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Tuesday’s analyst upgrades and downgrades

The new bombardier aircraft CSseries is shown in Mirabel, Quebec as it is due to take off for the first time on September 16, 2013.

AFP/AFP/Getty Images

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

Bombardier Inc. (BBD.B-T) was added to Raymond James' "Canadian Analyst Current Favourites" list by Steve Hansen in reaction to the news it has struck a deal to sell a majority stake in its C Series aircraft division to Airbus Group SE.

Mr. Hansen called the deal "transformational" and expects it to "1) accelerate the program's commercialization momentum; 2) reduce unit production costs; and, 3) bolster confidence in the company's goal to reach cash flow breakeven by the end of 2018."

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He currently has an "outperform" rating on the company's stock with a target price of $3.25. The analyst average target price is currently $2.97, according to Bloomberg data.

Mr. Hansen removed Methanex Corp. (MEOH-Q, MX-T) from the list, citing the "more visible" near-term catalyst for Bombardier.

He also has an "outperform" rating for Methanex with a $60 (U.S.) target. Consensus is $55.35.

Elsewhere, Cormark Securities Inc. analyst David Tyerman upgraded Bombardier to "market perform" from "reduce" with a target of $2.40, up from $2.10.

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Raymond James' Ben Cherniavsky added Rocky Mountain Dealerships Inc. (RME-T) to the firm's  "Canadian Analyst Current Favourites" list based on a "significant" projected return to his target price for its stock of $13.

"This is not in anticipation of an outsized 3Q17 print (although we expect results to be good) or any other specific potential catalyst on the horizon," said Mr. Cherniavsky. "Rather, our high conviction on this stock reflects a combination of improving company fundamentals, stabilized industry conditions, and an attractive valuation. In a market that presents investors with a paucity of 'good ideas,' we highlight Rocky as an outlier with an attractive risk-reward profile."

Along with the $13 target (unchanged), he has an "outperform" rating for the stock. Consensus is $13.02.

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Canaccord Genuity T. Michael Walkley raised his financial estimates and target price for shares of BlackBerry Ltd. (BB-N, BB-T) after "upbeat" investor meetings with chief executive officer John Chen and chief financial officer Steve Capelli on Monday.

The executives were in New York to mark the company's listing moving to the NYSE from the NASDAQ, and, according to Mr. Walkley, to "celebrate its transformation and rebranding opportunity."

"With BlackBerry completing its transformation from a hardware-centric smartphone OEM to an enterprise software company, management views the change in listing as a branding event to highlight its transformation and focus on growing its business with leading enterprises, many of which are also listed on the NYSE," he said. "Over the next year, the Enterprise Services and Solutions ('ESS') division will drive the majority of revenue growth, and we have modeled this division growing 14 per cent in fiscal 2019 and 12 per cent in fiscal 2020. We believe our F19 estimates are consistent with management's guidance for double digit growth in bookings for F2018, highlighted by the 19-per-cent year-over-year growth discussed on the Q2/F18 conference call.

"Longer term, management anticipates the BlackBerry Technology Solutions (BTS) business to drive the next leg of growth with its design win momentum for its QNX business with automotive ecosystem chipset suppliers such as Qualcomm and Nvidia, automotive suppliers such as Delphi, and automotive OEMs such as Ford. Management also highlighted its technology licensing business that it believes should generate roughly $100-million annually in lumpy technology licensing revenue augmented by its smartphone OEM licensees starting to sell BlackBerry devices such as TCL. Finally, management highlighted its $1.9-billion in net cash and focus to deploy this capital to generate growth through both investing in growing sales channels and technology competencies through either ongoing hiring efforts or potential acquisitions."

Mr. Walkley said he's "impressed" with the management's ability to transform the company from a hardware device manufacturer to an enterprise software and services provider.

He increased his projections for both 2019 and 2020 due largely to longer-term QNX automotive opportunities.

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"We believe the recent announcement with Delphi to support QNX secure OS and Hypervisor in their autonomous driving platform validates QNX OS beyond their historical strength in infotainment," the analyst said. "We believe BlackBerry's market share in infotainment is greater than 50 per cent and nearly all of the current royalty revenue in Blackberry Technology Solutions is derived from infotainment. Competitors in infotainment OS are primarily open source Linux and Google's Android with Linux the number two market share at roughly 20 per cent. We also expect these platforms to compete with new emerging use cases as the architecture of a vehicle changes from 60-100 disparate electronic control units in a vehicle to 10-12 domain control units in a vehicle controlling multiple functions inside the vehicle."

"BlackBerry's secure hypervisor is valuable in this new architecture as a result of its ability to separate multiple functions running on a single CPU or high-performance computing unit. We believe QNX is well positioned to grow its dollar content per automobile longer-term from its current leading infotainment market share. We believe design wins with Qualcomm, Nvidia, Ford, and Delphi demonstrate QNX's potential long-term growth potential. We believe ASPs on infotainment modules have declined over time due to competition from Linux and Google and are currently around $1.50 to $2.50 per automobile. However, we expect the revenue opportunity for QNX per auto to potentially increase 3X or more from new opportunities in ADAS, telematics, digital cluster and other opportunities. However, we view QNX as more a medium-term growth driver as the recent Delphi announcement will likely enter the model in roughly 18 to 24 months with the Ford win several quarters ago likely to start generating revenue in roughly 9 more months."

His 2019 and 2020 sales estimates rose to $911.9-million (U.S.) and $1.081-billion, respectively, from $908.5-million and $1.001-billion. His 2019 earnings per share projection remains 5 cents, while his 2020 expectation jumped to 20 cents from 12 cents.

Based on those changes, he bumped his target price for the stock to $11 (U.S.) from $10. Consensus is $10.25.

"Overall, we believe BlackBerry has stabilized its business and cost structure and now has the balance sheet to invest in driving growth for its targeted enterprise of things end markets," said Mr. Walkley. "We continue to believe our current estimates and price target fairly value the company based on our updated model. While we are impressed with what the team has accomplished the past several years, we maintain our HOLD rating based on the current share price near our increased price target."

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Touting its "solid" core operations and the potential for acquisitions to drive organic growth, RBC Dominion Securities analyst Walter Spracklin initiated coverage of Stella-Jones Inc. (SJ-T) with an "outperform" rating.

In justifying his "positive" view on the Quebec-based producer and marketer of pressure treated wood product, Mr. Spracklin pointed to a quartet of factors:

1. A "sold" base of business.

He said: "Rail tie and utility pole products are deemed to be essential for SJ's Class 1 railroad and utility customers – a message that was repeated consistently throughout our channel checks. The demand for both railway ties and utility poles is extremely stable and comprises an integral part of the railroad's/utility's core maintenance since deferral is very difficult due to the importance of the products to network safety. We believe SJ can deliver investors a very steady revenue stream year over year as 71 per cent of SJ's revenue is derived from these two segments (rail tie 39 per cent and utility pole 32 per cent)."

2. A market-leading position.

"Through acquisitions SJ has grown its two core segments to command a market leading position, with an estimated 40 per cent to 50 per cent in each. In rail ties, SJ has emerged as a leader in Canada, acting as a primary supplier to railroads and securing this position through well positioned and widely disbursed facilities. In the US, SJ has only one major railway tie competitor (Koppers). In utility poles, the market is far more fragmented, but from our channel checks we estimate the company holds nearly 40 per cent to 50 per cent of the utility pole market. This leadership position is protected from competition by the geographic advantage SJ enjoys with respect to its manufacturing facilities being on or close to its end-market users."

3. "Free cash flow is fuel for growth."

"The core base of business amassed generates stable cash flows that management has directed towards acquisitions – which in turn generate additional stable cash flows. As a result, the five-year cash flow per share CAGR [compound annual growth rate] is 35 per cent. Moreover, we believe this virtuous cycle is set to continue as we are forecasting for cash flow per share to climb to $3.18 for 2019, which we believe increases the dry powder available for acquisitions."

4. A proven management team.

"A testament to a management team's competency is its ability to successfully execute on a growth through acquisition strategy – and SJ management has delivered strong performance in that regard. Moreover, through our site tour and channel checks, we heard a high degree of praise for SJ's management team from employees and customers alike."

In the near term, Mr. Spracklin expects the integration of its Ram Forest Group Inc. assets, acquired in October of 2015, to act as a potential catalyst for the stock. He projects it help expand EBITDA margin to 15.8 per cent in 2019 from 14.4 per cent in 2016.

He anticipates acquisitions could propel the company moving forward, calling it "a significant catalyst as SJ directs FCF to fuel continental expansion into U.S. Residential Lumber; transformational acquisitions in the Utility Pole segment; and tuck-in acquisitions in railway ties."

Mr. Sprackin set a price target of $56 for the stock. Consensus is $49.57.

"We believe that the enterprise value (EV) to EBITDA multiple is set to expand from the current 13.0 times (2019) as the company 1) directs cash flow towards further acquisitions that increase share and network reach; 2) maintains strong execution in enhancing acquired assets to improve EBITDA margin; and 3) is uniquely positioned to capitalize on the improving pricing backdrop," he said. "As such, we assign a target EV/EBITDA multiple of 14.0x on 2019 estimates, resulting in a target price of $56, and implying an attractive all-in one-year return of 17 per cent."

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Brookfield Renewable Partners LP's (BEP.UN-T, BEP-N) deal for a stake in TerraForm Power Inc. (TERP-Q) provides a "solid option" for capital recycling and a "desired foothold" in operating solar and distribution generation, according to Desjardins Securities analyst Bill Cabel.

On Monday, Brookfield and its institutional partners announced the previously announced acquisition of a 51-per-cent interest in Maryland-based TerraForm for $656-million. Brookfield's commitment is $203-million, giving it an approximately 16-per-cent stake.

"The view is that with Brookfield's management expertise and financial strength, the TERP platform can continue to grow and provide value to shareholders, while at the same time provide Brookfield with a foothold in the solar and wind market on a large scale at a reasonable valuation," said Mr. Cabel, noting the deal is expected to be immediately accretive and contribute 6 per cent to Brookfield's annual run-rate funds from operations (FFO).

Mr. Cabel added: "At first blush, investors may focus on the fact that BAM has created a 2.3 GW development ROFO [right of first offer] list for TERP, which is roughly one-third of BEP.UN's 7GW development pipeline and could be viewed negatively by investors. However, our understanding is that all solar and wind development activities and acquisitions, including any acquisitions of development projects in North America and Western Europe, will remain at BEP.UN, while TERP will have interests only in operating wind and solar in the regions previously mentioned. As a reminder, development projects generally offer low to mid-teen IRRs, while operating wind and solar assets generally offer mid- to high-single-digit returns; therefore, the higher-return development business will remain at BEP.UN. We believe this new TERP structure provides some optionality to BEP.UN while it looks to crystalize value on operating wind and solar assets in North America and Western Europe. Further, hydro (generally the most sought-after renewable asset) remains exclusive to BEP.UN. Therefore, we believe the acquisition of TERP will be beneficial to BEP.UN as it offers another option for BEP.UN to complete capital recycling. Further, we do not believe the acquisition will have any negative impact on BEP.UN's ability to increase its unitholder distributions by 5–9 per cent annually."

Maintaining a "hold" rating for the stock, he raised his target price to $43.50 from $43. The average target is $42.78.

"BEP.UN offers a high-quality, diversified asset portfolio and provides stable, long-term cash flows/distributions," said Mr. Cabel. "While we like these assets, management and the growth strategy, we see higher-return options in other names under coverage."

Elsewhere, Industrial Alliance Securities analyst Jeremy Rosenfield maintained a "buy" rating and $35.50 (U.S.) target.

Mr. Rosenfield said: "The acquisition remains a strategic positive for BEP with significant upside to this base case forecast as TERP continues to grow, and if BEP can build around the base of the assets acquired in new markets."

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"International is the key" for Netflix Inc. (NFLX-Q) moving forward, said Macquarie analyst Tim Nollen.

"Valuation depends at this point largely on the pace of international sub growth—we model 30 per cent in 2018 and moderating gradually thereafter; factoring in mid-single-digit ARPU [average revenue per user] increases and assuming cost growth slightly below revenue growth, we can get to the stock's current market value," he said. "Getting beyond this assumes international growth elevates beyond current rates."

He deemed the U.S. media company's third-quarter financial results, released Monday after market close "strong" on top line and EBITDA, and emphasized its guidance for the next quarter indicates growth internationally is "accelerating."

For the third quarter, U.S. subscriptions of 52.8 million met expectations, increasing by approximately 850,000 from the previous quarter. Internationally, subs rose by 4.5 million to 56.5 million, exceeding targets.

"We like Netflix's focus on revenue and earnings, not just subs: examples include recently-announced price increases on higher-tier subs in more mature markets, and distribution deals such as through mobile operators Altice and T-Mobile, and new streaming partnerships with airlines," said Mr. Nollen. "But content obligations continue to soar—Netflix has $17-billion in commitments and plans to spend $7-8-billion in 2018, with over a quarter now on originals. This number could move to more than 50% in the next 3 years, including film output doubling to 80 next year. This will push FCF even further into the red in 2018 (management implied a working capital/content spend ratio rising to 1.55 times, or $11-12-billion). But sub additions demonstrate the content investments are working and do drive operating margins up (we model 7 per cent in 2017 rising to nearly 10 per cent in 2018), so investors continue to accept the trade-off.

In response to the fourth-quarter guidance, Mr. Nollen raised his 2017 earnings per share projection to $1.24 from $1.06. His 2018 estimate jumped to $1.74 from $1.46.

Keeping a "neutral" rating for the stock, his target rose to $200 (U.S.) from $175. The analyst average is $217.74.

Elsewhere, Credit Suisse analyst Stephen Ju lowered his target by a dollar to $209 with an unchanged "neutral" rating.

"Whereas we were previously expecting a staggered price hike to its user base, it does appear that Netflix will roll out to the relevant markets at one time, which does raise our revenue estimates for 2018," said Mr. Ju. "This is offset by increased content acquisition spend expectations of between $10.9-$12.4-billion next year – which at this point should not be a surprise as the company looks to pull the quality of its library even further away from its competitors in a bid to continue winning consumer engagement time. Our price target remains essentially unchanged at $209 (vs prior $210) as the increase in revenue is offset by higher content expenses. We remain on the sidelines on balanced risk/reward."

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Believing it has a "good set" of growth opportunities across its business lines, CIBC World Markets analyst Scott Fromson initiated coverage of AirBoss of America Corp. (BOS-T) with a "neutral" rating.

"AirBoss has built through a number of acquisitions a verticall yintegrated base of rubber compounding and finished goods assets, featuring low capex requirements and significant unused capacity (we estimate 30-40 per cent)," said Mr. Fromson. "The company believes it is the second-largest custom rubber compounder in North America. We see potential catalysts from higher sales across AirBoss' business lines: 1) rubber compounds, including increased internal sales; 2) auto parts, within the attractive noise, vibration and harshness (NVH) segment; and, 3) defence products, taking advantage of rising military budgets.


"We forecast 2016-2019 CAGRs [compound annual growth rates] of 5 per cent for EBITDA and EPS, and see potential for increased estimates and strong free cash flow with successful execution. Our base-case forecast scenario assumes AirBoss will use free cash flow to reduce net debt, which currently sits at just under 2 times EBITDA. AirBoss could pursue further acquisitions, continuing the theme of vertical integration, or it could further increase the dividend."

He set a price target of $13 for shares of the Newmarket, Ont.-based company. Consensus is $14.43.

"The key issues in the medium term are cyclical headwinds in automotive and stabilizing the organic growth profile," the analyst said. "The path to higher AirBoss estimates and valuation lies in successful execution of its growth strategy to increase exposure to finished goods."

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In other analyst actions:

Citing improved revenue growth, margin expansion potential and shareholder returns through both share buybacks and dividend growth, Scotiabank analyst Paul Steep upgraded Thomson Reuters Corp. (TRI-N, TRI-T) to "sector outperform" from "sector perform" with a target of $55 (U.S.), rising from $47. The average is $49.84.

GMP analyst Ian B Gillies downgraded Enbridge Inc. (ENB-T, ENB-N) to "hold" from "buy" and dropped his target for the stock to $58 from $62. The analyst average is $61.69.

Mr. Gillies upgraded TransAlta Renewables Inc. (RNW-T) to "buy" from "hold" with a target of $16.25. The average target is $15.27.

GMP's Stephen Harris downgraded AutoCanada Inc. (ACQ-T) to "reduce" from "hold" with a target of $20 (unchanged). The average is $24.13.

Dundee Securities Corp initiated coverage of CannTrust Holdings Inc. (TRST-CN) with a "buy" rating and $7 target. The average target is $6.42.

Alta Corp Capital Inc. initiated coverage of InPlay Oil Corp. (IPO-T) with an "outperform" rating and $2.55 target. The average is $2.49.

Macquarie analyst Iain Reid upgraded Chevron Corp. (CVX-N) to "outperform" from "neutral" and bumped his target to $135 (U.S.) from $105. The analyst average is $121.98.

"As a result of our Free Cash Flow analysis for the global integrated companies published today, we are upgrading our rating on Chevron to Outperform (from Neutral)," said Mr. Reid. "We estimate the company has the best oil price break-even amongst the integrated oil large-cap names, with its cost reduction efforts and new production volumes driving outstanding free cash generation; to the extent that we believe it should be able to cover its capex and dividend at an oil price below $40 (U.S.) per barrel from 2018 onward. This is some $10 per barrel lower than the average of its large cap peers."

Kinder Morgan Inc. (KMI-N) was cut to "neutral" from "buy" by Goldman analyst Theodore Durbin, who dropped his target to $22 (U.S.) from $26. The average is $24.19.

Goldman Sachs analyst Jerren Holder upgraded Phillips 66 Partners LP (PSXP-N) to "neutral" from "sell" with a target of $59 (U.S.), up from $54. The consensus is $59.54.

Mr. Holder downgraded Energy Transfer Partners LP (ETP-N) to "neutral" from "buy" with a target of $20 (U.S.), down from $25. The average is $26.61.

Buckingham Research Group initiated coverage of Parker-Hannifin Corp. (PH-N) with a "buy" rating and $205 (U.S.) target. The average is $184.74.

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About the Author
Globe Investor Content Editor

David Leeder is a content editor in the Report on Business. He was previously Deputy Sports Editor and Weekend Digital Editor at The Globe.  He holds an undergraduate degree from McMaster University and a graduate degree from Ryerson University. More

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