Inside the Market's roundup of some of today's key analyst actions
In response to a rebound in the prices for steel and oil from multi-year lows as well as sector valuations improvements, Raymond James analyst Frederic Bastien said the stock of Russel Metals Inc. (RUS-T) "has more room to run."
Increasing his target price for Russel, Mr. Bastien noted declines in quarterly steel shipments have begun to slow.
"Stats from the Metals Service Center Institute (MSCI) last week showed that Canadian volumes slipped 11 per cent year-over-year in March after logging a slight increase in February, while U.S. shipments fell 9 per cent," he said. "Importantly the monthly data effected a 5-per-cent decrease in Canadian volumes for 1Q16 and a 9-per-cent drop in U.S. shipments. While these results at first blush may not be anything to write home about, they reflect sequential improvements from the declines of 16 per cent and 11 per cent experienced on both sides of the 49th parallel in 4Q15. Another encouraging data point lies in inventories, which hit multi-year lows for this time of year. Canadian inventories represent 3.0 months of supply versus 3.8 months a year ago, while U.S. inventories equate to only 2.3 months of supply. For these reasons we advance that Russel's Metals Service Centers (MSC) division is approaching an inflection point."
He added: "Further validation that better days may lie ahead for Russel can be found in North American steel prices, which have recovered some 20 per cent since hitting bottom at the end of 2015. Directionally we expect this trend to continue as US demand for non-residential construction remains firm, pressure from imports abates and U.S. officials look to enforce stricter anti-dumping duties. Another positive for the stock is oil's rebound to the low $40s — a move directionally consistent with Raymond James Ltd.'s assumption for average WTI prices of $42/barrel and $47/bbl in 2016 and 2017, respectively."
Ahead of the release of the company's first-quarter results on May 3, Mr. Bastien tweaked his quarterly earnings per share projections. Accounting for a lower earnings projection for its energy segment due to warmer-than-normal temperatures, his EPS fell to 14 cents from 16 cents. He also dropped his second-quarter estimate by a penny to 27 cents, however his full-year expectation of $1.15 did not change.
Maintaining his "outperform" rating, he raised his target price to $23 from $20. The analyst consensus price target is $20, according to Thomson Reuters.
"Our new target reflects a forward EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization] multiple of 8.5 times that is up from 8.0x previously, but consistent with the Metals Service Centers' 5-year average of 8.4x," Mr. Bastien said. "Although Russel's valuation has improved materially from earlier this year, we believe it remains attractive relative to Reliance Steel & Aluminum's [RS-N]."
On Monday, Rogers reported wireless revenues of $1.89-billion, a 5.4-per-cent increase year over year and topping Mr. McReynolds's projection of $1.853-billion. Wireless EBITDA of $763-million was a decline of 0.3 per cent from the previous year and below the analyst's $785-million estimate.
"The negative surprise in the quarter was a decrease in wireless margins with network EBITDA margins down 175 basis points year over year (versus our negative 27 basis points estimate) and versus a decline of 63 bps year over year in the second half of 2015," said Mr. McReynolds. "Against the backdrop of increased volatility in wireless profitability through 2015, management attributed the YoY pressure in Q1/16 to elevated COA/COR in a competitive/subsidy-heavy environment and a lingering double cohort. While the ramp-up in promotional activity in March was well known, the magnitude of the margin pressure was greater than we anticipated. Despite this softer start to the year, management does expect the margin trend to improve as the year progresses (not unlike 2015) and is targeting flat wireless margins overall for 2016. We have recalibrated our wireless margin forecast and now assume a YoY decline of -49bps in 2016E (slightly more conservative versus management expectations)."
Mr. McReynolds said that, despite margin pressures, key wireless metrics, including postpaid net additions, blended average revenue per user (ARPU) growth and postpaid churn, showed "steady" improvements.
He added cable trends were largely unchanged from the previous quarters, noting management expects improvement by the end of the 2016 in the television division driven by the launch of all-IP.
Media revenue and earnings failed to meet his projections, due largely to weakness in conventional television and publishing. He said he expects that trend to continue, though management anticipates improvement as cost savings from restructuring are realized.
"Despite the pause in dividend growth, we continue to see an attractive set-up for the stock over the next 1-2 years reflecting: (i) industry trends (i.e., video-driven data growth, cord-cutting/shaving and television unbundling) that should favour the asset mix of Rogers (wireless exposure, cable/DOCSIS network, sports) relative to large-cap peers; (ii) steady improvement in the wireless subscriber-ARPU/ARPA [average revenue per account] balance; (iii) the potential for upside estimate revisions should customer service improvements, a revamped business market strategy and/or new cable offerings (including all-IP) gain traction; (iv) easing capex and cash taxes in 2016/2017; and (v) a valuation discount to large-cap peers (FTM [forward 12 months] enterprise value (EV)/EBITDA of 7.2x versus 8.0x for BCE and 7.7x for TELUS)."
Mr. McReynolds kept his "outperform" rating for the stock, but he lowered his target by a loonie to $54. The analyst average target price is $52.79.
"We have made changes to our forecast mainly to reflect: (i) lower wireless margins; (ii) higher wireless ARPU growth; and (iii) higher growth and margins at business solutions," he said.
BlackRock Inc. (BLK-N) is "an increasingly differentiated winner" following the U.S. Department of Labor's new fiduciary-duty rules affecting financial advisers, said Citi analyst William Katz.
He upgraded the stock to "buy" from "neutral."
"While clearly BLK is not a cheap stock – as measured by P/E [price to earnings] – we nonetheless see BLK as a 'core holding' and identify four incremental reasons to own the stock," he said. "First, 1Q results reinforce our building view that BLK is likely to be a major beneficiary around pending DoL reform. Second, we see ample runway for iShares, BLK's flagship passive platform, led by non-U.S., Smart Beta and FI. Third, we are particularly intrigued by the opportunity to leverage BLK's recent FutureAdvisor 'Robo model' with legacy BRS, creating an incremental revenue and growth segment and further differentiating BLK from the pack, the latter facing rising commoditization risks. Fourth, we see favourable margin dynamics continuing for BLK, allowing for adequate reinvestment to promulgate growth."
Mr. Katz said Blackrock is "increasingly well poised" to capture market share as financial advisory trends shift following the implementation of new fiduciary rules, requiring brokers who recommend investments for retirement meet a stricter set of standards. He pointed to two incremental drivers: "favourable" product mix and "major" technology and margin advantages over its peers.
He tweaked his earnings per share projections for 2016, 2017 and 2018 to $19.19 (U.S.), $21.90 and $25.01 from $19.19, $22.13 and $24.65, respectively. He said the changes were made largely to reflect lower performance fees, quarterly market impact and "numerous" line-item adjustments.
"While our revised target simply assumes BLK can retain its current P/E multiple over the next 12 months, we believe investors may come to view BLK more as a 'FinTech' play than simply grinding out nominal organic growth given mixed industry trends," he said. "Such a shift in valuation construct may not only bolster the current valuation, but could lead to moderate multiple expansion, even against a starting point of nearly $5-trillion in AUM [assets under management]."
He raised his target for the stock to $410 from $340. Consensus is $384.88.
"We screen BLK in two incremental ways – 'best of breed' analysis and using a SOTP [sum-of-the-parts] framework," said Mr. Katz. "Here, we believe investors are placing a very low multiple on "Legacy" (non-iShares and BRS) platform. If, as we suspect, BLK is successful in merging the advantages of passive plus technology, we believe investors may shift from thinking about BLK as a winner in a decaying sector to an incremental "FinTech" play, driving up the multiple given still robust 'TAM,' or Total Addressable Market."
BMO Nesbitt Burns analyst Brian Quast downgraded Primero Mining Corp. (P-T) to "market perform" from "outperform" in reaction to its first-quarter 2016 production results.
On Monday, Primero reported consolidated production of 36,158 gold equivalent ounces, lower than Mr. Quast's projection of 53,700. He said the 33-per-cent miss was largely attributed to new safety standards at its San Dimas mine to meet Ontario mining regulations.
The preliminary costs at the San Dimas facility were $998 per ounce of gold equivalent and all-in sustaining costs (AISC) of $1,362 per ounce, both higher than projected.
Primero also reduced its production guidance to 30,000 ounces to between 230,000 and 250,000 and raised its AISC estimate to $975-1,025/oz from $850-900/oz.
"The revised guidance reflects lower San Dimas production (and subsequently higher costs) because of the implementation of the new ground support, and higher cash costs at Black Fox, which reflect the inclusion of non-cash inventory draw down," said Mr. Quast.
The analyst also lowered his target price to $2.50 from $3.25 "as a result of lower 2016 cash flow stemming from lower production and higher costs." The average is $3.25.
Elsewhere, Cormark Securities analyst Richard Gray also downgraded the stock, moving it to "market perform" from "outperform." His target also moved to $2.50 from $3.25.
CIBC World Markets analyst Cosmos Chiu raised his target for Fortuna Silver Mines Inc. (FVI-T) upon release of its first-quarter production results.
The Vancouver-based company met the analyst's estimates by reporting production of 1.6 million ounces of silver and 9,264 ounces of gold as well as 9.1 million pounds of lead and 10.4 million pounds of zinc.
"Fortuna Silver is on track to achieving full-year guidance of 7.0 million ounces of silver and 42,800 ounces of gold, assuming the mill expansion at San Jose comes in as scheduled," said Mr. Chiu.
Rating Fortuna a "sector outperformer," Mr. Chiu raised his target to $6.75 from $5.75. The analyst consensus is $5.96.
"Fortuna has been a solid development story, delivering consistent high-margin growth for many years now," said Mr. Chiu. "Until the discovery of Trinindad North, this growth profile was at risk of losing its momentum, but the company now seems to be set to deliver another 50 per cent or so expansion over the next three years. While 2015 represented a year of consolidation, this expansion of low-cost ounces is expected from San Jose in 2016."
Canaccord Genuity analyst Kyle Franklin expressed confidence in Labrador Iron Ore Corp.'s (LIF-T) ability to sustain its annual dividend of $1 per share for 2016 given the recent strength in iron ore prices.
"We highlight the relatively attractive 7.2-per-cent current dividend yield and, in our view, increased stability of the dividend for 2016," said Mr. Franklin, who increased his dividend forecast to $1 from 85 cents.
He added: "We still remain cautious of a potential pullback in iron ore prices from current levels and the potential impact on LIF shares. In our view, there appears to be few signs of a slowdown in additional low cost iron ore production coming to market from the major producers in Australia and Brazil. We believe that Chinese steel makers will be hard-pressed to absorb new supply and that inventory levels are likely to rise again bringing back downward pressure on spot iron ore pricing."
Keeping his "buy" rating, he raised his target to $16 from $14. Consensus is $14.13.
"LIF has exhibited strong share price performance during 2016, up 45 per cent year to date," said Mr. Franklin. "Iron ore prices have experienced a substantial rebound since a mid-January low of $39.50 (U.S.) per tonne to now sit at $60/tonne, up 39 per cent year to date, with pellet premiums also rebounding this year to $30.50/tonne. Demand for iron ore in China has remained relatively healthy in the first part of 2016, in part, due to relatively low inventories at the beginning of the year and a weakening U.S. dollar. Current iron ore and pellet premium prices of $60/t and $30.5/t are well above our forecasts for the remainder of 2016 of $45/t and $28.5/t, respectively."
In other analyst actions:
AmerisourceBergen Corp (ABC-N) was rated new "market outperform" at Avondale Partners by equity analyst Greg Bolan. The 12-month target price is $111 (U.S.) per share.
Aphria Inc (APH-X) was rated new "speculative buy" at Mackie Research Capital by equity analyst Neal Gilmer. The 12-month target price is $2.25 (Canadian) per share.
Cardinal Health Inc (CAH-N) was rated new "market outperform" at Avondale Partners by equity analyst Greg Bolan. The 12-month target price is $111 (U.S.) per share.
Gazit-Globe Ltd (GZT-T) was rated new "outperform" at National Bank by equity analyst Matt Kornack. The 12-month target price is $14 (Canadian) per share.
Illumina Inc (ILMN-Q) was downgraded to "hold" from "buy" at Cantor Fitzgerald by equity analyst Bryan Brokmeier. The 12-month target price is $165 (U.S.) per share.
McKesson Corp (MCK-N) was rated new "market outperform" at Avondale Partners by equity analyst Greg Bolan. The 12-month target price is $203 (U.S.) per share.
Medivation Inc (MDVN-Q) was raised to "buy" from "hold" at Canaccord Genuity by equity analyst John Newman. The 12-month target price is $70 (U.S.) per share.
Mosaic Co (MOS-N) was downgraded to "underweight" from "equal- weight" at Barclays by equity analyst Matthew Korn. The target price is $22 (U.S.) per share.
Primero Mining Corp (P-T) was downgraded to "market perform" from "buy" at Cormark Securities by equity analyst Richard Gray. The 12-month target price is $3 (Canadian) per share.
Panera Bread Co (PNRA-Q) was raised to "buy" from "hold" at Jefferies by equity analyst Alexander Slagle. The 12-month target price is $245 (U.S.) per share.
Potash Corp of Saskatchewan Inc (POT-N) was downgraded to "underweight" from "equal-weight" at Barclays by equity analyst Matthew Korn. The target price is $14 (U.S.) per share.
Regions Financial Corp (RF-N) was raised to "outperform" from "market perform" at FBR Capital Markets by equity analyst Paul Miller. The 12-month target price is $10.50 (U.S.) per share.
Sunoco LP (SUN-N) was downgraded to "neutral" from "outperform" at Credit Suisse by equity analyst John Edwards. The target price is $36 (U.S.) per share.
Southwestern Energy Co (SWN-N) was downgraded to "sell" from "neutral" at UBS by equity analyst William Featherston. The 12-month target price is $9 (U.S.) per share.
Teranga Gold Corp (TGZ-T) was raised to "buy" from "hold" at Laurentian Bank by equity analyst Pierre Vaillancourt. The 12-month target price is $1 (Canadian) per share.
With files from Bloomberg News