Inside the Market's roundup of some of today's key analyst actions. This file will be updated often during the trading day so check back for new details.
First Quantum Minerals Ltd (FM-T) had "a bit noisy, but an okay quarter overall," said BMO Nesbitt Burns analyst Aleksandra Bukacheva.
She upgraded her rating for the stock to "outperform" from "market perform."
"Following a [greater than] 60-per-cent share price decline in the year to date, the share price currently screens attractive with a [greater than] 20-per-cent return to our target price," the analyst said. "In BMO Research's view, much of the share price decline has been driven by (a) balance sheet concerns, and (b) operational + macro uncertainty. However, after a recent site visit to First Quantum's Zambian operations, in BMO Research's view, downside risk to our estimates/valuation is lower due to less material negative unknowns."
First Quantum reported earnings per share for the third quarter of a loss of 10 cents (U.S.), compared to the consensus estimate of a loss of 4 cents and Ms. Bukacheva's projection of a loss of 7 cents. She pointed to "a sizable headline loss" of 62 cents driven by a charge based on its revaluation of its Zambian deferred tax liability ($471-million).
She said: "There are three potentially positive significant catalysts for the share price, including (a) Cobre Panama project finance (enabled by the recent agreement with [Franco Nevada Corp.]); (b) potential sale of non-core assets with the benefits of deleveraging (as part of targeted $1-billion net debt reduction by the first quarter of 2016); and (c) energizing a second power line at Sentinel and production optimization to improve the overall cash flow profile of integrated Zambian operations (in the fourth quarter)."
The analyst maintained her target for the stock of $8 (Canadian). The analyst consensus, according to Thomson Reuters, is $13.99.
The magnitude of the third-quarter revenue miss from Total Energy Services Inc. (TOT-T) will "likely disappoint investors," said TD Securities analyst Scott Treadwell.
He downgraded his rating for the stock to "hold" from "buy" based on lower revenue forecasts and stock market performance.
Total reported third-quarter revenue of $66.7-million, falling below both Mr. Treadwell's estimate of $86.3-million and the consensus projection of $78.7-million. Earnings before interest, taxes, depreciation and amortization came in at $11.5-million (17.3 per cent margin), which was also below the analyst's expectation ($14.9-million, 17.3 per cent) and the consensus ($13.5-million, 17.1 per cent).
"Total's Q3 revenue was 23 per cent below our expectations on reduced activity in its rental and compression segments, though partially offset by its drilling group due to higher than anticipated drilling days," he said. "Despite the significant miss on revenue, margins were in line with our forecast, a testament, in our view, to Total's lean cost structure and unwillingness to put equipment to work without generating adequate returns. In the company's drilling group, revenue per operating day was down 19 per cent year over year while utilization on its 18 rigs fell to 18 per cent from 55 per cent in the prior year."
In reaction to the miss, Mr. Treadwell reduced his revenue forecast for 2016 by 15 per cent, due largely to a drop in expectations for the rentals and compressions segments. His EPS estimates for both 2015 and 2016 also fell, declining from 73 cents and $1.25 to 43 cents and 91 cents, respectively.
"With the step down in revenue in both rentals and compression, we are lowering our top line forecasts in both segments through the short-term as it appears Total is choosing (wisely in our view) to not participate in a marketplace that is likely operating near cash costs for some equipment, notably in rental equipment such as tanks," said Mr. Treadwell. "However, with resilient margins displayed even in a slowing revenue environment, we would expect incremental margin pressure to be modest, barring further restructuring or material incremental revenue deceleration."
"The company's balance sheet remains strong, in spite of a nearly $5-million reduction in cash balances. We believe Total remains one of the most likely names to execute some level of consolidation, especially in the rentals segment."
Mr. Treadwell lowered his target price for the stock to $16 from $18. Consensus is $17.56.
"At 7.6x our 2016 EV/EBITDAS estimates, Total trades above its larger peers," he said. "We believe the premium is warranted based on the company's broad revenue base and pristine balance sheet, more than offseting its smaller size. We believe that the company's strong balance sheet and appetite for acquisitions open the possibility of a larger transaction that may re-cast the investment thesis and potentially re-value the equity to the upside."
A potential takeover offer from Anadarko Petroleum Corp. indicates Apache Corp. (APA-N) is undervalued compared to its peers, said RBC Dominion Securities analyst Leo Mariani.
According to Bloomberg, Apache received an unsolicited takeover approach that would be the largest for an independent producer in the United States this year. The company rejected the initial offer from Anadarko and is working with Goldman Sachs Group Inc. on a strategy going forward.
"We think this move makes sense from a buyer's perspective as we see APA's stock as relatively undervalued," said Mr. Mariani, who said he believes the stock is pricing in a "a healthy discount" even after jumping 13 per cent on Monday following the Bloomberg report.
"Apache is currently reflecting $68 WTI oil prices long-term versus peers at $66-$84," he said. "Additionally, APA is trading at a 5.6x multiple of 2016 Adjusted EBITDA-x and a 4.3x multiple on 2017 based on RBC's numbers. This compares favourably to peers who trade in the range of 7-12x in 2016 and 5-10x in 2017."
With $1.8-billion (U.S.) in working capital and an undrawn $3.5-billion revolver, Mr. Mariani said the company has one of the stronger balance sheets in the sector. Based on that, he feels it has the ability to wait out current commodity weakness, adding "there is no need for them to pursue a sale of the company at this time."
"We believe a reasonable takeout price for APA would be in the $70-$80 per share range," he said. "This would reflect a long-term WTI oil price of $75-$80 which we see as a more reasonable mid-cycle recovery case over the next several years plus a premium needed to entice a transaction to occur. This would also roughly coincide with APA's trading price from one year ago in a more normal oil price environment."
He added: "We believe the turnaround story is nicely underway, and APA is positioned to grow production and cash flow organically over the next few years from its existing drilling inventory. In our view, the quality of the Company's Egyptian and Permian assets are underappreciated by the market as these properties can make solid returns in a $50 oil world."
Maintaining his "outperform" rating for the stock, he raised his target price to $62 (U.S.) from $60. The analyst average is $55.33, according to Bloomberg.
The portfolio of Melcor Real Estate Investment Trust (MR.UN-T) has demonstrated resilience to the struggles of the Alberta economy, said Canaccord Genuity Jenny Ma.
Believing the "Alberta risk appears to be priced in," she upgraded her rating for the REIT to "buy" from "hold" based on an attractive valuation.
"While uncertainty continues to loom for the Alberta economy, we believe that Melcor's discount valuation at a 13.2-per-cent discount to net asset value and the lowest forward multiple amongst its peer group and attractive yield (which is well-covered by adjusted funds from operation) adequately account for the risk. With a forecast total return of 20 per cent, we are upgrading our rating."
Melcor reported third-quarter funds from operations per diluted unit of 26 cents, an increase of 15.5 per cent from the same period in 2014 and ahead of the projection of both Ms. Ma and the consensus of 24 cents. The analyst said the "strong" growth was driven by "significant" acquisition activity completed over the past year.
"Melcor is currently trading at 9.7x our estimate of 2016 AFFO, below its Canadian diversified commercial REIT/REOC peers under coverage which are currently trading at a simple average 2016 AFFO multiple of 13.0x," said Ms. Ma. "While Melcor trades at a discount multiple compared to its peers, we believe this reflects the REIT's smaller size and significant concentration in Alberta."
She maintained her price target of $8.50. The consensus is $8.85.
Autodesk Inc (ADSK-Q) is a "very good asset," said Canaccord Genuity analyst Richard Davis, despite downgrading his rating for the tech company to "hold."
He added "it is likely that at some point in the future we'll be back with a buy rating."
Mr. Davis explained his rationale for the change: "In our extended analyst day note from late September we asserted that: 1) we were quite confident that Autodesk has assembled a best-in-class suite and 2) the transition to cloud, while painful in the near-term financially, is the right strategy. We also noted that assuming our 2020 forecasts were right, if the stock breached $60, we would consider a downgrade to hold because the prospective return would dip below 10 per cent. With the revelation that an activist owns a position, ADSK shares have breached our threshold."
He noted the presence of activist investor Sachem Head Capital, which holds 5.7 per cent of the Autodesk's shares, but he does not expect major restructuring.
"Autodesk's platform is arguably best-in-class, so there is little to be done on that front," said Mr. Davis. "We likewise believe it would be quite ill-advised to do the classic 'lever up and pay a dividend or buy back more stock' just as the firm is about to see margins and cash flow compress in a transition to subscription and cloud."
With a recent rise in share price, including a 7.22-per-cent jump over the last five days heading into Tuesday trading, Mr. Davis said he simply could not maintain a buy rating.
"Therefore, this is a good news/bad news research note inasmuch as we believe Autodesk has built a tremendous asset that is about to jump ahead of its competition. However, unless investors believe 'it is different this time' and a design company like Autodesk will get a new, wholly unprecedented valuation in 2019, then the risk/reward up here at $63 is not especially compelling. The fact is that we have incinerated far too many investors with buy ratings based on the hope that valuations would rise through and stay at unprecedented levels. That strategy didn't work in 2000, it failed in 2014 and public investors are discovering it doesn't work in the pre-IPO unicorn world (thankfully we don't have investment ratings on those companies)."
He maintained a $60 (U.S.) target, compared to a consensus of $63.81.
Credit Suisse analyst Robert Moskow sees a lack of valuation upside for Dean Foods Co. (DF-N) in relation to its peers.
Accordingly, he downgraded his rating for the stock to "underperform" from "neutral."
"The dairy industry cycle turned highly favourable for Dean this year as rising dairy supplies radically reduced and stabilized Dean's input costs," said Mr. Moskow. "But the underlying challenges facing the dairy processing industry, including declining consumer demand and excess process capacity, have not gone away. We fear that consensus estimates will go lower from here as the dairy cycle corrects itself and farmers cut back on production to boost dairy prices. As a result, we think Dean's stock has less-than-average upside over the next 12 months in relation to our food stock coverage."
The company, the largest U.S. milk processor, announced third-quarter earnings per share of 30 cents (U.S.), topping consensus projections of 24 cents. The company's management provided full-year EPS guidance of $1.15 to $1.25, ahead of a $1.05 consensus. It also reported a better-than-expected profit as it kept high prices despite a drop in the costs of raw milk.
In reaction to the quarterly "beat," the stock jumped 7.3 per cent on Monday, finishing at a new 100-day high. However, Mr. Davis said he thinks the stock will "struggle to fetch a multiple much higher than 6 times the perceived peak EBITDA of $400-million."
"We might be overestimating the speed at which dairy prices will turn higher," he said. "In addition, we might be underestimating the positive impact of management's strategic shift in its selling and marketing efforts toward a national brand and higher price realization. Dean's market share improved 10 basis points sequentially in the third quarter despite a 9-per-cent increase in its branded price premium over private label. However, we have trouble believing that these efforts will fully insulate the business from what has historically been such a volatile industry."
He lowered his target price by a dollar to $18 (U.S.). Consensus is $18.86.
In other analyst actions:
Acerus Pharmaceuticals Corp (ASP-T) was downgraded to "sector perform" from "outperform" at RBC Capital by equity analyst Douglas Miehm. The 12-month target price is 35 cents (Canadian) per share.
Black Knight Financial Services Inc (BKFS-N) was downgraded to "neutral" from "buy" at Monness Crespi by equity analyst Alexander Veytsman.
Big Rock Brewery Inc (BR-T) was downgraded to "reduce" from "market perform" at Cormark Securities by equity analyst Marc Robinson. The 12-month target price is $4.50 (Canadian) per share.
Credit Acceptance Corp (CACC-Q) was raised to "neutral" from "sell" at Compass Point by equity analyst Lucy Webster. The 12-month target price is $150 (U.S.) per share.
CEB Inc (CEB-N) was rated new "buy" at Cantor Fitzgerald by equity analyst Joseph Foresi. The 12-month target price is $86 (U.S.) per share.
Capstone Infrastructure Corp (CSE-T) was downgraded to "market perform" from "outperform" at BMO Capital Markets by equity analyst Ben Pham. The target price is $3 (Canadian) per share.
Equity Residential (EQR-N) was rated new "hold" at BB&T Capital by equity analyst David Toti. The 12-month target price is $85 (U.S.) per share.
Ensign Energy Services Inc (ESI-T) was downgraded to "market perform" from "outperform" at FirstEnergy Capital by equity analyst Ian Gillies. The 12- month target price is $9.50 (Canadian) per share.
Essex Property Trust Inc (ESS-N) was rated new "buy" at BB&T Capital by equity analyst David Toti. The 12-month target price is $259.50 (U.S.) per share.
IHS Inc (IHS-N) was rated new "hold" at Cantor Fitzgerald by equity analyst Joseph Foresi. The 12-month target price is $119 (U.S.) per share.
Jazz Pharmaceuticals PLC (JAZZ-Q) was downgraded to "neutral" from "buy" at Mizuho Securities USA by equity analyst Irina Koffler. The 12-month target price is $140 (U.S.) per share.
Moody's Corp (MCO-N) was rated new "hold" at Cantor Fitzgerald by equity analyst Joseph Foresi. The 12-month target price is $98 (U.S.) per share.
Newmarket Gold Inc (NMI-T) was rated new "buy" at Beacon Secs by equity analyst Michael Curran. The 12-month target price is $2.75 (Canadian) per share.
NorthWest Healthcare Properties Real Estate Investment Trust (NWH.UN-T) was rated new "hold" at Canaccord Genuity by equity analyst Jenny Ma. The 12- month target price is $8.75 (Canadian) per share.
Verisk Analytics Inc (VRSK-Q) was rated new "buy" at Cantor Fitzgerald by equity analyst Joseph Foresi. The 12-month target price is $79 (U.S.) per share.
With files from Bloomberg News