Tuesday's analyst upgrades and downgrades

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

Oil and the related losses brought on by the commodity's struggles are the overriding issue facing the Canadian bank sector, said CIBC World Markets analyst Robert Sedran in a research report previewing the second-quarter earnings season.

"It has been an interesting year in the markets and, after a terrible start, bank stocks turned around in mid-February and are now modestly outperforming the index," he said. "Why? Oil went from a low low price to a higher low price. In other words, there was an improvement in the oil price, but at least so far, only to levels that indicate less stress in the system, not an all-clear. Still though, there is some logic to that rebound in the shares ... loan losses should be loosely tied to the price of oil."

Mr. Sedran said the share prices of the Big Six banks declined by an average of 10 per cent through the middle of February, adding they've since rebounded "smartly." Gains over the past three months have averaged 14 per cent and 7 per cent for the year, ahead of the S&P/TSX Composite.

"With the strength in the shares, however, a second issue has become more topical: valuation," the analyst said. "We have been using a target multiple of a little over 10 times rather than the 12-times pre-crisis average to reflect a higher cost of equity owing to slower growth and higher risks. We have perhaps been too conservative and so are now using closer to the 10.9x post-crisis average on our F2017 EPS estimates, which we place in historical context in this note. As for the quarter, loan losses have been the focus for a while now. Last quarter saw the first signs of cracks and pre-announcement season was a busy one with NA [National Bank] and CWB [Canadian Western Bank] signaling higher losses (not to mention a restructuring charge from Scotiabank).

"More loan losses are coming from all of them. On the capital markets front, we look for a better quarter on fee-based revenues. Meanwhile, the margin remains a bigger concern than asset growth, which has been trending well. Our forecast calls for an average sequential earnings decline of 2 per cent (though up 1 per cent year over year) for the Big Five banks (National Bank is affected by the pre-announced sectoral)."

Mr. Sedran forecasts dividend increases for Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank and Laurentian Bank.

"At BMO, NA and LB, the dividend increase is in keeping with the every-other-quarter pattern," he said. "We note that Canadian Western Bank would have been scheduled to increase its dividend this quarter based on this pattern, but we forecast no move given that it sits at the higher end of its payout range target and faces heightened uncertainty around loan losses. CIBC has increased its dividend for the past six quarters, consistent with management's desire to move its payout ratio to the upper end of its target range. We assume there is at least one more move to come, though the end of this process will likely come soon unless earnings growth is better than we have assumed."

Admitting his "conservative disposition" for the banks' risk-reward profiles "tilted too far on the conservative side," he raised his target prices for the stocks "closer to the post-crisis average from the discount we had previously assumed."

His changes were:

- Bank of Montreal (BMO-T, sector performer) to $84 from $79. Consensus: $80.
- Bank of Nova Scotia (BNS-T, sector performer) to $65 from $61. Consensus: $64.71.
- Canadian Imperial Bank of Commerce (CM-T, not rated) to $103 from $96. Consensus: $98.50.
- National Bank of Canada (NA-T, sector performer) to $44 from $42. Consensus: $45.75.
- Royal Bank of Canada (RY-T, sector outperformer) to $81 from $78. Consensus: $78.50.
- Toronto-Dominion Bank (TD-T, sector outperformer) to $60 from $58. Consensus: $57.43.
- Canadian Western Bank (CWB-T, sector underperformer) to $26 from $25. Consensus: $25.02.
- Laurentian Bank of Canada (LB-T, sector performer) to $51 from $49. Consensus: $50.44.

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The "sharp" decline in the share price for Methanex Corp. (MEOH-Q, MX-T) over the last three weeks is in stark contrast to rising oil prices and improvement in the outlook for methanol, according to Raymond James analyst Steve Hansen.

In reaction to this difference, Mr. Hansen upgraded his rating for the Vancouver-based company to "strong buy" from "outperform."

"Global methanol prices continue to gain largely as expected, with U.S. spot methanol surging 45 per cent over the past 10 weeks as excess regional supply (and large commensurate price discount) continues to fade on sizeable export moves," said Mr. Hansen. "At the same time, European spot prices have rallied nearly 60 per cent over the same period on multiple supply outages (planned and unplanned), all while Asian spot prices have trended modestly higher (up 6.0 per cent). In short, the methanol price backdrop continues to look demonstrably better than earlier this year, in our view, with many of these gains yet to be reflected in Methanex's current regional contract prices — a common lag effect that we expect will adjust in the coming months."

Mr. Hansen believes the current price for shares, which closed at $29.55 (U.S.) on Monday, presents an attractive entry point for investors, while he maintained his $40 price target for the stock. The analyst consensus price target is $40.29, according to Thomson Reuters.

"Notwithstanding the improving methanol price backdrop described, we highlight that Methanex's share price has sharply decoupled versus rising Brent crude over the past three weeks — an uncharacteristic (and unjustified) break in performance, in our view," the analyst said. "Specifically, we highlight that Methanex shares have fallen 18.3 per cent since April 27, versus a 4.7-per-cent increase in Brent oil. In this context, we believe the recent pullback has created an attractive, risk-adjusted entry point for long-term investors."

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Though Raymond James analyst David Sadowski called the first gold production from Roxgold Inc.'s (ROG-X) flagship Yaramoko mine in Burkina Faso a "major milestone," he downgraded his rating for the company's shares to "outperform" from "strong buy" based on strong recent price performance.

Shares of the Toronto-based natural resource company have risen 100 per cent thus far in 2016, compared to a 90-per-cent rise for the Market Vectors Junior Gold Miners ETF (GDXJ).

"The stock is trading at 0.9 times NAV [net asset value] versus our junior gold producer peers at 1.1x, a discount we believe will narrow as ROG continues its market re-rating towards producer multiples, justifying our rating on the stock," said Mr. Sadowski.

The output at Yaramoko came a month ahead of schedule and commercial production is expected by the third quarter. Mr. Sadowski believes the company has "ample" funding for the remaining capital expenditures necessary to complete construction of the facility, in which it owns a 90-per-cent stake.

He also believes Yaramoko's 55 Zone holds "considerable exploration upside."

"With a current 11,000-metre drill program ongoing (targeting upper 430 metres of mine), we expect the release of exploration results and a revised resource estimate (2H16) to represent meaningful potential catalysts for the stock," said Mr. Sadowski.

Mr. Sadowski raised his target price for the stock to $1.70 from $1.50. Consensus is $1.51.

"We continue to encourage investors to build positions in ROG at current levels," the analyst said. "With the stock trading at 0.9x NAV vs. our junior producer peers at 1.1x, we believe this discount will continue to narrow as ROG declares and ramps up commercial production at Yaramoko. Furthermore, we believe there is ample exploration upside at both the 55 Zone and Bagassi south (satellite), that will be accretive to production (and NAV) over time."

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BMO Nesbitt Burns analyst Alexander Pearce said Fission Uranium Corp. (FCU-T) is his preferred exploration play.

Citing expansion potential, "greater" confidence in its resources and "attractive" valuation metrics, Mr. Pearce initiated coverage of the stock with an "outperform" rating.

"The company's project, Patterson Lake South (PLS), is located in the prolific uranium-producing region of the Athabasca Basin in Canada," the analyst said. "Fission is run by a management team with a proven track record of successfully finding and defining resources, having delineated 108 million pounds at PLS, with good potential for more to come. Its recent PEA provides a level of confidence in the economic rationale to continue to develop the resource base, suggesting the current resource is capable of supporting nearly 14Mlbpa U3O8 from an open pit and underground operation some nine years hence. In our view, the company could be attractive for M&A by an established player or new entrant looking for a foothold in the basin."

Mr. Pearce estimates the company has a net present value (NPV) of 75 cents. He claimed near-term earnings are "immaterial" given its status as an exploration play. However, according to his estimates, he believes its fully funded for the next two to three years of drilling and technical analysis based on its cash balance of $77-million.

He said near-term catalysts for the stock include an updated resource estimate and technical study in the middle of 2017.

Mr. Pearce did not set a target price for the stock. The analyst consensus is $1.73.

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BMO Nesbitt Burns analyst Wayne Hood dropped his financial expectations and target price for Nordstrom Inc. (JWN-N) upon further analysis of its "disappointing" first quarter.

The U.S. retailer reported adjusted earnings per share of 26 cents (U.S.), missing the 47-cent projection of both Mr. Hood and the consensus, after a 1.7-per-cent decline in consolidated comparable store sales. Mr. Hood had projected a 0.4-per-cent drop and the consensus was an increase of 0.1 per cent.

In reaction to the results, the company reduced its 2016 EPS guidance to $2.50 to $2.70 from $3.10 to $3.35. Mr. Hood reduced his full-year estimate to $2.64 from $3.22. His 2017 projection moved to $2.99 from $3.75.

"At this juncture, the reduction in EBITDA and associated cash flow caused us to assume the company would no longer repurchase additional common stock in 2016, compared to our prior assumption of $750-million," the analyst said. "In 2017, with the rebound in EBITDA we assume Nordstrom's will be able to buy back $1-billion in common stock."

Mr. Hood maintained his "market perform" rating and lowered his target to $41 from $54 "on the earnings revision as well as the factors we believe keep the multiple towards the low-end of the range until the company is able to solve for the points discussed." The analyst average is $40.97, according to Bloomberg.

He said: "Following the disappointing first quarter EPS print, the stock is down over 21 per cent year-to-date and trades at about 13x our 2017 EPS estimate, which is at the low-end of the five-year range of 12x to 22x. We expect the stock to remain at the low-end of the range until the company is able to: 1) restore comp-store sales growth in the full-line stores, 2) reaccelerate comp-store sales at Nordstrom Rack, 3) strike a better balance between full-price and promotional selling, 4) better align inventory with sales growth, therefore lowering markdown risk, and 5) articulate how management plans to recalibrate its growth plans."

Elsewhere, Northcoast Research analyst Jeffrey Stein upgraded the stock to "neutral" from "sell" while maintaining a $39 target.

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In other analyst actions:

American International Group Inc. (AIG-N) was raised to "outperform" from "market perform" at Wells Fargo by equity analyst Elyse Greenspan.

Barnes & Noble Inc. (BKS-N) was rated new "overweight" at Consumer Edge Research by equity analyst David Schick.

Colfax Corp. (CFX-N) was raised to "buy" from "hold" at BB&T Capital by equity analyst C Schon Williams. The 12-month target price is $34 (U.S.) per share.

Canadian Imperial Bank of Commerce (CM-T) was raised to "buy" from "market perform" at Cormark Securities by equity analyst Meny Grauman. The target price is $105 (Canadian) per share.

Darden Restaurants Inc. (DRI-N) was raised to "overweight" from "neutral" at Piper Jaffray by equity analyst Nicole Miller Regan. The 12-month target price is $78 (U.S.) per share.

Freeport-McMoRan Inc. (FCX-N) was raised to "buy" from "hold" at Jefferies by equity analyst Christopher Lafemina. The 12-month target price is $15 (U.S.) per share.

Halliburton Co. (HAL-N) was raised to "outperform" from "market perform" at FBR Capital Markets by equity analyst Thomas Curran. The 12-month target price is $49 (U.S.) per share.

Madalena Energy Inc. (MVN-X) was downgraded to "hold" from "speculative buy" at Mackie Research Capital by equity analyst Bill Newman. The target price is 20 cents (Canadian) per share.

Sierra Metals Inc. (SMT-T) was raised to "speculative buy" from "market perform" at Cormark Securities by equity analyst Alec Meikle. The 12-month target price is $1.95 (Canadian) per share.

Sovran Self Storage Inc. (SSS-N) was downgraded to "market perform" from "outperform" at BMO Capital Markets by equity analyst Paul Adornato. The target price is $120 (U.S.) per share.

Terex Corp. (TEX-N) was raised to "outperform" from "market perform" at Wells Fargo by equity analyst Andrew Casey.

With files from Bloomberg News