Tuesday's analyst upgrades and downgrades

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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.

CIBC World Markets analysts are becoming uncomfortable with the strong rally in silver stocks this year, given that they have far outpaced the rise in the price of the precious metal at a time when there are mixed signals about the strength of investment demand for the commodity.

After a fresh analysis of the sector, they downgraded their rating on Fortuna Silver Mines Inc. but upgraded Pan American Silver Corp.

While the silver price is up 10 per cent so far this year, silver equities have surged between 25 per cent and 60 per cent, noted CIBC analysts led by Leon Esterhuizen.

Some of this may be explained by the underperformance of the silver price relative to gold and the belief that silver's leveraged relationship will push the metal price higher in the not-too-distant future. The gold/silver ratio is 65 times, above the 12-year average of 60 times, suggesting silver may be undervalued relative to gold. This ratio is closely followed in the precious metals arena and expresses how many ounces of silver it takes to purchase one ounce of gold.

But Mr. Esterhuizen thinks fundamentals for silver may not be painting such an optimistic picture. Investment demand is providing mixed signals, and industrial demand may not be strong enough to justify current valuations, either. Silver is used extensively in electronics, and while this industry has seen rapid growth in emerging markets, demand has not grown to the levels once thought possible, he pointed out.

"This combined with multiples approaching historical peaks, leaves us with little room to play," he cautioned in a research note.

"Many of the equities are trading at or above the higher end of the historical 5x to 15x price to cash flow range ... These fairly high multiples are still of concern to us, especially as the gold stocks under our coverage are trading at much lower multiples (roughly 10x). While much of this is attributable to better balance sheet positions and the higher optionality of silver stocks versus their gold peers, we struggle to justify valuing silver stocks at the upper end of the range in the current climate where significant uncertainty exists with regard to the potential for better economic indicators out of the U.S. and Europe as we move into summer," he said.

Fortuna was downgraded to "sector performer" from "sector outperformer" with an unchanged price target of $5 (Canadian). Pan American Silver was upgraded to "sector performer" from "sector underperformer" and the price target was raised to $15.25 (U.S.) from $10.

Mr. Esterhuizen noted that Pan American Silver has made good progress in adapting its operations to the lower silver price environment and should see improved costs and cash flows going forward as it focuses on growth opportunities. He now values Pan American at a one-year forward price-to-cash flow multiple of 13 times - which is in line with its peers - up from 10 times.

CIBC retained its silver price forecast this year of $22 (U.S.) an ounce, still above the current spot price of $21.50.

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Macquarie Equities Research analyst Chris Feltin downgraded Imperial Oil Ltd. to "underperform" from "neutral," warning investors are paying too much for growth that's coming at a high cost. He has a price target of $47 (Canadian), below the stock's trading price near $51 Tuesday afternoon.

Mr. Feltin estimates that Imperial Oil will boost its production per share by 14.5 per cent in 2014 and by 9.1 per cent in 2015, which is near the upper end of its Canadian large cap peers. Much of the growth is derived from the Kearl oil sands mine.

But that type of growth is coming at a cost. He estimates Phase 1 of the Kearl mine requires an oil price of $115 (U.S.) per barrel to break even, and the project's second phase will only drop that to $90 per barrel.

"Kearl, while delivering production growth, is eroding Imperial's once impressive ROCE (return on capital employed) and ROE (return on equity) metrics," Mr. Feltin said in a research note. "In fact, by 2016 we see these ratios moving in line with peers."

In the meantime, Imperial is trading at a rich valuation, with an estimated 2014 price-to-earnings ratio of 14.5 times versus global integrated oil companies at 11.3 times.

"We attribute Imperial's recent outperformance to investors wanting to ride the Kearl production growth wave. That said, we simply cannot justify the valuation multiple given poor cost control and deteriorating profitability," Mr. Feltin said. "Imperial has the lowest dividend yield of the global integrateds with negative free cash until 2016, limiting the ability to increase dividends materially. Further, if Exxon and Imperial move forward with plans to build an LNG export facility in British Columbia, we see risk this free cash vanishes.

"We see a more attractive combination of near-term production growth, yield, free cash growth and relative valuation in Husky and Suncor currently," he said.

The analyst consensus price target for Imperial Oil over the next year is $49.57, according to Thomson Reuters.

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Precision Drilling Corp. is "hitting its earnings stride," said Credit Suisse analyst Jim Wicklund as he raised his price target to $11 (U.S.) from $9 and increased his earnings estimates for the company.

Precision drilling, he noted, enjoyed a 6 per cent rise in revenues in the fourth quarter of last year, thanks to improved drilling activity in the U.S. and international markets as well as some pricing improvement in Canada. Adjusted EBITDA margins also showed improvement.

"After a few choppy quarters, PDS has emerged a stronger player and has proven to investors that operational execution is strong," Mr. Wicklund said in a research note. "PDS suffered through several one-time events in 2013 that masked the company's full potential, but now confidence has been restored."

"Continued execution on its organic growth plans and the potential for a delayed spring break-up due to weather will benefit PDS," he added. Spring breakup prevents the movement of rigs because of difficult ground conditions.

"Additionally, the outlook is solid for PDS given its ability to strongly execute growth in lucrative international markets as well as the US C&P business, which should increasingly impact the bottom line throughout 2014. The growing international profitability reaffirms our positive bias on our neutral rating," he added.

The consensus price target is $12.14 (U.S.).

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Shares of Western Forest Products Inc. have sunk low enough relative to CIBC World Markets analyst Mark Kennedy's price target to garner a ratings upgrade.

The stock has declined by approximately 15 per cent since Feb. 3, 2014, which represents a 33 per cent upside to Mr. Kennedy's price target of $3.

He notes that the company has a margin improvement program and a discretionary capital program which are expected to add $50-million to annual EBITDA when completed by 2016.

Mr. Kennedy upgraded his rating to "sector outperformer" from "sector performer." The analyst consensus price target over the next year is $2.89.

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The loss of a contract with the State of Massachusetts will not negatively affect CGI Group Inc.'s stock price, says Cantor Fitzgerald Canada analyst Justin Kew.

Mr. Kew was responding to a March 17 Boston Herald story in which a vice-president with Blue Cross Blue Shield of Massachusetts indicated that the state intends to "part ways" with CGI.

He regards the news as "immaterial."

"Our view on the fundamentals has not changed," he says. "CGI is a well-managed business that has industry-leading margins and a solid growth profile (positioned well for recovery in Europe and the U.S.) with a growing backlog in excess of $19.2-billion that provides excellent revenue visibility."

Mr. Kew maintains his "buy" recommendation and $46 price target. The analyst consensus price target over the next year is $42.69, according to Thomson Reuters.

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In other analyst actions:

M Partners downgraded Golden Queen Mining to "hold" from "buy," citing valuation concerns, but hiked its price target to $2.10 (Canadian) from $1.80.

TD Securities downgraded Southern Pacific Resource to "reduce" from "hold" and maintained a 15 cents (Canadian) price target.

Credit Suisse cut its price target on Empire Co. to $80 (Canadian) from $87 and maintained an "outperform" rating.

Canaccord Genuity hiked its price target on Whitecap Resources to $15.50 (Canadian) from $14.50 and maintained a "buy" rating.

CIBC World Markets cut its price target on Fortress Paper to $3 (Canadian) from $4.50 and maintained a "sector underperformer" rating.

National Bank Financial initiated coverage on DHX Media with an "outperform" rating and $6 (Canadian) price target.

Euro Pacific Canada cut its price target on Rare Element Resources to $2.10 (Canadian) from $3.10 and maintained a "hold" rating.

Barclays upgraded Hewlett-Packard to "overweight" from "equalweight" and raised its price target to $38 (U.S.) from $33.

Barclays downgraded Cisco to "equalweight" from "overweight" and cut its price target to $23 (U.S.) from $25.

Goldman Sachs raised its six-month price target on Tesla Motors to $200 (U.S.) from $170 and maintained a "neutral" rating.

RBC Dominion Securities upgraded L-3 Communications to "sector perform" from "underperform" and raised its price target to $120 (U.S.) from $107.

Credit Suisse upgraded Nabor Industries to "neutral" from "underperform" and hiked its price target price to $22 (U.S.) from $12.

Cowen downgraded Shutterfly to "underperform" from "outperform" and cut its price target to $39 (U.S.) from $57.

Jefferies assumed coverage on North American Energy Partners with a "buy" rating and $8.50 (U.S.) price target, up from its previous target of $5.

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