was made to reflect a rise in share price of 20 per cent since he added the stock on Oct. 17.

Mr. Cherniavsky maintained an "outperform" rating and $14.50 target, which is 20 cents higher than the current average on the Street.

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Though he believes "attractive optionality remains" for Cronos Group Inc. (MUN-X), Canaccord Genuity analyst Matt Bottomley feels its stock has reached fair value.

Accordingly, he lowered the Toronto-based cannabis company, formerly PharmaCan Capital Corp., to "hold" from "speculative buy."

"With a whirlwind of industry updates over the past few months, we are updating or valuation Cronos for what we believe to be moderate de-risking of the recreational opportunity," said Mr. Bottomley. "With additional clarity provided over the past number of weeks surrounding the potential legislative framework and distribution models for recreational cannabis in Canada, we have lowered the discount rate utilized in valuing Cronos' recreational opportunity. In doing so, we have lowered our rec discount rate by 200 basis points, down to 14 per cent (versus our peer group range of 12 per cent to 16 per cent)."

On Wednesday, Cronos reported third-quarter financial results that fell below the analyst's expectations. Revenues of $1.3-milion missed his projection of $2.2-million, which he pegged on lower-than-anticipated production and "flow through to medical patients from the company's existing infrastructure out of Peace Naturals." EBITDA of a loss of $500,000 was in line with his expectations.

"We believe a number of strategic initiatives underway could provide upside to our valuation down the road," said Mr. Bottomley. "The company is seeing its penetration into Germany continue to increase QoQ and plans to commence construction of is JV greenhouse in Israel by FQ1/18 and its Original BC greenhouse in the FQ2/18. Although we believe the company is executing on its differentiated strategy, in our view, these initiatives will still take some time to come to fruition, and we have elected to not allocate material value to them at this time.

"Peace Naturals expansion should drive significant growth. The company's wholly owned investment in Peace Naturals is in the midst of a sizable expansion plan that is expected bring its total capacity to 40,000 kilograms by the end of 2018."

"Although we are lowering our recommendation, we still believe Cronos has implemented an attractive differentiated strategy versus many of its peers (including ownership in several LPs and international distribution and cultivation arrangements) and has a balance sheet and funded capacity that could see it emerge as a major player in the space. However, the company currently trades at a two-year forward EV/EBITDA multiple of 14.0 times versus comparable peers at 5.5 times. In our view, a sizable premium is justified, but as the top four LPs by market cap (with greater invested capital and production capacity) trade at an average multiple of 13.3 times two-year forward enterprise value-to-EBITDA, we would remain on the sidelines at current levels."

Mr. Bottomley raised his target to $4.15 from $3.50 based on the lowering of his recreational discount rate. The analyst average target is $4.32.

"Given the recent greater-than 80-per-cent increase in the stock over the past three months, our revised target forecasts a return of only 3.2 per cent from current levels, and we are therefore lowering our rating to a HOLD," he said.

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BMO Nesbitt Burns analyst Ben Pham sees Enbridge Inc.'s (ENB-T, ENB-N) new strategic plan as a positive compared to his "tempered expectations," however he feels investor confidence could take a few quarters to materialize and drive valuation expansion.

On Wednesday, the company unveiled a strategic plan following its merger with Spectra Energy, whoch closed in late February.  It's set to issue $1.5-billion of shares and plans to sell at least $3-billion in assets to seek funding for new projects and streamline operations. It also plans to raise its dividend to 67.1 cents per quarter.

"While the $1.5-billion equity offering was unexpected and resulted in dilution to our estimates, we think it removes an overhang regarding near-term funding needs," said Mr. Pham. "Moreover, the company plans to focus on growth in three core businesses: liquids pipelines and terminals, gas transmission and storage, and utilities, with unregulated gas midstream and onshore renewables viewed as 'non-core.; With that, ENB plans to monetize at least $3-billion of non-core assets in 2018 out of an identified $10-billion. These actions accelerate de-leveraging and improve financial flexibility to fund growth (debt/EBITDA to 5 times by end of 2018 and 4.5 times by 2020)."

He added: "Good news in that ENB raised its quarterly dividend by 10 per cent to $0.671, consistent with our outlook and equating to a 5.9-per-cent yield (vs. our coverage at 4.9 per cent). More important, the company expects similar 10-per-cent growth through 2020, underpinned by a $22-billion capital program. That compares to previous guidance of 10-12 per cent through 2024 which was predicated on securing additional growth projects of $5-6-billion per annum beyond 2020. In that sense, the new guidance is a "reset", but more realistic and achievable and based solely on secured projects. The payout is expected to be below 65 per cent through 2020, still conservative relative to peers, but above 50-60-per-cent long-term target."

Mr. Pham kept an "outperform" rating for Enbridge shares but dropped his target to $66 from $70. The average is $57.94.

Elsewhere, though he sees its strategic plan and outlook as a negative in the near term, GMP analyst Ian Gillies upgraded Enbridge to "buy" from "hold," believing it's currently priced into the stock. Suggesting any share price weakness over the coming days should be seen as a buying opportunity, he raised his target price for its shares to $58 from $54.

"We view this as a prudent, yet difficult decision," said Mr. Gillies. "Investor focus can now return to Enbridge's significant capital program and execution of its business plan."

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Royal Bank of Canada's (RY-T, RY-N) fourth-quarter financial results brought Credit Suisse analyst Nick Stogdill "increased conviction" on its 2018 growth.

On Wednesday, the bank reported adjusted earnings per share of $1.92, an increase of 14 per cent year over year and exceeding the projections of both the analyst ($1.88) and the consensus on the Street ($1.87).

Mr. Stogdill said the beat was "aided by better than expected PCLs and a low tax rate, however, we believe strong results in Canadian Banking (up 9 per cent) and Wealth (up 24 per cent) outweigh the 'lower quality' drivers this quarter."

Based on the results, he raised his full-year fiscal 2018 and 2019 EPS estimates to $8.18 and $8.74, respectively, from $8.00 and $8.55.

Keeping an "outperform" rating for Royal shares, Mr. Stogdill's target rose to $108 from $105. The analyst average is $106.01.

"RY continues to earn its premium valuation with its diversified platforms delivering strong growth," the analyst said. "We are increasing our 2018/2019E EPS by 2 per cent, primarily to reflect a more favourable outlook in Canadian Banking driven by margin expansion, stable loan growth and benign credit. A deterioration in the Canadian economy is a key risk to our outlook."

Meanwhile, Desjardins Securities analyst Doug Young bumped up his target by a loonie to $109 with a "buy" rating (unchanged).

"We like the momentum at [City National Bank], RY's scale (which should allow it to better manage costs vs peers as growth slows) and capital management strategy," said Mr. Young.

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In other analyst actions:

Citi analyst Alexander Hacking believes multi-year underperformance has led to a reset in investor sentiment toward Goldcorp Inc. (G-T, GG-N), leading him to raised his rating for its stock to "buy" from "neutral."

Conversely, Mr. Hacking cut his rating for Barrick Gold Corp. (ABX-T, ABX-N) to "sell" from "buy" based on operating concerns and the potential for an "upcoming re-investment cycle."

TD Securities analyst Cherilyn Radbourne upgraded Canadian National Railway Co. (CNR-T) to "buy" from "hold" with a target of $115, rising from $110. The consensus is $109.32.

RBC Dominion Securities analyst Shailender Randhawa upgraded Tamarack Valley Energy Ltd. (TVE-T) to "sector perform" from "underperform" with a target of $3.25, up from $2.75. The average target is $3.90.

Canaccord Genuity analyst Anthony Petrucci upgraded Spartan Energy Corp. (SPE-T) to "buy" from "hold" and hiked his target by 50 cents to $8. The consensus is $9.22.

Maxim Group LLC analyst Jason Kolbert upgraded Gilead Sciences Inc. (GILD-Q) to "buy" from "hold," keeping his $84 (U.S.) target. The average is $86.65.