Tuesday’s analyst upgrades and downgrades

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

The fourth-quarter 2016 results for DragonWave Inc. (DWI-T, DRWI-Q) highlighted the ongoing challenges for the company, according to Desjardins Securities analyst Maher Yaghi.

Citing an unclear growth path and funding concerns, Mr. Yaghi downgraded the wireless networking equipment maker to "sell" from "hold."

On May 18, DragonWave reported a 73-per-cent drop in revenue year over year, due largely to an end of a relationship with Nokia and, as Mr. Yaghi pointed out, "a widespread decline in most geographies across the company's footprint." Accordingly, the company's earnings before interest, taxes, depreciation and amortization fell to a loss of $7.6-million (U.S.) from a $2.4-million loss in the same quarter of the previous year.

"As expected, the company is still suffering from the termination of its long-standing partnership with Nokia," the analyst said. "However, there was also a sharp decline in direct and indirect sales which are not related to the partnership with Nokia. ... Management indicated on the call that a significant portion of this decline was caused by the fact that Reliance, an important customer in India, is not currently increasing the size of its network, thus reducing the need for DWI's products. However, the decline in sales for the direct and indirect segment is present across all geographies, except for the rest of the world. While the termination of the partnership with Nokia results from a situation that DWI is unable to control (the Nokia-Alcatel-Lucent merger), we do not see a similar reason that would justify the decline in sales in the direct and indirect segment. If this trend continues, DWI's cash production could be affected and make it more difficult to invest sufficient funds in R&D, which would reduce the attractiveness of future products."

Expressing concern about the company's debt and liquidity, Mr. Yaghi dropped his target price for the stock to $5 (Canadian), which is currently the analyst average, from $10.

"We continue to recommend that investors wait for more clarity on DragonWave's future sales and profitability outlook, and we see potential downside risk until funding is secured by a new facility agreement," he said. "Revenue trends are heavily impacted by the Nokia relationship woes, which in turn affects the company's capacity to return to profitability. We believe the company requires a strategic transaction to restart its growth path."

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Shares of Deere & Co. (DE-N) have underperformed "significantly" since 2011, according to BMO Nesbitt Burns analyst Joel Tiss.

That has led to an "under-owned stock trading at an attractive long-term valuation," he said.

Mr. Tiss upgraded his rating for the Illinois-based manufacturing company to "outperform" from "market perform."

"We have looked at the past three cycles for Deere and conclude that the company's revenue, operating margin, and return on capital (ROC) have all significantly improved over time from cycle to cycle," the analyst said. "We believe two important factors are currently being overlooked by investors: 1) the emphasis on equipment inventory in North America, which is overshadowing the more balanced inventory picture in the rest of the world; and 2) the combination of a positive industry structure -- consolidated supplier base and growing global crop demand -- and management's constant focus on returns, FCF (free cash flow) generation, and driving shareholder value.

"We acknowledge that the 2013 peak for revenue and operating margin was likely a high-water mark that Deere may not exceed anytime soon. However, with the diluted share count reduced to 315 million today versus 521 million in 1995, the EPS potential is greatly amplified."

Since the company reached its EPS peak of $9.08 (U.S.) in 2013, Mr. Tiss said it has worked to cut costs, output and inventory. He said those initiatives set "the stage for higher returns when crop prices finally rebound and volume eventually improves."

In reaction to the release of the company's second-quarter results last week, Mr. Tiss reduced his 2016 EPS projection to $3.85 from $4.05. His 2017 and 2018 estimates moved to $3.55 and $4.30, respectively, from $4 and $5.05.

He moved his target price for the stock to $96 from $70 "based on a mid-cycle multiple of 16x (times) applied to our mid-cycle EPS assumption of $6.00." The analyst average is $77.26, according to Bloomberg.

"With valuations of most industrial companies elevated versus history, we are comfortable using a 16x P/E multiple instead of 14.5x seen historically," he said.

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BMO Nesbitt Burns analyst Kenneth Zaslow believes the fundamentals for Archer Daniels Midland Co. (ADM-N) will hit a nadir in the second quarter before "vastly" improving in the second half of the 2016 fiscal year.

He upgraded his rating for the U.S. global food processing and commodities trading corporation to "outperform" from "market perform."

Mr. Zaslow said: "ADM's stock underperformance over the past 12 months creates an attractive entry to capitalize on: 1) reduced competition from South America; 2) stronger U.S. crush margins; 3) improving -- albeit not strong -- ethanol fundamentals; 4) its internal initiatives, which create an incremental $1.00-1.50 to EPS; and 5) ADM's strategic portfolio actions, which increase its relevance as an ingredient supplier to CPG companies and reduce earnings volatility."

He said the company's reduced earnings guidance of 60-70 cents "may have been premature." He said it has the capability to recapture a portion of it in the second half of the year.

"Notwithstanding the severe pressure in FY2Q16, we believe ADM has become a compelling investment, as its outlook is approaching an inflection point in 2Q16 and should continue to improve to a run rate of at least $3.10," he said. "First, the reduction in competition from South America has vastly improved the U.S. soybean crush margin outlook and shifted trade flows to the U.S. U.S. crush margins increased to $1.00 from $0.40-$0.50/bushel, while the smaller Brazilian safrinha corn and Argentina soybean crops materially improved the U.S. export margin outlook. Second, the ethanol outlook has improved with potentially tighter supply/demand dynamics in 2017. Third, we gain confidence in ADM's ability to generate $1.00-1.50 incremental EPS from efficiency, WILD acquisition, and share repurchases, while its portfolio reshaping should begin to stabilize earnings growth."

Mr. Zaslow said ingredient companies, like Archer Daniels Midland, are poised to become "more integral to innovation and reformulation."

He raised his target for the stock to $48 from $36 based on his improved 2017 earnings outlook. Consensus is $39.

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Ahead of the release of its fourth-quarter 2016 results on Wednesday after the markets close, RBC Dominion Securities analyst Amit Daryanani lowered his target for NetApp Inc. (NTAP-Q).

Mr. Daryanani expects the California-based storage and data management company to report revenue at the low end of its guidance ($1.35-billion U.S. to $1.5-billion) as a result of a "soft" market for disk-based storage products.

"Our revenue estimate of $1.4-billion (down 9 per cent) reflects our view of the storage market; however, savings from recently announced cost reduction plan could enable NTAP to report EPS at the higher end of the guidance range ($0.55-0.60) and help offset dilution from the SolidFire acquisition," said Mr. Daryanani. "Fundamentally, we think NTAP will continue to see competitive top line pressure from both large-scale enterprise vendors and emerging players compounded by broader storage market declines. How NTAP manages cost containment initiatives and potential for improving the accretion/dilution dynamics from SolidFire will be key areas of focus for the company and investors."

The analyst said his revenue and earnings per share projections for the quarter of $1.4-billion and 59 cents are in line with the Street ($1.4-billion and 58 cents). He expects gross margins of 61.5 per cent and operating margin of 15 per cent.

His second-quarter projections of $1.28-billion and 48 cents are slightly below the consensus of $1.27-billion and 45 cents.

Maintaining his "sector perform" rating, he lowered his target price to $26 from $29. Consensus is $24.78, according to Thomson Reuters.

"Examining multiples over the last cycle, we believe NetApp should trade closer to the low end of the historical 11–17x FTM P/E [forward 12 month price-to-earnings] range and we have adjusted our multiple accordingly, as we think SolidFire dilution headwinds will materially impact near-term EPS and make NTAP a much less attractive takeout candidate," Mr. Daryanani said. "We believe this valuation supports our Sector Perform rating."

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NYX Gaming Group Ltd. (NYX-X) is "open for business" following the completion of its acquisition of OpenBet (OB Topco Ltd.), said Canaccord Genuity analyst Kevin Wright.

"This is a transformational acquisition that moves NYX from its position as an owner of a significant volume of digital games to a leading software supplier for tier one sports betting operators," said Mr. Wright.

Calling OpenBet a "leading" sports bet software supplier, Mr. Wright said some of the largest online sports bet operators are its customers, including William Hill, SkyBet, Paddy Power and Ladbrokes

"[OpenBet] has focused on top tier providers with 1 to 2 new customers signed up per year," he said. "OpenBet does not cater to mid-tier operators where NYX's relationships are deep so future growth may come from a 'SkinnyBet' or OpenBet Light product."

Mr. Wright added NYX's core business is "growing quickly."

"The core business that includes the royalties and licensing segment continues to show rapid growth posting 37-per-cent year-over-year revenue growth in Q4/15," he said. The digital content library is large and while it is not considered 'top tier,' it is showing strong growth which we expect to continue in 2016; we estimate 11.9-per-cent year-over-year growth in the segment.

The company is scheduled to release quarterly earnings on May 26, and Mr. Wright said he expects "another strong result from the core royalty and licensing business during a seasonally slow quarter."

Maintaining his "buy" rating, he lowered his target price for the stock to $5 from $6.50 due largely to share dilution from the purchase. Consensus is $5.36.

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In other analyst actions:

America Movil SAB de CV (AMX-N) was raised to "neutral" from "reduce" at New Street Research by equity analyst Soomit Datta. The target price is $12.80 (U.S.) per share.

Anthem Inc. (ANTM-N) was downgraded to "neutral" from "buy" at Sterne Agee CRT by equity analyst Brian Wright.

Brookfield Asset Management Inc. (BAM-N) was rated new "outperform" at Keefe Bruyette by equity analyst Ann Dai. The 12-month target price is $41 (U.S.) per share.

Brick Brewing Co. Ltd. (BRB-T) was rated new "buy" at Paradigm Capital by equity analyst Corey Hammill. The 12-month target price is $2.75 (Canadian) per share.

CF Industries Holdings Inc. (CF-N) was downgraded to "sector perform" from "sector outperform" at Scotia by equity analyst Ben Isaacson. The 12-month target price is $32 (U.S.) per share.

Equity Residential (EQR-N) was raised to "buy" from "hold" at BB&T Capital by equity analyst David Toti. The 12-month target price is $74.50 (U.S.) per share.

Home Depot Inc. (HD-N) was rated new "buy" at Topeka Capital by equity analyst Laura Champine. The 12-month target price is $158 (U.S.) per share.

Lumber Liquidators Holdings Inc. (LL-N) was rated new "sell" at Topeka Capital by equity analyst Laura Champine. The 12-month target price is $9 (U.S.) per share.

Lowe's Cos. Inc. (LOW-N) was rated new "hold" at Topeka Capital by equity analyst Laura Champine. The 12-month target price is $75 (U.S.) per share.

Pier 1 Imports Inc. (PIR-N) was rated new "buy" at Topeka Capital by equity analyst Laura Champine. The 12-month target price is $12 (U.S.) per share.

Restoration Hardware Holdings Inc. (RH-N) was rated new "equal-weight" at Consumer Edge Research by equity analyst David Schick.

Twitter Inc. (TWTR-Q) was downgraded to "sell" from "neutral" at MoffettNathanson by equity analyst Michael Nathanson. The 12-month target price is $12 (U.S.) per share.

VMware Inc. (VMW-N) was downgraded to "market perform" from "outperform" at Cowen by equity analyst Gregg Moskowitz. The 12-month target price is $61 (U.S.) per share.

Western Digital Corp. (WDC-Q) was raised to "outperform" from "market perform" at Cowen by equity analyst Karl Ackerman. The 12-month target price is $50 (U.S.) per share.

With files from Bloomberg News