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A Bank of Montreal location in Toronto.Deborah Baic/The Globe and Mail

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

Credit Suisse analyst Kevin Choquette downgraded Bank of Montreal (BMO-T) after it restated its regulatory capital ratios for the first three quarters of the year on Tuesday.

Moving his rating to "underperform" from "neutral," Mr. Choquette emphasized its industry-low return on equity (ROE) and high valuation.

The analyst also lowered his price target to $93 from $98. The analyst average is $87.52, according to Bloomberg.

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There are multiple catalysts that could move Alaris Royalty Corp.'s (AD-T) share price higher, said Canaccord Genuity analyst Scott Chan. Noting the stock had declined more than 25 per cent since the release of its second-quarter results on July 28, Mr. Chan upgraded his rating to "buy" from "hold."

"We believe the decrease was largely due to continued work though for certain portfolio companies (KMH, SCR, Kimco, Agility and SMi)," the analyst said. "Currently, the stock is trading at 11.8 times price to next 12 months earnings per share (versus 20.0x historical average), which is a trough valuation over the past six years. We believe several potential catalysts could move the stock price from the current level: (1) final resolution at KMH; (2) incremental positive updates from challenged partner companies (i.e., SCR, Kimco, Agility and SMi); and (3) new investment activity supporting better growth."

On Monday, Alaris announced it has repurchased Solowave Designs LP for $44.6-million after the private company partner sold its children's play division, which generated the majority of its earnings.

"While Alaris' investments have long-term investment horizons without forced exit dates, repayments occur when a partner company becomes less reliant on capital (e.g., divests of a business segment, sale of company etc.)," said Mr. Chan. "This transaction resulted in a total return (including distributions) of 79 per cent, or an internal rare of return of 17 per cent, which is relatively consistent with the return from royalty payments to date. As of Q2/16, Solowave represented [approximately] 7 per cent of Alaris' total revenue. We believe the impact is slightly negative as the company works to re-deploy capital and replace Solowave distributions."

Mr. Chan reduced his 2017 revenue and EPS projections to $112-million and $1.92, respectively, from $119-million and $1.98 in reaction to the deal.

"At this juncture, we believe AD's dividend is safe with an estimated payout ratio of greater-than 80 per cent for 2017 (consistent with management's target)," he said. His target price for the stock declined to $26.50 from $28, which he said represents a rate of return of 27 per cent (including the dividend yield of 7.3 per cent). The analyst consensus price target is $29.42, according to Thomson Reuters. Elsewhere, Acumen Capital analyst Brian Pow reduced his target to $30.50 from $33 with a "buy" rating.

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Accountability Research analyst Mark Rosen downgraded Metro Inc. (MRU-T) based on valuation.

Citing "limited upside for the sector in an increasingly competitive retail environment with lower food inflation, more normalized square footage growth, and continued pressure from non-traditional retailers," Mr. Rosen moved his rating to "sell" from "hold."

Mr. Rosen pointed to increased competition among grocers and slowing sales growth as well as influence of new rivals, like Wal-Mart, Costco and drugstores.

"We expect that Metro will struggle in a low-inflationary environment," he said. "As a result, we have modelled revenue growth of 4.7 per cent in FY16 to reflect moderate inflation in the first two quarters and lowered sales growth to 2.5 per cent in FY17. We forecast increased competition from both traditional and non-traditional retailers resulting in lower traffic and basket size.

"We anticipate operating margin to narrow as customers are increasingly switching to the discount banner. In FY15, COGS and SGA as a percentage of sales was 93 per cent and we have increased it by 20 basis points in FY16 and FY17. As a result, our projected EBIT and FCF are $701.5-million and $405.1-million respectively for FY16, and $699.4-million and $433.8 million-respectively for FY17."

Mr. Rosen raised his target price by a loonie to $39. Consensus is $46.85.

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Stock of Granite Real Estate Investment Trust (GRT.UN-T) should react positively to the "substantial" extension on the lease terms on 15 properties tenanted by Magna International Inc., according to Desjardins Securities analyst Michael Markidis.

On Monday, Granite and Magna announced an agreement to renew early and extended the leases of the properties, which represents 25 per cent of Granite's total income producing property portfolio. Under the deal, Granite will invest $54-million (U.S.) to acquire building expansions at two U.S. special purpose properties.

"This news should be well received by investors, given (1) enhanced lease duration (weighted average lease terms increases to more than seven years), (2) substantially reduced near-term leasing risk (the next special-purpose facility does not expire until 2022), and (3) greater cash flow certainty (which should provide management with increased confidence in deploying the balance sheet)," said Mr. Markidis. "Offsetting these positives are (1) rental rate rolldown (annualized lease payments is flat despite the $54-million investment), and (2) the reduced likelihood of a sale of special-purpose properties back to Magna."

Mr. Markidis said Granite has "more than sufficient" resources to afford the $54-million investment from its cash on hand. Given net operating income and interest expenses are remaining neutral, he said the impact on earnings "should essentially be a wash."

"From a net asset value perspective, the extended lease duration is a positive," he said. "To reflect the greater cash flow certainty, we have reduced the cap rate that we employ in our NAV work to 8.0 per cent (from 8.5 per cent). These adjustments drive a $2 (Canadian) increase in our NAV to $46.50."

He maintained his "hold" rating for the stock and raised his target price to $46.50 from $42. Consensus is $43.

"Arguably, the more attractive total return potential could warrant a ratings upgrade," he said. "However, we believe greater evidence of an acceleration of capital deployment will be required to attract new investors to the name. The substantial reduction in near-term leasing risk should be well received by investors. However, an acceleration in capital deployment will likely be required to drive a prolonged period of outperformance."

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Winnebago Industries Inc.'s (WGO-N) acquisition of privately held Grand Design Recreational Vehicle Co. looks like a "grand slam," said BMO Nesbitt Burns analyst Gerrick Johnson.

In a deal announced Monday, Winnebago acquires the manufacturer of travel railers and fifth-wheel recreational vehicles for $500-million (U.S.) in cash and newly issued WGO shares.

"While Grand Design will continue to operate as a separate entity, both Winnebago and Grand Design should realize scale benefits in purchasing and back office operations," said Mr. Johnson. "Winnebago management estimates annual cost synergies of $7-million and noted additional upside beyond that figure over time. The company should experience top-line synergy as well. Management called out minimal dealer overlap, with less than 50 per cent of dealers in the combined network carrying both WGO and Grand Design brands.

"The company is acquiring growth. Grand Design was founded in 2012 and has expanded revenues at north of an 80-per-cent compound annual growth rate since 2013. The deal also brings diversification. Headquartered in Middlebury, Ind., Grand Design greatly enhances Forest City, Iowa-based Winnebago's presence in the heart of RV country as well as in the rapidly growing towables segment. Grand Design manufacturers towable RVs, exclusively, with no exposure to the motorized category. For calendar year 2015 the company had a 2.3-per-cent market share in the towables segment, which has grown to about 3 per cent year to date in CY2016. More specifically, Grand Design is a meaningful player in the fifth-wheel segment of the industry, as the company captured 8.0 per cent of the market in CY2015 and 8.7% so far in CY2016."

With the announcement, Winnebago also released preliminary fourth-quarter 2017 results. Earnings per share of 49 cents topped Mr. Johnson's 47-cent estimate as well as the consensus of 45 cents. It's a 6-cent increase year over year.

Mr. Johnson maintained his "outperform" rating for the stock and increased his target to $33 from $27. Consensus is $27.50.

"We rate the shares of Winnebago outperform as we think the company can rapidly grow earnings over the next three years as it executes its turnaround," the analyst said. "The company benefits from its strong position in the rapidly growing RV market, which is being boosted an ongoing post-recession replacement cycle, the retiring of America, and a renewed popularity of RVing and RV culture. We think Winnebago should increase sales faster than the industry through an expansion of market share, owing to its strong brand name and innovative new products. The problem for Winnebago in the near term, however, has been the company's ability to satisfy this demand owing to ongoing capacity constraints. With new management and some strategies already in place, however, we anticipate these constraints easing. In fact, we have seen constraints ease a bit as the company improves efficiency in its existing plants. And we also view favorably new strategies put in place to expand capacity and believe the table is set for strong growth in FY2017 and beyond."

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Stifel analyst Selman Akyol downgraded Kinder Morgan Inc. (KMI-N), emphasizing a 54-per-cent increase in share price in the year to date.

Moving the stock to "hold" from "buy," Mr. Akyol said the next major catalyst for the stock will be a decision from the Canadian government on the company's proposal to expand its Trans Mountain pipeline to Vancouver.

The analyst anticipates the controversial plan will be approved. A decision is expected before the end of the year.

He maintained a $24 (U.S.) price target for the stock. The analyst average is $22.94, according to Bloomberg,

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Citi analyst P.J. Juvekar upgraded both DuPont (DD-N) and Dow Chemical Co. (DOW-N) to "buy" from "neutral."

"We view both stocks as execution and strong self-help stories as both companies have delivered so far in implementing their individual cost-cutting programs and the proposed Dow-DuPont merger could take those cost reductions even higher," the analyst said. "If completed, the combined Dow-DuPont company would be the stock to own in 2017."

Mr. Juvekar cited a trio of reasons for his stance:

  1. The opportunity for mass cost-cutting: “Each company has solid momentum from their individual cost cutting programs ahead of the merger. Dow has delivered 15 quarters of EBITDA growth amidst a tough macroeconomic backdrop while DuPont CEO Ed Breen has moved quickly to cut costs and remains on target for $730-million of realized cost reductions, or $1-billion on a run-rate basis by the end of the year. While macro conditions haven’t improved by much, both companies have done well in controlling the ‘controllables.’ This upgrade is not a call on the cycle but a view that combining these iconic companies and splitting them in three could unlock significant shareholder value.”
     
  2. The potential for upside to the $3-billion synergy target: “We believe the company could exceed that target by as much as $1-billion. Additionally, Dow-DuPont CEO Ed Breen intends to separate MergeCo into three individual companies on the earlier side of 18-24 months. After these companies are set free, we think the three businesses will be more agile and more competitive. An incremental $1-billion of cost cuts would add over 30 cents per  share to pro forma DowDuPont EPS.”
     
  3. Opportunity from “self help” and portfolio changes: “Dow has made significant investments in several new USGC plants as well as Sadara in the Middle East which all remain on schedule to startup on time. Furthermore, we think Dow Corning’s silicone chemistry fits well with Dow's existing chains and revenue synergies ($100-million targeted) seem achievable in our view. Dow Corning could add as much a $1-billion of EBITDA in two years. Historically, Dow shares have not necessarily worked going into the weak part of the ethylene cycle as new capacity starts. But the cost cutting opportunity, the addition of Dow Corning and the proposed merger with DuPont makes Dow a very different company.”

The analyst raised his target price for DuPont stock to $76 from $72. Consensus is $73.29.

His target for Dow rose to $59 from $55. Consensus is $60.25.

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In other analyst actions:

Raymond James analyst Nick Stodgill initiated coverage of ECN Capital Corp. (ECN-T) with a "neutral" rating and $4 target,  while Barclays analyst John Aiken gave the stock a new "overweight" rating and $4 target.

Kelt Exploration Ltd. (KEL-T) was upgraded to "action list buy" from "buy" by TD Securities analyst Juan Jarrah. He raised his target to $9 from $8.50. The analyst average is $6.57, according to Bloomberg.

Laurentian Bank of Canada (LB-T) was raised to "buy" from "hold" at TD Securities by analyst Lemar Persaud. His target increased to $54 from $52. The average is $52.82.

Wells Fargo & Co. (WFC-N) was downgraded to "underperform" from "market perform" by Raymond James analyst David Long. He did not set a target, while the average is $51 (U.S.).

Jefferies analyst Daniel Fannon downgraded Janus Capital Group Inc. (JNS-N) to "hold" from "buy." He maintained a target of $16 (U.S.). The average is $14.92.

Evercore ISI analyst Robert Ottenstein downgraded Dr Pepper Snapple Group Inc. (DPS-N) to "hold" from "buy." He did not specify a target price, while the average is $98.62 (U.S.)

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