Inside the Market's roundup of some of today's key analyst actions
The precious metals sector is approaching "fair value," according to Canaccord Genuity analyst Tony Lesiak, who believes a further rise in gold prices is necessary to facilitate "further material share performance in the current bull phase of the rally."
In updating his forward curve pricing assumptions and a subsequent 20-per-cent increase in his target price for the sector's stocks, Mr. Lesiak pointed to a 27-per-cent rise in the Amex Gold BUGS Index (HUI), which tracks the world's biggest gold producers, since April 7. That increase has come alongside a 6-per-cent increase in the price of gold and 17-per-cent jump in silver.
"Thus far in 2016, we have seen the HUI increase 127 per cent off the low in mid-January, a seven-times leverage to the underlying price of gold," he said. "It is interesting to note that while the current major gold equity rally is the second shortest in duration since 2000, it has exhibited one of the strongest daily average equity share performances, second only to the market crash recovery at the end of 2008. The intensity of the current upswing can be partly explained by the extreme low valuation starting point and the lack of accompanying cost inflation that we saw in the previous decade and hence improved margin benefit."
"We currently forecast an average return to target of just 17 per cent for the group," said Mr. Lesiak.
His target price changes included:
- Kinross to $7.75 from $6. Consensus is $5.86.
- Barrick to $26 from $23.50. Consensus: $19.68.
- Alamos to $9.50 from $8.50. Consensus: $8.27.
- Franco Nevada Corp. (FNV-T, hold) to $84 from $80. Consensus: $80.16.
- Osisko Gold Royalties Ltd. (OR-T, buy) to $30 from $19. Consensus: $17.72.
- Royal Gold Inc. (RGLD-Q, buy) to $71 (U.S.) from $66. Consensus: $60.99.
- Asanko Gold Inc. (AKG-T, hold) to $4.25 from $3.25. Consensus: $3.84.
- Torex Gold Resources Inc. (TXG-T, speculative buy) to $2.75 from $2.25. Consensus: $2.34.
- Agnico Eagle Mines Ltd. (AEM-T, buy) to $67.50 from $62. Consensus: $52.61.
- Argonaut Gold Inc. (AR-T, hold) to $3 from $2.50. Consensus: $2.64.
- B2Gold Corp. (BTO-T, buy) to $3.50 from $2.75. Consensus: $2.71.
- Centerra Gold Inc. (CG-T, buy) to $10 from $9. Consensus: $8.
- Claude Resources Inc. (CRJ-T, hold) to $2.15 from $1.50. Consensus: $1.59.
- Detour Gold Corp. (DGC-T, buy) to $32 from $29. Consensus: $26.88.
- Endeavour Mining Corp. (EDV-T, hold) to $17.50 from $16.50. Consensus: $17.29.
- Eldorado Gold Corp. (ELD-T, hold) to $5.75 from $5. Consensus: $5.63.
- Fortuna Silver Mines Inc. (FVI-T, hold) to $8.25 from $5.50. Consensus: $6.11.
- Goldcorp. Inc. (G-T, hold) to $26.50 from $22.50. Consensus: $25.62.
- IAMGOLD Corp. (IMG-T, hold) to $4.50 from $3.40. Consensus: $3.61.
- Klondex Mines Ltd. (KDX-T, buy) to $6 from $5. Consensus: $4.26.
- New Gold Inc. (NGD-T, hold) to $6.25 from $6. Consensus: $5.87.
- Richmont Mines Inc. (RIC-T, buy) to $11.50 from $10.50. Consensus: $9.08.
- Silver Wheaton Corp. (SLW-T, buy) to $30 from $26.50. Consensus: $27.33.
Short-term uncertainty is on the rise for Alimentation Couche-Tard Inc. (ATD.B-T), said Credit Suisse analyst David Hartley, who believes the stock is set for a "significant pause in its upward trajectory."
He downgraded his rating for the convenience story company to "underperform" from "neutral."
"The stock price has had an excellent run since 2009, but the valuation is near all-time highs owing to exuberant expectations for M&A or profitability and positive fund flows perhaps initiated by an oil price that collapsed," said Mr. Hartley. "Furthermore, we believe Street forecasts are too high, suggesting to us that downward revisions are imminent.
Mr. Hartley made the change after examining proprietary analysis of the supply of mergers and acquisitions possibilities in both North American and Europe. He concluded the M&A value creation expectations for Couche-Tard are unrealistic.
"Attractive deals may be fewer, take more time to consummate, and contribute less than the market thinks," the analyst said. "Does Europe offer opportunity to buy bigger consistently? … We find that [approximately] 6,000 sites could be available. However, expectations for transactions and value accretion may be overdone."
He added: "We believe the market is effectively pricing in Couche-Tard buying large targets every year. Couche may have the financial capacity to do so, but investors may not be properly discounting the probability, given that the company has never executed such a feat in the past. We have pointed out that there may be few attractive large scale assets available in Europe. Furthermore, as we have shown with potentially available U.S. assets, the level of accretion and returns may not be acceptable to a disciplined buyer such as Couche at current levels. The expected level of accretion based on previous SFR [Statoil Fuel & Retail AS] and/or PTRY [The Pantry Inc.] deal economics and synergies. The analysis points to the stock being overvalued by 11 per cent to 28 per cent."
Mr. Hartley lowered his price target for the stock to $47 from $61. Consensus is $68.05
He noted: "Our target forward P/E [price-to-earnings] multiple has been reduced to 16.5 times from 22.5x to reflect (1) the expected increase in uncertainty for short-term M&A opportunities, given potentially higher transaction prices and read-throughs from our proprietary analysis of short-term M&A supply; (2) the inclusion of significantly higher U.S. fuel margin assumptions; and (3) our view of increasing uncertainty surrounding impact of potentially adverse CAD/USD and oil price movement."
Credit Suisse analyst Kevin Choquette said he expects continued volatility in Canadian bank stocks based on elevated short interest.
"Canadian banks have rallied 19 per cent off 2016 lows and are up 9 per cent year to date, outperforming the TSX up 7 per cent, U.S. major banks down 7 per cent and Canadian Lifecos down 3 per cent," he said. "Short interest remains near record highs, however, given the strength in the rally and risk of higher energy provisions in the upcoming quarter (February/March redeterminations), although very manageable, we see some near-term trading risk."
In a research note on the sector, Mr. Choquette downgraded National Bank of Canada (NA-T) to "neutral" from "outperform" based on its strong performance thus far in 2016, up 10 per cent, as well as valuation "recovery" and higher-than-average exposure to the energy sector.
He moved his target price for the stock to $50 from $48. Consensus is $45.25.
Mr. Choquette upgraded Toronto-Dominion Bank (TD-T) to "outperform" from "neutral." He cited "lagging share price performance, up only 2 per cent year to date, the lowest of the major banks as well as its industry low exposure to oil and gas (0.8 per cent of loans) with continued benefits expected from the December U.S. rate hike, U.S. dollar (although slowing) and large restructuring charge (positive operating leverage)."
He moved his target to $65 from $62. Consensus is $56.87.
At the same time, the analyst raised his target prices by an average of 7 per cent.
"We expect resilient earnings to result in higher valuations and we continue to believe the pending credit cycle (housing and WTI) has been fully discounted by the market and short-sellers," he said.
His other changes were:
- Bank of Montreal (BMO-T) to $93 from $90. Consensus: $79.21.
- Bank of Nova Scotia (BNS-T) to $72 from $62. Consensus: $63.21.
- Canadian Imperial Bank of Commerce (CM-T) to $108 from $110. Consensus: $97.07.
- Royal Bank of Canada (RY-T) to $95 from $90. Consensus: $77.20.
- Canadian Western Bank (CWB-T) to $26 from $23. Consensus: $24.75.
- Laurentian Bank of Canada (LB-T) to $52 from $50. Consensus: $49.67.
Raymond James analyst Ken Avalos downgraded his rating for InterRent Real Estate Investment Trust (IIP.UN-T), citing the desire to "await a more attractive entry point."
In moving the REIT to "market perform" from "outperform," Mr. Avalos said the REIT has had a "terrific" start to 2016, rising 16 per cent in price in comparison to a 13-per-cent increase for the TSX Capped REIT Index.
"InterRent has been among the strong performers in the Canadian real estate space from a same-property NOI [net operating income] and NAV [net asset value] growth perspective over the last year, thanks in large part to management's ability to create value through upgrades and redevelopment of assets. We estimate the REIT has grown NAV 10 per cent annualized over the last four years."
"Our long-term thesis has not changed. Management has restocked the redevelopment pipeline following the completion of its LIV [apartment] project. The REIT has a solid runway of assets where in-suite renovations can generate a 15-20 per cent ROI [return on investment]. We expect this to help the REIT continue to generate sector-leading SPNOI [same property NOI] and NAV per unit growth. However, the REIT is trading just 2 per cent off its all-time high, trading liquidity is thin and we are hesitant to commit sizable new capital at current levels."
Mr. Avalos maintained his 6-12-month target price of $8 per unit. Consensus is $7.80.
"The REIT now trades at a 7-per-cent premium to our NAV and at a 5.2-per-cent implied cap rate," he said. "On both metrics, this is as about the most 'expensive' the REIT has ever looked. We are thus downgrading the stock solely due to the REIT's strong relative performance to start the year and corresponding valuation premium. We think the strong short-term outperformance is set to moderate and would recommend investors wait for a better entry point.
He added: "We believe the REIT has better than average NAV growth prospects, but we think the current implied valuation captures much of the near-term cash flow growth."
Raymond James analyst Ken Avalos also downgraded his rating for Pure Industrial Real Estate Trust (AAR.UN-T) in reaction to its performance thus far in the calendar year and based on a premium to his net asset value estimates.
"Since Kevan Gorrie joined PIRET, the REIT has shifted its strategic focus away from asset aggregation towards NAV per unit growth," said Mr. Avalos, who moved his rating to "market perform" from "outperform." "Recently, this has come with less dilutive equity issuance, a more flexible balance sheet, more value creation initiatives and an effort to high grade the portfolio. All of this, in our opinion, has made the REIT a much better company. This shows in the results as PIRET has delivered a 25-per-cent total return since Kevan was named co-CEO in January 2014 (versus a decline of 1 per cent for the TSX Capped REIT Index)."
"However, industrial fundamentals have softened recently as Edmonton and Calgary have seen sizable increases in vacancy as per CBRE data. Though PIRET has executed well in a tough environment, SPNOI has fallen for two consecutive quarters and the REIT is expected to see some large tenant move outs/downsizing in Alberta and the U.S. rents are likely under pressure in Alberta and likely to roll down on new and renewal leases. We expect the balance of 2016 to be somewhat difficult to navigate through for industrial landlords in general, even those as adept as PIRET."
Mr. Avalos did not change his target price of $5.25. Consensus is $5.21.
"The REIT now trades above NAV and at a 1.0-times multiple premium to its industrial peers," the analyst said. "We feel that with the recent outperformance, and the headwinds facing the industrial asset class, PIRET units should perform in-line with the broader market in the near-term."
Secure Energy Services Inc. (SES-T) lived up to its name in the first quarter, said BMO Nesbitt Burns analyst Michael Mazar.
On Monday, the Calgary-based company reported a quarterly adjusted loss of 5 cents and earnings before interest, taxes, depreciation and amortization (EBITDA) of $23-million, both in line with Mr. Mazar's forecasts.
"Very little to get excited about in this quarter, which is, perhaps, something to get excited about," said Mr. Mazar, who maintained an "outperform" rating for the stock. "While revenue declined by 40 per cent year over year, the company still managed to generate positive EBITDA - an increasingly rare capability in our space. EBITDA declined by only a third year over year. While much of Secure's ongoing strength is due to the production bias of the majority of its PRD [processing, recovery and disposal] segment's business, the company has also improved its cost structure meaningfully and has been able to reduce G&A expense on a sequential basis in each quarter of the downturn and by 38 per cent year over year."
Based on the results, Mr. Mazar raised his 2016 estimate to a 19-cent loss from a 21-cent loss. His 2017 projection moved to a 1-cent loss from a 4-cent loss.
"While Q1 results met the expectations of both us and the Street, predictability in the current uncertain activity environment is something that deserves a premium valuation, in our view," he said. "Despite considerable exposure to producer spending on the DS and OS sides of its business and to a lesser extent in PRD, commodity price weakness is mitigated by the strong production focus of the bulk of the company's PRD segment. Management's dedication to cost management makes SES a further enticing story."
He raised his target price for the stock by a loonie to $11. Consensus is $11.19.
There are opportunities for improvement at Wal-Mart Stores Inc. (WMT-N), according to RBC Dominion Securities analyst Scott Ciccarelli, but he does not see a magic elixir.
While initiating coverage of the stock with an "underperform" rating, he asked the question: "where do you go from the top of the mountain?"
"Wal-Mart's low-cost/low-price strategy drove it to the top of the retail food chain, but its already-massive size, intensifying competition, and the broader retailing shift towards e-commerce, heighten both top and bottom-line risk," said Mr. Ciccarelli. "Even after multiple investments/improvements, we believe there is greater downside risk than upside potential to earnings growth in the near/mid-term, which will likely weigh on future multiple expansion for the stock."
The analyst feels recent store closures and labour investments are a good step "in the right direction," but he said "a lot more changes need to be made, from greatly improving retail basics to further simplifying the portfolio."
"We also believe the company's significant earnings reset is likely a 'necessary evil' as it adapts to today's rapidly changing retail environment," he said.
He added: "We believe that due to its already-immense market share and the likelihood that everyone who was going to shop at Wal-Mart, already shops at Wal-Mart, the company's productivity loop has entered the phase of diminishing returns. Further, we believe that material, incremental share gains within the all-important grocery category (56 per cent of Wal-Mart U.S. sales) are likely to become more difficult to achieve given intensifying competition from legacy grocery competitors, deep discounters, and the growing importance of fresh and organic products, which don't play as well to its strengths."
He set a price target of $66 (U.S.). The analyst consensus is $64.92.
"Wal-Mart is undergoing a two-year, 15–20-per-cent downward reset in its earnings due to competitive pressures and accelerated investments in technology and labour," said Mr. Ciccarelli. "While the stock is not overly expensive at 16.1 times 2016 and 15.4 times 2017 EPS estimates and sports a 3-per-cent dividend yield, it has already bounced nearly 20 per cent from recent lows. Further, additional competitive pressures and investments heighten future earnings risk, in our view. Given this earnings uncertainty, multiple expansion seems unlikely in the near/mid-term."
In other analyst actions:
Alimentation Couche-Tard Inc. (ATD.B-T) was downgraded to "underperform" from "neutral" at Credit Suisse by equity analyst David Hartley. The target price is $47 (Canadian) per share.
Baidu Inc. (BIDU-Q) was downgraded to "neutral" from "buy" at GuoTai JunAn by equity analyst Ricky Lai. The target price is $187 (U.S.) per share.
CenturyLink Inc. (CTL-N) was downgraded to "market perform" from "outperform" at Wells Fargo by equity analyst Jennifer Fritzsche.
DreamWorks Animation SKG Inc. (DWA-Q) was raised to "hold" from "sell" at Topeka Capital by equity analyst David Miller. The 12-month target price is $41 (U.S.) per share.
International Paper Co. (IP-N) was downgraded to "hold" from "buy" at Jefferies by equity analyst Philip Ng. The 12-month target price is $47 (U.S.) per share.
Manitoba Telecom Services Inc. (MBT-T) was raised to "neutral" from "underperform" at Macquarie by equity analyst Greg Macdonald. The 12-month target price is $40 (Canadian) per share.
National Bank of Canada (NA-T) was downgraded to "neutral" from "outperform" at Credit Suisse by equity analyst Kevin Choquette. The target price is $50 (Canadian) per share.
Phillips 66 Partners LP (PSXP-N) was downgraded to "market perform" from "outperform" at Wells Fargo by equity analyst Michael Blum.
United Technologies Corp. (UTX-N) was downgraded to "sector perform" from "outperform" at RBC Capital by equity analyst Robert Stallard. The 12-month target price is $108 (U.S.) per share.
With files from Bloomberg News