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Thursday's analyst upgrades and downgrades

A CN locomotive makes it's way through the CN Taschereau yard in Montreal, Saturday, Nov., 28, 2009.

Graham Hughes/THE CANADIAN PRESS

Inside the Market's roundup of some of today's key analyst actions. This file will be updated during the trading day. For breaking analyst actions prior to market open every day, read our Before the Bell morning report.

A disappointing third-quarter earnings report and outlook at Hudson's Bay Co. prompted at least three analyst downgrades for the retailer, although the value of its real estate holdings is seen supporting the stock price.

CIBC World Markets analyst Perry Caicco lowered his rating to "sector performer" but kept a $20 (Canadian) price target. BMO Nesbitt Burns analyst Wayne Hood lowered his rating to "market perform" from "outperform" and reiterated a $21 price target. Credit Suisse analyst David Hartley downgraded his rating to "neutral" from "outperform" and cut his price target to $19 from $21.

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Those targets still suggest some minor upside for the stock over the next 12 months; in late afternoon trading, shares were down 1.8 per cent at $18.45.

In its third quarter, Toronto-based HBC's loss widened to $124.2-million, or $1.04 a share from $14.4-million, or 14 cents a year earlier, mostly because of costs related to the acquisition of U.S. retailer Saks. Adjusted profit of 7 cents a share missed the Street consensus by about three cents. HBC also reduced its 2013 outlook, expecting normalized earnings before interest, taxes, depreciations and amortization to be between $315-million and $335-million, down from its earlier guidance of between $360-million and $390-million.

The company "is having difficulty balancing sales growth with margin improvement," commented Mr. Hood, who lowered his 2013 gross margin forecasts for the company.

Mr. Caicco noted The Bay itself actually had a strong quarter, with same-store sales up 6.4 per cent. "The problem was the guidance for Q4, suggesting serious gross margin investments at Lord & Taylor, and material spending on projects," he said in a research note.

"Lord & Taylor has not really recovered from Hurricane Sandy, despite coming back to positive same-store sales. Hence HBC has to invest in gross margin to drive the business in the last few weeks of 2013. As we show in the report, operating profit and valuation are extremely sensitive to gross margin rates," he said.

But Mr. Caicco's estimates of HBC's real estate value has gone up, after seeing what Sears Canada recently got for its properties. "The increase in our net asset value due to real estate offsets the decrease to due weaker operations," he said.

Mr. Hartley sounded less upbeat: "Management is not yet positioned to provide firm financial guidance. We expect Street forecasts could fall in wide range and be subject to low conviction levels. Furthermore, management's tone regarding monetization of real estate value appeared less positive/imminent than that previously," he said.

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The average analyst target is $20.67, according to Bloomberg data.

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Canaccord Genuity analyst Juan Plessis cut his price target on Fortis Inc. to $31 (Canadian) from $34 and maintained a "hold" rating after the company announced late Wednesday it was acquiring UNS Energy Corp. for $4.3-billion (U.S.), including the assumption of debt.

Mr. Plessis thinks the acquisition could add about 6 cents to Fortis's earnings per share in the first full year of ownership, with earnings per share contributions improving thereafter as capital is spent in UNS Energy's utility operations.

But the financing surrounding the acquisition could put the stock price under pressure, he warned. Fortis announced a $1.8-billion convertible debenture issue to help pay for the acquisition, which will convert to 58.59 million common shares shortly after closing. For the remaining $850-million (Canadian) of required funding for the acquisition, Fortis anticipates issuing $500-million to $600-million of preferred equity and about $250-million of debt.

"We believe some investors may be attracted to the 12 per cent effective yield for the first 12 to 15 months on the convertible debenture issue but may not be as willing to hold Fortis shares," Mr. Plessis said. "Consequently, despite the acquisition being accretive to EPS and potentially adding up to $1.00 of value to the stock, we expect to see some short selling at a price above the $30.72 debenture exercise price as holders attempt to lock in returns, placing a cap on the shares."

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Indeed, shares are under pressure this morning on the TSX in reaction to the news announced after market close on Wednesday, with the stock down by nearly 4 per cent in late afternoon trading.

The average analyst target is $33.80.

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The North West Co. is likely to hike its dividend next year but risks are also rising for a near-term pullback in the stock after its recent strong performance, said Industrial Alliance Securities analyst Neil Linsdell. He downgraded his rating to "hold" from "buy" while maintaining a $27 (Canadian) price target.

The rural communities retailer this week reported earnings per share for its third quarter of 36 cents, below the consensus expectation of 40 cents. But the company's outlook was positive, with expectations that improved operating productivity will raise margins in remote regions.

He expects the company to raise its annualized dividend of $1.12 to $1.20 next year, and then to $1.26 the year after that.

The average analyst target is $26.50.

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Desjardins Securities' Benoit Poirier came away from Canadian National Railway Ltd.'s analyst gathering this week even more confident in the outlook for the company.

"Overall, the presentations further reinforced our view that CN is an industry leader and that rail fundamentals remain strong," he commented in a research note.

Mr. Poirier raised his price target to $63 (Canadian) from $59 and maintained a "buy" rating. "We expect the stock to continue to trade at rich multiples as CN benefits from several growth opportunities," he said.

The average analyst target is $60.21.

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CIBC World Markets analyst Adam Gill downgraded Painted Pony Petroleum Ltd. to "sector performer" and slashed his price target to $9 (Canadian) from $13 after the company revealed continued challenges in moving oil and gas volumes from some of its fields.

"Volumes from the Townsend and Daiber areas continued to be constrained until facility expansion comes online through H1/14. With that, we expect very limited growth over the first half of 2014 and have reduced our production outlook 2 per cent to 11,790 Boe/d," he said.

"Given that the facility timing is key for Painted Pony, we believe the stock will be lethargic until the early spring when we have better clarity on getting shut-in volumes on-stream," Mr. Gill added.

The average analyst target is $12.06.

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In other analyst actions:

AltaCorp downgraded Encana to "sector perform" from "outperform" and sliced its price target to $22.50 (U.S.) from $25. This followed a downgrade Wednesday afternoon by National Bank Financial, which cut its target to $21 (U.S.) from $22.50 and lowered its rating to "sector perform" after the company said it will focus capital spending on expanding liquids production next year.

Canaccord Genuity hiked its target on SNC-Lavalin to $59 (Canadian) from $54 and reiterated a "buy" rating.

Desjardins Securities cut its price target on Southern Pacific Resource to 10 cents (Canadian) from 50 cents and maintained a "hold" rating. TD Securities cut its target to 55 cents from $1 and maintained a "speculative buy" rating.

Canaccord Genuity raised its target on Mainstreet Equity to $37 (Canadian) from $32.35 and maintained a "hold" rating. BMP Securities raised its target to $42 from $40 and maintained a "buy" rating. TD Securities raised its price target to $38 from $36 and maintained a "hold" rating.

M Partners initiated coverage on Lake Shore Gold with a "buy" rating and 75 cents (Canadian) price target.

Berstein initiated coverage on Teck Resources with a "market perform" rating and $25 (Canadian) price target.

Bernstein initiated coverage on Freeport-McMoRan with an "outperform" rating and $42 (U.S.) price target.

Macquarie initiated coverage on TransAlta with an "outperform" rating and $14.75 (U.S.) price target.

RBC Dominion Securities downgraded Scripps Networks Interactive to "sector perform" from "outperform" and kept an $85 (U.S.) price target.

UBS raised its target on Yahoo to $46 (U.S.) from $37 and reiterated a "buy" rating.

RBC Dominion Securities initiated coverage on ExxonMobil with an "outperform" rating and $105 (U.S.) price target.

RBC Dominion Securities initiated coverage on Chevron with a "sector perform" rating and $120 (U.S.) price target.

Credit Suisse raised its price target on Walt Disney to $80 (U.S.) from $73 and maintained an "outperform" rating.

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For more analyst actions, breaking investing news and analysis, follow Darcy Keith on Twitter at @eyeonequities

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About the Author
Investment Editor

Darcy Keith is The Globe and Mail's Investment Editor. He has been a business journalist since 1992 and joined the Report on Business in 2010 from Yahoo! Canada, where he was the senior editor of finance. More

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