Tuesday’s analyst upgrades and downgrades

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

Credit Suisse analyst Kevin Choquette moved his rating for Bank of Montreal (BMO-T) based on its current valuation and the expectation of a decline in a U.S. dollar tailwind in the fourth-quarter of 2016.

Downgrading the bank to "neutral" from "outperform," Mr. Choquette noted its relative price-to-earnings to the bank group is "high at an 8-per-cent premium, well above its historic mean."

"We have liked BMO partially on the [U.S. dollar] earnings upside, which has been positive, with two more quarters (Q2 & Q3) of easy comps before tailwind decline in Q4/16 and Q1/17 headwinds," he said.

"If U.S. dollar/Canadian dollar stays the same as current levels, the USD appreciation (average) would decline from 18 per cent in Q1/16 to 8 per cent Q2, 7 per cent Q3, 1 per cent Q4 and negative 3 per cent Q1/17."

Mr. Choquette maintained his $90 target price. The analyst consensus is $79.47, according to Thomson Reuters.

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The removal of Enbridge Inc.'s (ENB-T) funding overhang through a $2.3-billion common equity issuance is more important than the near-term dilution, said Credit Suisse analyst Andrew Kuske, who reinstated coverage of the stock following a restricted period.

"In our view, ENB's recent equity offering illustrates the duality of affiliate vehicles (i.e., contagion complexity versus efficient capital market segmentation)," said Mr. Kuske. ENB is in the early innings of an affiliate funding strategy and, among other factors, a de-risking market along with a variety of MLP and commodity specific issues impaired the recent utility of this approach. Very positively, Enbridge Group's funding needs are now resolved for the foreseeable future. With the overhang being overcome, we believe the Street's focus should shift toward ENB's potential reinvention path beyond the current capital program."

Mr. Kuske said Enbridge has one of North America's largest infrastructure "footprints." However, he said it requires "reinvention" given the current crude market.

"ENB's advantaged asset position is poised to deliver visible growth until the end of the decade," he said. "With the current malaise in crude pricing, ENB's growth beyond that point in time looks more questionable. As a result, we believe ENB needs to shift capital allocation towards non-liquids business groups. Given the relative group sizes, the pace of reinvention would likely require acquisitions which are not a core part of ENB's culture."

Mr. Kuske reinstated his "neutral" rating for the stock with a $54 target price. Consensus is $56.45.

"We continue to believe Enbridge Inc. holds an enviable set of assets and the valuation is historically attractive in light of the forecasted dividend growth," he said. "Yet, we believe the current market environment is more problematic for the stock's longer-term growth prospects, but the funding situation is now largely resolved … Accordingly, in a manner relatively consistent with other crude contagion stocks … we maintain ENB at Neutral."

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In reaction to a reduction in its 2016 earnings outlook, Wunderlich Securities analyst Rommel Dionisio downgraded his rating for Performance Sports Group (PSG-N, PSG-T) to "hold" from "buy."

On Tuesday, the Exeter, N.H.-based company, formerly known as Bauer Performance Sports Ltd., reduced its 2016 adjusted earnings per share forecast to 12 to 14 cents (U.S.) from 66 to 69 cents. Analysts had expected 66 cents, already a decline from the $1.02 result from the 2015 fiscal year.

It pointed to three factors for the reduction: a write down of the receivable balance from Sports Authority Inc., which filed for U.S. bankruptcy protection on March 2 (9 cents per share); reduction in sales due to weakness in the baseball/softball market (31 cents) and additional bad debt reserves primarily for "certain" U.S. hockey customers (19 cents).

For the third quarter, which ended in February, PSG expects an EPS loss of 29 cents, versus the consensus projection of a profit of 13 cents.

Mr. Dionisio moved his target price for the stock to $6 from $12. The analyst average is $11.13.

GMP Securities also downgraded its rating to "buy" from "hold."

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Raging River Exploration Inc. (RRX-T) posted "solid" fourth-quarter 2015 financial results and has "continued upside potential," according to Canaccord Genuity analyst Dennis Fong.

On Monday, the Calgary-based energy company reported cash flow per share of 20 cents, in line with Mr. Fong's projection and a cent below the consensus estimate. Production for the quarter of 14,771 barrels of oil equivalent (boe/d) had previously been released in a February reserves updated.

"The company had completed all Q1/16 capital activities with a total of 57.5 net Viking wells drilled on its lands," said Mr. Fong. "Raging River saw average on-stream costs during the quarter of [approximately] $680,000 per well, representing 25-per-cent year over-year cost reductions and 15 per cent below our type curve of $800,000 per well. In addition to the cost savings, the company has begun testing longer lateral horizontals with associated costs of $250,000 higher than the shorter length wells and is encouraged by the results."

Mr. Fong also said the company has "dry powder" for acquisitions, noting the potential for transactions from 1,000 to 2,500 boe/d at a cost of between $45,000 to $65,000 per flowing barrel. He said: "We believe the company could enter into an acquisition of up to 2,500 boe/d at $45,000 per boe/d and stay under [approximately] 1.5 times run-rate D/CF [discounted cashflow] on strip pricing."

Emphasizing potential organic and inorganic future growth, Mr. Fong raised his price target for the stock to $11 from $10.50. The analyst average price target is $11.06, according to Bloomberg.

He maintained his "buy" rating.

"Raging River continues to be a strong performer even in the current volatile commodity price environment," he said. "The company boasts a premium multiple which reflects management's track record of shareholder value creation, the company's clean balance sheet and its ability show profitable returns even in a depressed commodity price environment. We expect this premium multiple to continue and for management to use this advantage to continue pursuing accretive acquisitions."

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Cost-reduction efforts by Savanna Energy Services Corp. (SVY-T) are taking effect, said RBC Dominion Securities analyst Dan McDonald.

Savanna reported fourth-quarter adjusted earnings before interest, taxes, depreciation and amortization of $22.6-million, in line with Mr. McDonald's projection of $22.5-million and above the $21-million consensus. Adjusted earnings per share of a loss of 11 cents fell below the estimates of Mr. McDonald (an 8-cent loss) and the Street (a 10-cent loss).

"Overall, results showed the benefit of ongoing cost reduction efforts, which SVY now pegs at $52-million annually, allowing debt levels to fall a further 6 per cent quarter over quarter," the analyst said.

He added: "SVY has done a good job of removing costs, which, when combined with higher margin rigs working, led to operating margins flat basis points (bps) year over year in contract drilling, while drilling days were down 64 per cent. Corporate EBITDA margin of 22.4 per cent was up 210 bps year over year. We do expect margins to come under further pressure in 2016, in line with its peers, as lower demand combines with further pricing concessions.

SVY exited 2015 with $273-million in net debt, improving $18.1-million quarter over quarter. Importantly, $175-million of this debt is long term-notes, due May 2018. SVY has done a good job of reducing long-term debt by $73.5-million in 2015, bringing its leverage in line with its land drilling group, with a forecast net debt/capitalization of 33 per cent in 2016, versus the group average of 34 per cent. Our 2016 forecast calls for $35-million in free cash flow (FCF)."

Mr. McDonald said his estimates for the company did not change "materially" for the company, though his 2017 diluted earnings per share projection fell by five cents to a loss of 52 cents. He noted "the further deterioration in North American drilling demand to date in 2016."

Keeping his "sector perform" rating for the stock, he raised his price target by 50 cents to $2. The analyst average is $2.11.

"Our price target is now based on an enterprise value/EBITDA multiple of 6.8 times, up from 5.3 times previously, as overall sector multiples have expanded with rising oil prices and improving investor sentiment," said Mr. McDonald.

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Sabina Gold & Silver Corp. (SBB-T)  is "more than just making the grade," said Canaccord Genuity analyst Eric Zaunscherb, who initiated coverage of the stock with a "speculative buy" rating.

"We recommend purchase to investors cognizant of the risks associated with exploration and development companies but seeking exposure to a first-rate gold project with one of the highest open pit feed grades globally, in a low-sovereign-risk jurisdiction," said Mr. Zaunscherb.

He added: "We believe that Sabina features a strong management team and board with the demonstrable capacity to finance, advance and build mine projects."

Sabina, based in North Vancouver, owns the Black River gold project in Nunavut. The analyst noted the project covers a "key" portion of a greenstone belt that has "extensive" gold mineralization, estimated at 7.2 million ounces at an average grade of 6.21 grams per tonne gold.

"We consider the exploration potential to expand this inventory to be excellent," said Mr. Zaunscherb, who estimates the project to commence gold sales in 2020 with an annual amount of 200,000 ounces at an average cost of $532 (U.S.) per ounce.

He set a price target for the stock of $1.50. The analyst consensus is $1.14.

"Sabina is trading at 0.25 times our net asset value (5 per cent), which is a significant discount to an average of 0.38x for covered exploration and development companies in our universe," he said. "We expect Sabina to 'move right' as Back River is de-risked and the market re-rates, crystalizing our current 44-per-cent projected return.

"There are multiple potential catalysts as Sabina advances through the permitting process and executes 2016 exploration plans. Success at the nearby Kogoyok nearsurface discovery, for example, could be impactful to NAV by extending Back River's mine life as well as deferring costly underground development in the mine plan."

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BMO Nesbitt Burns analyst John Morris raised his target price for Urban Outfitters Inc. (URBN-Q) after better-than-expected fourth-quarter 2015 results, highlighted by better gross margins.

The retailer reported earnings per share of 61 cents (U.S.), topping Mr. Morris's projection by 4 cents. Gross margin was 34.5 per cent, ahead of the consensus projection of 33.9 per cent.

"EPS were ahead of expectations on better gross margins relative to expectations as well as a lower share count and lower SG&A," the  analyst said. "Gross margins improved primarily from lower markdowns at the core Urban Outfitters brand and supports our recent data-mining reads, which showed sequential improvement in the SKU markdown rate. In terms of category performance, strength was driven by non-apparel categories home and intimates at Urban Outfitters and Anthropologie."

"Selling, General and Administrative Expense (or SG&A) spending is expected to be up in the high-single digits in 1Q16 and up in the mid-single digits for the year as the company invests further in marketing, technology, and infrastructure to support e-commerce and omni-channel initiatives. Gross margins could improve slightly on higher maintained margin. The company repurchased 6.6 million shares in the quarter and has 7.3 million remaining on its current authorization; we believe it will allocate addition capital to share repurchases as the current authorization is exhausted."

Mr. Morris raised his EPS projection to $2.01 from $1.90 "in anticipating of a lower share count." He initiated a 2017 estimate of $2.16.

Maintaining his "market perform" rating, he increased his target to $28 from $22. The analyst average is $31.79.

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In other analyst actions:

Amicus Therapeutics Inc (FOLD-Q) was raised to "buy" from "neutral" at Janney Montgomery by equity analyst Douglas Roy Buchanan. The 12-month target price is $12 (U.S.) per share.

Manitowoc Foodservice Inc (MFS-N) was rated new "neutral" at Susquehanna by equity analyst Ted Grace. The 12-month target price is $14 (U.S.) per share. It was rated new "equal-weight" at Barclays by equity analyst Robert Wertheimer with a target price of $12 per share.

M/A-COM Technology Solutions Holdings Inc (MTSI-Q) was rated new "buy" at Evercore ISI by equity analyst C Muse. The 12-month target price is $50 (U.S.) per share.

Paylocity Holding Corp (PCTY-Q) was rated new "buy" at Craig-Hallum by equity analyst Jeff Van Rhee. The 12-month target price is $39 (U.S.) per share.

Steel Dynamics Inc (STLD-Q) was raised to "buy" from "hold" at Berenberg by equity analyst Alessandro Abate. The target price is $23.50 (U.S.) per share.

Sykes Enterprises Inc (SYKE-Q) was raised to "buy" from "hold" at Craig-Hallum by equity analyst Mike Malouf. The 12-month target price is $34 (U.S.) per share.

Valspar Corp (VAL-N) was downgraded to "sector weight" from "overweight" at KeyBanc by equity analyst Ivan Marcuse.

With files from Bloomberg News