Thursday’s analyst upgrades and downgrades

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

Believing its shares are currently fully valued after recent "strong" appreciation in price, Canaccord Genuity analyst Derek Dley downgraded Liquor Stores N.A. Ltd. (LIQ-T).

In moving the Edmonton-based company to "hold" from "buy" ahead of the release of its fourth-quarter financial results on March 7, Mr. Dley cited the expectation for "challenging" conditions to persist in Alberta, its exposure to resource dependent markets and increasing competition from discount retailers.

The analyst said he made the move following the completion of several key strategic initiatives that led to a jump in share price of 26.4 per cent since the end of October.

"Importantly, Liquor Stores announced the sale of its Kentucky and New Jersey operations midway through Q4/17," he said. "The company received gross proceeds of $43-million (excluding potential earn-outs) from these transactions, which reduced Liquor Stores leverage from 3.8 times to 2.4 times. In our view, this was a key initiative from management, as the Kentucky and New Jersey stores had underperformed over the course of 2017, due to increasing competition and challenging market dynamics. We believe exiting these markets was a wise decision.

"Furthermore, management has already reduced its inventory position by $20-million, with a goal of increasing inventory turns from 4 times to 8 times, which could free up an additional $50-million in capital. That said, the low hanging fruit related to inventory reduction has already been captured, and we believe the remaining reduction will occur at a slower pace. As the company looks to reduce its private label inventory, and inventory of less productive products, we are likely to witness increased discounting, which will unfavorably impact gross margins in the near term. Meanwhile, the Alberta environment remains highly promotional driven by the increased presence of discount liquor retailers, which provides another headwind to Liquor Stores near-term margins. Therefore, while management has executed on the early stages of its turnaround strategy, we believe the 31-per-cent increase in the share price since the company reported Q3/17 results reflects the achievement of the lower hanging fruit turnaround initiatives."

He thinks the company has benefited from the strength in the cannabis sector as investors await a potential strategy from management. However, he feels the potential for cannabis sales is already reflected in the share price.

"Given Alberta's current stance that cannabis must be sold in a separate structure from an alcohol retail, we find it difficult to assume Liquor Stores will be a major beneficiary from potential cannabis distribution," he said.

Mr. Dley is projecting revenue for the quarter of $142.6-million, and EBITDA of $11.5-million, which is below the Street's expectation of $12.7-million. His EPS estimate of 18 cents is a penny below the consensus.

He maintained a $12 target price for Liquor Store shares. The average on the Street is currently $12.29, according to Bloomberg data.

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Shares of CGI Group Inc. (GIB.A-T, GIB-N) continue to provide an attractive investment opportunity, said Desjardins Securities analyst Maher Yaghi following Wednesday's release of its first-quarter financial results.

Though the Montreal-based information technology company reported better-than-anticipated revenue for the quarter ($2.82-billion versus the Street's $2.78-billion expectation), Mr. Yaghi believes the "focal point" of the earnings release was the company's clarification on the potential impact of U.S. tax reform, which he believes has been overlooked by most analysts.

"The reduction of the U.S. federal corporate tax rate to 21 per cent (from 35 per cent) as well as the imposition of a one-time repatriation tax had a positive effect on CGI overall," he said. "In Belgium, the corporate tax rate was decreased by 8 per cent and France imposed a corporate surtax of 5 per cent in the quarter. This surtax is not expected to recur, although the matter remains uncertain. On the earnings call, the company indicated that it expects an effective tax rate in FY18 of 24.5–26.5 per cent down from 27–29 per cent previously.

"While we had already adjusted our estimates for this event, we believe it was not reflected in most analyst estimates before the earnings release. However, we believe the adjustment should now be made since the company's view is now clear, in our view. We estimate the change should lift FY18 EPS estimates by 14 cents. Applying our 16.0 times price-to-earnings multiple would boost the share price by $2.20. It will also be interesting to see whether tax reforms will impact client behavior. For example, a multinational client could now be looking to move costs away from the U.S., as tax savings generated from additional expenses in the U.S. would now be diminished. We do not believe this will have a material impact on CGI given its broad international presence."

With the results, Mr. Yaghi raised his fiscal 2018 and 2019 revenue forecast given the "outperformance" in the first quarter. His margin expectations, however, did decline, as he noted: "benefits from the restructuring are taking more time to materialize than what we had initially anticipated."

His adjusted earnings per share projections for 2018 and 2019 are now $4.21 and $4.75, respectively, from $4.17 and $4.74.

Maintaining a "buy" rating for the stock, his target rose to $80 from $77.50. The average among analysts covering the stock is $74.55

"We expect the company to generate EPS growth of 15.3 per cent in FY18; we have not modelled further M&A transactions," said Mr. Yaghi. "In our view, the robust growth, FCF [free cash flow] yield of 8 per cent and strong management team are a solid combination for good stock performance."

Elsewhere, Raymond James analyst Steven Li increased his target by $2 to $80 with an "outperform" rating (unchanged).

Mr. Li said: "This was a great start to fiscal 2018. With room for organic growth to accelerate through F2018 (as new Glasgow, SSA contract awards ramp), for margins to surprise (restructuring almost done but savings yet to come) and for M&A pace to pick up (cash generation making new highs), we continue to like this set-up especially with CGI's valuation discount to U.S. peers near the 10-year high."

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Detour Gold Corp. (DGC-T) finds itself on the "right road to unlocking value," said Laurentian Bank Securities analyst Barry Allan.

Calling 2017 a "major milestone" for the Toronto-based mining company, he initiated coverage of the stock with a "buy" rating.

"Not only was a significant financial obligation materially lowered and termed-out, but 2017 was a good operating year – tangible proof of the cash-flow potential of the [flagship Detour Lake] mine," said Mr. Allan. "A small underground mine may augment the quality of ore processed, but in the larger scheme it is not too material at this point. We see two pathways for Detour Gold. If the valuation level does not improve, there is a potential for a business combination. If the valuation does improve, then Detour goes hunting for incremental production growth. In our mind this may mean looking at new mines with start-up problems."

Mr. Allan said the Detour Lake facility has seen steady annual production with record output in 2017, following a longer-than-anticipated ramp-up period. He believes it reached "stable operations that are now being optimized for better performance."

"2018 should be another record year for output, followed by a low-grade phase in 2019 and 2020, after which production should once again rise above 600,000 ounces per year, and average 656,000 ounces per year over the remaining reserve-life," the analyst said. "The important point is that after a tough start-up, the mine is now running very well and is being optimized for better performance.

"The Detour Lake mine is a long-life asset. Gold reserves exceed 16 million ounces, making the mine the largest gold deposit in Canada which should support mining operations to 2040. After operating costs, taxes, sustaining capital and debt repayment, the Detour Lake mine should generate total free cash-flow of $6.6-billion over the current mine life. And more importantly, free cash-flow really just got started in 2016, and 2017 and 2018 should be milestones in demonstrating the true cash-flow potential of the mine at a capacity level of operation."

Noting Detour offers "significant" exposure to a low Canadian dollar as well as higher gold prices, he set a price target of $20 for its shares, which is 30 cents lower than the current consensus.

"Compared to comparable operating companies, Detour Gold is trading on the low-end of the valuation range and is below the NAV [net asset value]," said Mr. Allan. "We accept that Detour is a 'one mine' company, but we are cognizant the mine has developed an operating legacy that has steadily improved year-over-year, and is now approaching the 'harvesting' years of operating cash-flow."

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Open Text Corp.'s (OTEX-Q, OTEX-T) acquisition mode is "paying off," said Raymond James analyst Steve Li, believing its integration of Dell EMC's Enterprise Content Division is going "well."

On Wednesday, the Waterloo, Ont.-based tech company reported revenue of US$734-million, topping the consensus projection of US$689-million and up from US$543-million a year ago.

"Organic growth was positive for a third quarter in a row which combined with ECD's accretion made for a potent combo," said Mr. Li. "Cash flow grew substantially (up 56 per cent year over year) and OTEX raised its long term EBIT margins by 200 basis points to 36-40 per cent. With shares trading below market price-to-earnings, organic growth concerns dissipating, margins and cash flow increasing and the company ready for more M&A, we are increasing our target as we see more room for share price appreciation even after the rally [Wednesday] morning."

Mr. Li added that the company possesses more potential M&A "firepower," noting: "Historically, M&A has played a large part in OTEX value creation. The acquisitions of Covisint and Guidance soon after ECD signals to us the company plans to remain active and opportunistic on the M&A front. With cash of $476-millionn (vs. debt of $2.8-billion), we estimate current available M&A firepower at $1+bln including one year of FCF."

He raised his earnings per share estimates for 2018 to 2019 to US$2.58 and US$2.79, respectively, from US$2.50 and US$2.69.

Keeping an "outperform" rating for Open Text shares, he bumped his target to US$44 from US$40. The average is US$42.99.

Elsewhere, Industrial Alliance Securities analyst Blair Abernethy raised his target to US$41 from US$38 with a "buy" rating (unchanged).

"In our opinion, these results again evidence an improving ECD performance," said Mr. Abernethy.

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Though he believes Starbucks Corp. (SBUX-Q) remains "one of the best long- term stories" in the U.S. consumer sector, Mizuho analyst Jeremy Scott expressed concern about the deterioration in U.S. comparable same-store sales.

Mr. Scott thinks the market will be "less willing to justify" a premium multiple moving forward, leading him to downgrade Starbucks to "neutral" from "buy."

Also expressing concern over the company's shift in focus to China, believing investors require more visibility before raising their valuation to a higher multiple, the analyst lowered his target price to US$60 from US$68. The analyst average target is currently US$64.12.

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RBC Dominion Securities analyst Mark Mahaney upgraded eBay Inc. (EBAY-Q) in reaction to what he deemed to be "solid" fourth-quarter results released Wednesday after market close.

Citing a trio of factors, Mr. Mahaney raised his rating for the San Jose-based e-commerce company to "outperform" from "sector perform."

"We've been Neutral/Skeptical of EBAY shares for several years," he said. "What's changed? Three things: 1. eBay has been able to sustain accelerating GMV [gross merchandise volume] growth in its key U.S. market through a series of improvements (structured data initiatives, guaranteed delivery offerings, authentication, promoted listings, increased personalization, etc…) and we believe these improvements are not yet fully rolled out in the U.S. or especially internationally, meaning core Marketplace fundamentals can continue to improve. 2. The surprise move to Intermediate Payments via the Adyen partnership creates a material (10 per cent-plus) new Revenue and Profit driver for eBay down the road. And 3. The dramatic rampup in share repos -- US$3.5-billion per year – meaningfully boosts EPS growth. What hasn't changed? A large secular growth opportunity -- Online Retail only 10 per cent penetrated. An attractive valuation – 20 times price-to-earnings or 10 times enterprise value-to-EBITDA. And AMZN competitive risk … "

For the quarter, eBay reported revenue of US$2.61-billion and earnings per share of US$0.59, both in line with the expectations of Mr. Mahaney and the Street.

Its first-quarter 2018 revenue expectation of US$2.57-$2.61-billion was well above the Street's projection of US$2.40-billion. Its low-end EPS guidance of 52 US cents to 54 US cents met the consensus estimate of 52 US cents.

After raising his revenue projections for 2018 and 2019 to fall in line with the company's guidance, Mr. Mahaney's EPS estimates rose by 8 US cents and 23 US cents, respectively, to US$2.28 and US$2.79.

His target for the stock rose to US$51 from US$39. The average on the Street is currently US$47.30.

"Our Outperform rating reflects our view that eBay has shown consistent acceleration of Marketplaces revenue and has successfully established several new growth opportunities (Offline Payments, BRIC expansion, eBay Now, and intermediating its payment system)," he said. "We also believe higher share purchases should support a relative valuation floor.

"After losing share to Amazon and other competitors in earlier years, we believe that eBay has had a successful pivot, wherein it has fundamentally turned around its Marketplaces segment and has room to grow domestically and internationally."

Meanwhile, BMO Nesbitt Burns analyst Daniel Salmon raised his target by US$10 to US$55 with an "outperform" rating.

Mr. Salmon said: "We believe eBay is making solid progress with the replatforming of its business and expect the company's new marketing campaign and several ongoing initiatives (eBay Guaranteed, Grouped Listings, etc.) to support improving GMV growth rates. We also believe the rollout of Promoted Listings should support an increasing Marketplace take-rate, which we believe will be viewed positively by investors."

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BMO Nesbitt Burns analyst Amit Sharma downgraded Dr Pepper Snapple Group (DPS-N), citing limited upside at its current level following the announcement of its proposed merger with Keurig Green Mountain Inc..

"Though we remain positive on the attractiveness of the proposed merger, the company's additional financial disclosures, particularly on KGM's historical margin performance, signal that some of the key assumptions behind its three-year EBITDA and EPS CAGR [compound annual growth rate] outlooks of 11-12 per cent ($4.1-4.2 billion) and 15-17 per cent ($1.65-1.75) are aggressive," said Mr. Sharma. "Specifically, 1) the expected 800-850 basis-point EBITDA margin expansion in KGM between 2018 and 2021, on top of a 600-bp margin expansion from 2015 to 2017, and expected 250-bp expansion in 2018; and 2) high-single-digit expected EBITDA growth for DPS, well above its 3-4-per-cent growth over the past 3-5 years."

Moving the stock to "market perform" from "outperform," he raised his target to US$125 from US$105. The average on the Street is $117.67.

Elsewhere, Consumer Edge Research analyst Brett Cooper upgraded Dr Pepper Snapple Group to "overweight" from "equal-weight" with a target of US$123, rising from US$98.

Gabelli & Co analyst Damian Witkowski upgraded the stock to "buy" from "hold." He did not specify a target.

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In other analyst actions:

Macquarie analyst Konark Gupta upgraded WestJet Airlines Ltd. (WJA-T) to "neutral" from "underperform" with a target of $25. The average on the Street is $28.13.

UBS analyst Dennis Geiger downgraded Chipotle Mexican Grill Inc. (CMG-N) to "sell" from "neutral" and lowered his target to US$290 from US$345. The average is US$327.44.

Eight Capital initiated coverage of First Cobalt Corp. (FCC-X) with a "buy" rating and target of $1.35.

The firm also initiated coverage of US Cobalt Inc. (USCO-X) with a "buy" rating along with a $1.40 target.