Tuesday's analyst upgrades and downgrades

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

Macro drivers in the uranium market should outweigh stock-specific risks for Cameco Corp. (CCO-T, CCJ-N), said BMO Nesbitt Burns analyst Edward Sterck.

Accordingly, he upgraded his rating for the stock to "outperform" from "market perform."

"Our recent downgrade was qualified with the comment that continued improvement in uranium prices could override stock-specific headwinds," said Mr. Sterck. "Although we cannot say for certain that uranium prices will continue to move higher, we are now confident that downside risks are limited and that the macro picture offsets Cameco's current idiosyncrasies. We also see the TEPCO dispute as being resolvable through arbitration, which although negative for near-term cash flows, could provide a future cash boost."

Mr. Sterck feels the decision by Kazatomprom to cut its production by 10 per cent, announced on Jan. 10, is a "positive" for the market. The Kazakhstan state-owned company produces almost 40 per cent of the world's uranium supply.

"It sends the message that Kazatomprom will cut production to support prices, which reduces downside risks," he said. "Secondly, it tightens the spot market, which biases the outlook to the upside as it puts constraints on the carry trade and may stimulate an uptick in term contracting. Our view is that this improving macro outlook is likely to be the main driving factor for Cameco's share price and that macro downside risks should be limited."

"In terms of the stock-specific risks of the TEPCO [Tokyo Electric Power Company Inc.] contract cancellation and the CRA dispute, we see these as longer dated issues that may be overlooked by the market if the uranium price continues to improve. Starting with the TEPCO contract cancellation, the impact to near-term cash flows is slightly negative but partially offset by significant capex and opex savings (2017 CFPS is down 4 per cent). However, we see a resolution through arbitration as being possible, potentially providing a settlement payment in the future. The CRA dispute is harder to call, but with a 18-plus month time-frame to a resolution we think that the market will look past this in the event of continued uranium price improvement."

Mr. Sterck also called Cameco's uranium assets "world class in the sector" and said its ability to restart its Rabbit Lake mine in northern Saskatchewan, which closed last year, "can bring unencumbered pounds into production to gain leverage to any increase in the uranium price."

"With downside risks constrained, Cameco's trading multiples should move towards the top of their trading ranges if the uranium price continues to move higher," he said. "Thus we upgrade Cameco to Outperform with a modestly increased target price, which reflects potential valuation multiple expansion."

His target price for the stock increased by a loonie to $18. The analyst consensus price target is $16.03, according to Thomson Reuters.

"Cameco typically trades at a significant premium to peers in terms of P/E [price-to-earnings] and EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization] multiples," the analyst said. "In terms of the current one-year forward consensus multiples, we note that Cameco is already trading towards the top end of the range in terms of P/E but slightly below fair value in terms of EV/EBITDA. However, we suspect that consensus uranium price forecasts are likely lagging the improved uranium price (as ours is) and also note that the uranium company share prices have typically led movements in the physical uranium price in the past. This second point reflects the greater liquidity and efficiency exhibited in the equities market which allows for a faster reflection of market conditions than the rather turgid physical uranium market."

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RBC Dominion Securities analyst David Palmer raised his target price for shares of Restaurant Brands International Inc. (QSR-N, QSR-T) under the expectation of higher free cash flow and earnings per share growth going forward.

On Monday, the company reported slowing same-stores growth for Tim Hortons in the fourth quarter of 2016, however, according to Mr. Palmer, Burger King trends "remained firm."

"We believe the Tim's slowdown was partially the result of temporary factors (e.g. weather, promotional timing) and we believe the rollout of espresso-based beverages and the chain's mobile app can help bolster trends as the year progresses," said the analyst. "In addition, we were heartened to see a strong finish to 2016 unit development--particularly in the emerging markets. Lastly, our model now incorporates interest cost savings (25 basis points) from the company's term loan refinancing, which we believe can add 6 cents to EPS."

Later in the day, reports emerged that Restaurant Brands has approached Popeyes Louisiana Kitchen Inc. (PLKI-Q) about a possible acquisition, people familiar with the matter said on Monday. On the day, Popeyes shares jumped 14 per cent in New York to a record $75.30 (U.S.), while Restaurant Brands shares rose 4 per cent to $70.12 (Canadian) in Toronto.

"In our April. 11, 2016 report 'Thinking like 3G in Food and Restaurants,' we presented strategic menu for recent acquisition targets in food and restaurants," said Mr. Palmer. "These include: 1) overhead reduction; 2) higher franchise mix; 3) additional leverage; and 4) accelerating top-line growth. We believe Popeyes … fits this criteria well and could present a strong read-through to other companies with high ratios of G&A/EBIT (e.g. Papa John's). However, we believe such an acquisition would be a negative read-through for those hoping for a 3G takeout of YUM Brands. For YUM, we believe the upside is coming from the implementation of many 3G-like strategies including a more franchised, leveraged business model with accelerating unit growth ahead."

Mr. Palmer almost emphasized the company's "underappreciated" free cash flow, noting: "While distribution margin upside (greater-than 1000 basis points since the start of 2015) should taper off, we believe that FCF growth has been an under-appreciated element of the RBI story. Following a meaningful slowdown in capital spending in 2016, we are forecasting $38-million and $40-million CAPEX in '17 and '18, which we believe can help FCF accelerate to $2.70/share by 2018 (FCF yield of 4 per cent and 5 per cent in 2017 and 2018). Higher free cash flow may pave the way toward share repurchases (we currently are not modeling), further dividend increases (9 consecutive quarters in a row), and perhaps RBI's next M&A deal. We believe the M&A discussion will pick up through 2017 as the company approaches the first call date of its 9-per-cent preferred stock."

Reacting to the results and near-term outlook, Mr. Palmer raised his 2017 earnings per share projection to $1.77 (U.S.) from $1.69, which would be a rise of 12 per cent year over year and 3 cents higher than the consensus estimate. His 2018 estimate rose to $2.37 from $2.27, a 34-per-cent increase and 4 cents higher than the Street.

"Since the start of 2015, EPS upside for RBI has largely been driven by supply-chain efficiencies in Tim Horton's distribution margin as Tim's COGS as a percentage of distribution sales has contracted by over 10% over this time period. With the lion's share of these savings in the past, we are shifting our focus to emerging market strength and accelerating FCF. We also continue to estimate that refinancing the company's preferred equity will add 30–35 cents to 2018 EPS," he said.

With an "outperform" rating (unchanged), Mr. Palmer's target rose to $59 (U.S.) from $54. The analyst consensus is $50.38.

"RBI's 100-per-cent-franchised business model offers stability and predictability of earnings and cash flows with low capital requirements and insulation from input costs," he said. "In addition, international unit growth has been accelerating and the company's sales momentum seems to have improved in recent months. With Tim Hortons, the company has created additional value by employing cost discipline, which may lead to returning capital to shareholders and accelerating international unit growth."

BMO Nesbitt Burns analyst Peter Sklar said the company is continuing its "impressive" unit growth and raised his target to $57 from $52 with an "outperform" rating.

Mr. Sklar said: "Overall, we consider RBI's Q4/16 earnings to be generally in line with expectations. In terms of our longer-term thesis, we continue to view the stock favourably as both banners continue to generate notable top-line growth through impressive unit growth and acceptable comps while demonstrating cost discipline. In addition, RBI generates substantial cash flow, and we believe there could be room to further increase the common dividend."

CIBC World Markets analyst Mark Petrie raised his target to $60 from $54 with an "outperformer" rating.

"QSR is displaying strong momentum - NRG [net restaurant growth] is largely accelerating, margins continue to expand, and SSS is healthy," he said. "The only exception is Tim's in Canada, though we expect SSS will turn positive again in short order. We continue to rank QSR as one of our top picks and see several catalysts over the next 12-18 months."

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Though its fourth-quarter results were "weak," the outlook and growth profile for Emera Inc. (EMA-T) remain "strong," according to Desjardins Securities analyst Mark Jarvi.

On Feb. 10, the Halifax-based energy company reported adjusted earnings per share of 51 cents, below both Mr. Jarvi's projection of 56 cents and the consensus estimate of 59 cents.

"In our view, the biggest driver of the miss was weaker-than-forecast results from Emera Energy, which were squeezed by lower spark spreads and slightly lower capacity revenue versus our forecast," said Mr. Jarvi. "Storm-related costs were also a drag on earnings at NSPI [Nova Scotia Power] and the Caribbean operations. On a positive note, the Corporate & Other segment performed better than our forecast."

Despite the ratings miss, Mr. Jarvi remains optimistic that 2017 will be a "good year" for Emera, which he feels will benefit from a full year of contributions from its TECO Energy assets, acquired in June of 2016 as well as the "energizing the Maritime Link (ML) and LabradorIsland Link (LIL) transmission lines".

"The company expects the newly acquired utility assets in Florida and New Mexico to perform well—in particular, it believes Tampa Electric (which benefits from a step-up in revenues with the recently completed Polk conversion project) can earn toward the upper end of its authorized ROE [return on equity] range of 9.25–11.25 per cent in 2017 (we conservatively forecast Tampa Electric hitting around the midpoint of the ROE range). Additionally, continued spending on the ML and LIL projects should drive higher allowance for funds used during construction (AFUDC), and while spark spreads, which averaged $9 (U.S.) per megawatthour in 4Q16, will likely stay around that level through 2017, the Emera Energy segment will benefit from rising capacity payments (already locked in). Finally, we expect that the company's EPS payout ratio will be around the higher end of its 70–75-per-cent target in 2017."

Based on the quarterly results, he reduced his EPS estimates for 2017 and 2017 to $2.67 and $3.09, respectively, from $2.71 and $3.11.

His target price for the stock rose to $51 from $50 with an unchanged "buy" rating. The analyst consensus price target is $52.96.

"EMA provided updated capex plans for 2017, which show strong investment across the different segments and should drive continued rate base, EPS and dividend growth," said Mr. Jarvi. "Moreover, a number of potential investments (eg Atlantic Link transmission project) could provide upside to our growth forecast."

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Deluxe Corp.'s (DLX-N) $70-million (U.S.) offer to purchase RDM Corp. (RC-T) looks fairly valued, said Canaccord Genuity analyst Kevin Wright.

With the probability of a superior competitive bid being low, Mr. Wright lowered his rating for RDM, a Waterloo, Ont.-based provider of specialized software and hardware products for electronic payment processing, to "hold" from "buy."

On Monday, Deluxe, based in Shoreview, Mn., announced it has offered $5.45 per RDM, which Mr. Wright said implies a 9.9 times estimated 2017 calendar year enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA) based on a $72-million (U.S.) EV calculated by the company. He said that is in line with his 10.2 times target multiple.

"While there is potential that another bidder could emerge, we believe that the probability is low given that RDM Corp appears to have run a process that considered the outright sale of the business and potential acquisitions; we expect that Deluxe was not the only bidder to see the company but it did emerge as the highest offer," he said. "We think that the software created by RDM for remote deposit capture is robust, as evidenced by contracts with large U.S. banks with global footprints, and that there may have been more than one interested party. However, we are not convinced that an offer by Deluxe Corporation is likely to elicit a bidding war among other strategic or financial buyers."

Mr. Wright lowered his target price for the stock to $5.50 from $6 to better reflect the bid. Consensus is $5.56.

"In spite of our view that RDM Corp's software solution is robust as evidenced by its blue chip customer base we believe that a second bidder is unlikely," the analyst said. "The company appears to have run a process that assessed potential acquisitions and the outright sale of the business so we expect that the company was shopped to multiple potential buyers with Deluxe emerging as the most attractive suitor. A $4.1-million break fee and a short window ahead of the shareholder vote on March 27 indicates that the probability of a second offer is low. Nonetheless, it is possible that another bidder could emerge. If we assign probabilities of 10 per cent that an offer comes at 11 times and a 5-per-cent chance of a 12-times bid we come to a probability weighted price of $5.57 including the 2.5-cent (U.S.) dividend."

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Superior Plus Corp.'s (SPB-T) $412-million agreement to acquire Gibson Energy Inc.'s (GEI-T) industrial propane business is "an attractive deal," said Raymond James analyst Steve Hansen, who cautioned regulatory risks remain.

"We believe the strategic and financial merits of this transaction are attractive, offering SPB not only enhanced scale in a core market (western Canada), but also significant cost synergies and healthy financial accretion (13 per cent to adjusted operating cash flow)," said Mr. Hansen. "We also like the deal's timing, with SPB arguably pouncing near the low-point of the demand cycle, thus offering healthy organic demand growth in future years. That said, while SPB confidently asserts that no divestitures will be required, our own view of the regulatory hurdle is more reserved ('cautiously optimistic') given SPB's pro-forma market share in western Canada is expected to exceed 50 per cent."

Mr. Hansen raised his target price for Superior Plus shares to $15 from $14 due to its "reinvigorated growth outlook." Consensus is $13.28.

He kept his "outperform" rating for the stock.

"We continue to admire SPB shares given our view there are still 'multiple ways to win,'" he said. "Specifically, our positive thesis rests on a combination of potential catalysts/developments, including: i) further tuck-in opportunities across the North Amercan propane market, both in traditional retail end-markets (Eastern Canada, U.S. northeast) as well as larger wholesale opportunities on both side of the border—none of which are currently built into our estimates; ii) healthy organic growth in propane demand, largely stemming from last year's atypically warm winter and a broader secular recovery in oil & gas exploration activity; iii) reduced Fx headwinds following the recent elimination of out-of-the-money hedges; iv) improving specialty chemical pricing, most notably caustic soda and HCl, with the latter offering significant torque, in our view; and, v) finally, the company's attractive dividend (5.6 per cent) that pays investors to wait."

Meanwhile, the stock was downgraded to "sector perform" from "outperform" at Alta Corp Capital by analyst Dirk Lever. His target remains $13, versus the average of $13.89.

Canaccord Genuity analyst Raveel Afzaal did not change his "buy" rating and $13 target, noting: "We assume the acquisition results in $45-million in incremental EBITDA in 2018. However, we have reduced the EV/EBITDA multiple used to value the Energy Distribution business back to 10.0 times from 10.5 times. We had previously increased the multiple in anticipation of this transaction. We value the Specialty Chemicals division using 7.4x multiple (unchanged). Hence, our sum-of-the-parts-derived target remains at $14.25, but we now have higher conviction in our target price as the financing overhang is removed and the Competition Bureau potentially approves this transaction."

BMO Nesbitt Burns analyst Ben Pham raised his target price for Gibson shares to $20 from $19.50 (with an unchanged "market perform" rating) in reaction to the deal. Consensus is $19.45.

He said the sale "is consistent with management's strategic goal to focus on growth opportunities in the higher-multiple infrastructure/midstream asset class while at the same time improving the balance sheet. We are increasing our target price to ...to reflect the modest accretion from the sale, as well as the improved business mix and contract profile."

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Ahead of the release of its fourth-quarter financial results, scheduled for Feb. 28, RBC Dominion Securities analyst Douglas Miehm lowered his target price for Valeant Pharmaceuticals International Inc. (VRX-N, VRX-T) to account for a reduced outlook for its dermatology unit.

Mr. Miehm is projecting quarterly revenue of $2.37-billion, slightly ahead of the consensus ($2.34-billion). The company's implied guidance is $2.28-billion to $2.48-billion.

"We are comfortable with Valeant's Q4/16 guidance, which was reiterated in January, as CFO Paul Herendeen (formerly Zoetis CFO) has historically provided conservative guidance in his previous roles with other public companies," he said.

The analyst's adjusted earnings before interest, taxes, depreciation and amortization estimate is $1.05-billion, versus the consensus of $1.01-billion and the implued guidance of $0.99-billion to $1.09-billion.

"We believe that the focus of Valeant's Q4/16 release and call will be on 2017 guidance and how much lower it will be relative to 2016 results," said Mr. Miehm. "While VRX stated that 2017 adjusted. EBITDA would be lower than 2016's on its Q3/16 call, we anticipate that adjusted. EBITDA guidance below $3.75-billion could lead to further share price weakness. We anticipate revenue guidance of $8.9–$9.2-billion adjusted EBITDA of $3.8–4.1-billion, and adjusted EPS of $4.50–5.00. We currently forecast $9.1-billion in revenue (consensus $9.1-billion), $4.0-billion in adjusted EBITDA (consensus $3.9-billion), and $4.64 in adjusted EPS (consensus $4.95)."

Mr. Miehm did not alter his "sector perform" rating for the stock, but his target fell to $22 (U.S.) from $29. Consensus is $22.87.

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In other analyst actions:

Enbridge Income Fund Holdings Inc. (ENF-T) was downgraded to "hold" from "buy" at GMP by analyst Ian Gillies. His target remains $36.50 per share. The analyst average target price is $35.77, according to Bloomberg.

Goldman Sachs Group Inc. (GS-N) was downgraded to "market perform" from "market outperform" by Vining Sparks analyst Marty Mosby with a target price of $255 (unchanged). The average is $252.29.

Keyera Corp. (KEY-T) was raised to "buy" from "hold" at GMP by analyst Ian Gillies. His target rose to $45 from $43.50. The average is $45.30.

Patterson-UTI Energy Inc. (PTEN-Q) was raised to "buy" from "neutral" by Guggenheim Securities analyst Michael Lamotte with a target of $40 (U.S.). The average is $30.54.

Pioneer Natural Resources Co. (PXD-N) was raised to "overweight" from "neutral" at MUFG Securities Americas by analyst Michael Mcallister. His target rose to $250 (U.S.) from $212. The average is $226.68.