Tuesday’s analyst upgrades and downgrades

Share

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

Apple Inc.'s (AAPL-Q) massive run may be coming to end, according to Nomura Instinet analyst Jeffrey Kvaal.

He took a rare step on Tuesday, lowering his rating for the U.S. tech giant's stock to "neutral" from "buy."

It's the first downgrade of Apple since June. However, the Street remains bullish on its fortunes, with 36 of the 44 analysts covering the stock having buy ratings (and the other eight with holds), according to Bloomberg data.

"We argue that the stock's gains for the iPhone X supercycle are in the late innings," said Mr. Kvaal. "We believe unit growth, if not quite Average Selling Price growth, is well anticipated by consensus and a historically full multiple."

He believes the Street's expectations are now too lofty, noting unit growth projections that he deems unsustainable and its historically high multiple.

"While its user base and services growth are powerful tailwinds, neither is yet sufficient to flout the trend of 30-40-per-cent intracycle downticks," he said. "We consider now the time to downgrade; supply/demand balance for the X portends component anxiety."

In the wake of an impressive run for the stock, which has seen it jump in price by 52 per cent thus far this year, Mr. Kvaal lowered his target price to $175 (U.S.) from $185. The analyst average target on the Street is currently $192.69.

"Apple is certainly not the same company as it was five or even three years ago. The growth in its services business is a particularly notable departure though hardly the only one," said the analyst. "We do believe Apple's improvements merit a richer multiple than in prior years, though marginally so. We do not consider any of these sufficient, either individually or in aggregate, to flout the historical precedent."

=====

Barclays analyst John Aiken adjusted his rating for four Canadian bank stocks on Thursday.

Believing the integration upside from its acquisition of PrivateBancorp Inc. is "readily apparent," Mr. Aitken boosted his rating for Canadian Imperial Bank of Commerce (CM-T) by two levels to "overweight" from "underweight."

Also emphasizing the benefits it will feel from Bank of Canada rate hikes, his target for CIBC shares jumped to $125 from $119. The analyst average is $127.08.

Mr. Aiken feels the market is overlooking the progress Laurentian Bank of Canada (LB-T) is making on its transformation plan, though he noted mortgage documentation concerns linger.

He raised Laurentian to "overweight" from "equal-weight" with a target of $62, suggesting it will see a higher valuation multiple with stronger margins and loan growth. The average is $59.45.

The analyst downgraded National Bank of Canada (NA-T) to "equal-weight" from "overweight" with a target of $64, rising from $59. The average is $66.15.

He cut Canadian Western Bank (CWB-T) to "underweight" from "equal-weight" with a $36 target. The average is $39.29.

=====

BMO Nesbitt Burns analyst Ben Pham believes Inter Pipeline Ltd.'s (IPL-T) $3.5-billion Heartland Petrochemical project could prove to be a "material positive long-term."

However, Mr. Pham believes its near-term valuation upside to peers could be limited, leading him to downgrade its stock to "market perform" from "outperform."

"Sentiment towards DRIP programs financing growth has waned and capex budgets for mega projects are not without risk," he said. "IPL has established a solid track record for growth and our bias is to give management the benefit of the doubt. But given the contractual uncertainty for such a large investment, we are maintaining our target of $28 and reducing our rating to Market Perform."

On Monday, Calgary-based Inter announced its board of directors has authorized the construction of the integrated propane dehydrogenation (PDH) and polypropylene (PP) plant in Strathcona County, Alta. The complex is scheduled for completion in late 2021.

"Recall, this project was assumed as part of the 2016 Williams Canada acquisition and is anticipated to convert locally-sourced low cost propane (22,00 barrels per day) into 525,000 tons per year of polypropylene," said Mr. Pham. "Capital costs have increased 13 per cent from the latest estimate (to $3.5-billion versus $3.1-billion) as detailed engineering nears completion (PDH engineering 85-per-cent complete with Fluor Corporation; 70 per cent on the PP project with Linde Engineering), with IPL noting healthy availability of skilled labor as it enters construction beginning next year.

"While the project hasn't yet crossed the finish line with respect to securing an adequate level of long-term contracts, the odds look favorable longer term, with the upside of successful execution being: (1) realizing $3 in present value ($5 in future) based on the targeted EBITDA contribution with no major equity required beyond the DRIP; (2) support for significant dividend growth once the project is complete (late 2021); and (3) extension of the NGL value chain, further diversifying IPL's cash flow from oil sands infrastructure and positioning the company for longer-term growth."

Mr. Pham kept a target of $28 for Inter shares. The average target is $29.70.

"Historically, IPL used to trade at a discount to other Canadian midstream stocks, but now trades at a premium (2019 FCF yield of 8.2 per cent versus peers at 9.2 per cent; enterprise value/EBITDA of 14 times versus peer average at 12 times)," he said. "Valuation improved with growth announcements in oil sands transportation on Cold Lake and Polaris along with a corporate conversion in late 2013 that improved corporate governance and removed an impediment for U.S. investors to invest in the stock.

"We believe the company's oil sands pipeline assets will continue to garner a premium multiple given the long-life assets with high-credit counterparties (i.e., target 15 times EBITDA multiple on 55 per cent of 2017 estimated EBITDA). However, commodity contribution for IPL has increased relative to its peers given the Williams Canada acquisition last year and recent frac spread strength benefiting its NGL processing business (commodity exposure to 20 per cent from 12 per cent in 2016). That commodity exposure could remain high depending on the outcome of the contracting process for the Heartland petrochemical facility and direction of frac spreads. For that reason, we believe there is less relative valuation upside in IPL near term especially following recent outperformance of the stock (since the beginning of September, IPL has delivered total return of 17 per cent versus the pipeline/midstream average of negative 3 per cent)."

Elsewhere, CIBC World Markets analyst Robert Catellier raised his target to $32 from $30 with a "neutral" rating.

Mr. Catellier said: "Sanctioning the PDH/PP plant without disclosing the level of contractedness will pressure the stock in the short term as the shares turn over from dividend and income investors to more traditional equity investors. That said, the economics of the project are compelling and we believe investors will warm to it as new contracts are announced."

=====

Touting its strong position in the medical marijuana market, which he believes positions it well to compete in the recreational market in 2018, Echelon Wealth Partners analyst Russell Stanley initiated coverage of MedReleaf Corp. (LEAF-T) with a "speculative buy" rating.

"The cannabis market is rapidly growing, and with shortages expected once the recreational/adult-use market is legalized, simply expanding capacity is a valid strategy in the immediate term," said Mr. Stanley. "However, what stands LEAF apart from its peers is its use of data analytics to drive both the selection of customer groups with high lifetime value, as well as continued improvement in production yields. While the government's policy change with respect to reimbursing veterans negatively impacted revenue from that customer base, we understand that the results reported in November fully reflect that impact, and we still view this patient category as a significant market opportunity given the potential to 8 times the number of patients in the program. We believe the company's focus on quality over quantity with respect to customer acquisition is unique, and positions it well for strong relative margin performance."

Mr. Stanley believes Markham, Ont.-based MedReleaf's fully funded capacity is amongst the largest in the industry.

Following the closing of its recent bought deal financing, which closed on Dec. 4, the analyst estimates the company's fully funded capacity is at least 58,000 kilograms per year. The company is currently aiming to expand production from 7,000 kilograms to 35,000 kilograms through the growth of its Bradford, Ont., facility.

With that estimate, Mr. Stanley projects annualized revenue of at least $540-million based on last quarter's realized price of $9.34 per gram.

"For the purposes of our model, we assume that this capacity is brought on line and licensed to sell by the end of calendar 2018 (i.e. 12 months from now), or the third quarter of fiscal 2019," he said. "These assumptions could prove conservative if the company is able to build or acquire capacity at a lower CAPEX/gram cost, and/or if the capacity is added via acquisition, in which case it could be brought online sooner than we have modeled. We assume that this third facility operates at 50-per-cent capacity in fiscal 2020.

"We assume a decline in realized pricing for dried cannabis (from $8.37/gram last quarter to $7.21/gram in F2019, and $6.00/gram in F2020), reflecting the wholesale pricing that LEAF is likely to receive on sales to the recreational market. We assume that the relative premium on extracts averages 58 per cent during our forecast period, so our realized pricing for extracts declines from $13.97/gram last quarter to $11.10/gram in F2019, and to $9.47/gram in F2020. This is partially offset by our assumption that extract increase their share of cannabis revenue from 19 per cent last quarter to 52 per cent in F2019 and 79 per cent in F2020."

Mr. Stanley said his forecast implies "significant" revenue and earnings performance in fiscal 2019 and 2020. Though he assumes operating expenses will grow, he said revenue improvements "should outpace it."

He set a target price of $21 per share. The analyst average target is $19.43.

"Constellation Brands' (STZ-N) $245-million investment in Canopy Growth Corporation (WEED-T) is a major validation of our view that major players from the alcohol, tobacco, and pharmaceutical markets are beginning to recognize the growth opportunity in the cannabis space," said Mr. Stanley. "As one of just four cannabis producers with a $1-billion-plus market capitalization, and a very sophisticated approach to this market, LEAF is uniquely positioned for its potential to 'move the needle' for strategic investors."

"Potential catalysts include additional product development news, further expansion progress, and improved financial results. We value LEAF using a 17 times enterprise value to calendar 2019 EBITDA multiple applied to our estimates for C2019 versus the average amongst its closest peers of 32 times. We believe this multiple is warranted given LEAF's process-driven dominance in high-value market segments."

=====

Touting its "stronger" core and options for the future, RBC Dominion Securities analyst Joseph Spak raised his rating for General Motors Co. (GM–N) to "outperform" from "sector perform."

"The stock fits squarely into our preferred narrative for 2018 – increased confidence on downturn resiliency with a seat at the table on new mobility," he said. "Further, we see upwards 2018 earnings revisions."

Mr. Spak said the company's "encouraging" third-quarter financial results, released on Oct. 24, showed a "more robust and flexible" business model.

"3Q17 results made us more comfortable in GM's stated downturn scenario (profit $6-$8-billion lower in a 25-per-cent U.S. downturn)," he said. "We believe uncertainty around downturn performance has been a contributing factor weighing on the multiple. We don't want to over-extrapolate one quarter, but the results were encouraging enough that we believe investors should begin to fade the overly pessimistic view."

He added: "We now have more confidence that a 10-per-cent GMNA target is achievable in 2018 which represents the biggest change to our model," he said. "The change is driven by higher truck production than previously assumed and cost savings. On the former, CEO Mary Barra indicated that the 'Oshawa shuttle' – building K2XX pickups at Fort Wayne body shop and shipping them to Oshawa for painting and final assembly – gives the company more flexibility/capacity than may be appreciated. Barra indicated that net of new TI platform, full-size pickups will only be down 70,000 year over year. We are going to down 100,000 year over year (from down 125,000) and even though the variable profit on these trucks is likely to be lower than normal considering the incremental shipping costs, this does help us come off the $2-billion lower year-over-year GMNA profit we previously forecasted. If GM is correct and trucks are only down 70,000 year over year, that could be another $300-million to our EBIT forecast or greater-than 15 cents per share, all else equal. Additionally, we believe that the IHS K2XX SUV forecast which shows down 35,000 is too dire. We believe this could be flat to down a few thousand, though are prudently modeling down 10,000. GM also has another $1-billion of gross cost saving it expects to achieve in 2018 (we are putting 75 per cent in GMNA). Finally, the company will also have a full-year of its new mid and compact SUVs. GM also talks about ramping up adjacencies though this isn't really considered in our model."

Mr. Spak raised his target for GM shares by $1 (U.S.) to $52. The average is currently $46.36.

"It remains to be seen if GM can win on the robo-taxi opportunity, but it has a seat at the table," he said. "And it's early enough in the story that we still see a lot of potential for that narrative to take hold and for growth/tech investors to look to GM, increasing demand for shares and potentially the multiple."

=====

BMO Nesbitt Burns analyst Andrew Mikitchook said Northern Dynasty Minerals Ltd. (NDM-T) has cleared "a key positive milestone" by securing a financing and development partner for its Pebble mine project in Alaska.

On Monday, Northern Dynasty Minerals announced First Quantum Minerals Ltd. (FM-T) has agreed to acquire an option to buy a 50-per-cent stake in the project for $1.50-billion (U.S.).

"First Quantum is an established producer with a strong track record of mine building and operations, which in our opinion is a positive for both permitting and development of this project," said Mr. Mikitchook. "First Quantum also intends to attach at least one person to the permitting team and should the option be exercised would appoint additional personnel as well as the operating company CEO.

"First Quantum will fund $15-million of permitting over the next 4 years (option to extend to 6 years). Thereafter it will have the option to earn a 50-per-cent interest in the project by funding the next $1.35-billion of development costs. This is substantially similar to the total commitment of Northern Dynasty's previous partner Anglo at $1.4-billion. Notably this is stronger than the US$1-billion we previously assumed in our valuation."

In reaction to the news, Mr. Mikitchook upgraded Northern Dynasty to "outperform" from "market perform" with a target of $3.50, up a loonie. The average is $3.93.

"We are upgrading our recommendation to recognize the significant risk reduction achieved in securing a permitting and development partner," he said. "We are updating our valuation for the terms of the First Quantum earn-in and slightly increasing our multiple to 0.75 times from 0.6 times. We are also allowing for 4 years of permitting which moves our start of construction back by one year to 2022 and first production to 2026."

=====

Citing its leadership position in the production of a diverse range of inorganic chemicals, Desjardins Securities analyst David Newman initiated coverage of Chemtrade Logistics Income Fund (CHE.UN-T) with a "buy" rating.

"Investors do not have to enroll in Chemistry 101 to understand Chemtrade Logistics Income Fund (CHE) for a few key reasons: (1) the company continues to expand across the periodic table, with strong diversification across a broad range of inorganic chemicals, limiting its exposure to any single commodity or specialty chemical; (2) it offers downside protection through a multitude of risk-mitigation strategies, with some potential upside in the current chemicals cycle, courtesy of the recent Canexus acquisition; and (3) it benefits from its leading market positions, extensive geographic footprint, operational scale, industry-leading cost advantages (eg low-cost electricity) and strong operational execution. CHE's efforts have been supportive of its sustainable and attractive distributions," said Mr. Newman.

He sees Chemtrade possessing a "strong competitive moat," noting its leadership position in sulphuric acid and now the production of sodium chlorate through its recent acquisition of Canexus Corp., which possessed North American's largest and lowest-cost facility in Brandon, Man.

"In our view, CHE is a relatively safe, high-yielding investment, with potential upside on the back of rising commodity chemicals prices, select organic growth opportunities and synergies," said Mr. Newman. "We believe adjusted EBITDA and adjusted FCF should grow by 6 per cent and 9 per cent, respectively, from 2017–22, following five-year CAGRs [compound annual growth rates] of 12 per cent and 6 per cent, respectively, from 2011–16, driven mostly by acquisitions. While the company has a relatively buoyant outlook and a conservative payout ratio, aided by a strong recovery in caustic soda and HCI prices, we do not anticipate any near-term distribution increases (it has maintained the current annual distribution of $1.20 per unit over the past 10 years). Instead, we anticipate the company will invest in its modest organic growth initiatives and debt reduction, as noted.

"We believe the rapid ascent in caustic soda and HCI prices has provided some torque to an otherwise safe story, with downside protection through various risk-mitigation strategies. While there have been periods of inconsistent operational performance, most recently exemplified by CHE's 3Q17 results and the two-week shutdown at its North Vancouver chlor-alkali plant in 4Q17, the company has tended to recover quickly."

Mr. Newman set a price target of $23 per unit. The average is currently $21.61.

"CHE offers a potential total return of 28 per cent, with a strong mix of stable yield and growth, as well as potential catalysts, given the rapid increase in caustic soda and HCI prices following CHE's timely acquisition of Canexus," he said. "We expect CHE to maintain its current annual distribution of $1.20 per unit, while its rising cash flows and improving balance sheet are increasingly reserved for future investments and M&A."

=====

With its portfolio of assets "well on its way to being 'right-sized'" following its recent sales of its Peak mine in Australia and El Morro project in Chile,  Laurentian Bank Securities analyst Ryan Hanley initiated coverage of New Gold Inc. (NGD-T) with a "buy" rating.

"Given NGD's cornerstone assets which offer long mine lives based on existing reserves & resources, our belief that Rainy River should reach a steady-state level in early 2018, and a compelling valuation, we believe that now is the time to take a fresh look at NGD," said Mr. Hanley.

"With commercial production having been declared in October, followed by the mine processing an average of 19,000 tons per day over the first two weeks of October (vs. nameplate capacity of 21,000 tpd), we believe that the worst is over at Rainy River. In addition, we expect continued cash flow generation from New Afton and Mesquite to result in what should become an improved financial situation for the company going forward."

After the sale of the two assets, Mr. Hanley said the bulk of the company's production will now fall to its "cornerstone" assets in Canada of New Afton and Rainy River as well as the Mesquite mine in California.

"Following the declaration of commercial production at Rainy River in October, along with the receipt of the Schedule 2 amendment which will allow NGD to complete construction of the tailings management facility, we believe that Rainy River has now largely been de-risked," he said. "This mine represents the next leg of growth for NGD, and is expected to produce an average of 317,000 ounces of gold per year over its operating life (excluding the processing of stock piles at the end of the mine life).

"Cornerstone assets offer up lengthy mine lives. Both New Afton and Rainy River continue to offer further exploration upside; however given their sizable reserve & resource bases, exploration has not necessarily been the focus. Once Rainy River has fully ramped-up, we expect that these two assets will combine to produce an average of 410,000 ounces of gold and over 81 million pounds of copper per year, over lengthy mine lives which exceed ten years."

Calling its valuation "compelling," he set a price target of $4.75. The average on the Street is $5.34.

" Given prior start-up issues and related funding concerns at Rainy River, we believe that the worst is behind the company and that, upon the mine hitting production targets over subsequent quarters, this should result in the stock being re-rated," he said. "NGD currently trades at a price-to-net asset value multiple of 0.80 times and 2018 estimated price-to-cash flow multiple of 5.5 times versus a peer group which trades at an average P/NAV multiple of 1.00 times and 2018 P/CF of 6.5 times."

=====

BMO Nesbitt Burns analyst Gerrick Johnson downgraded Funko Inc. (FNKO-Q) after recent channel checks found a build-up of its inventory in retail stores and a rise in markdowns.

After initiating coverage of the Everett, Wash.-based toy maker, best known for its flagship Pop! line of figures, with an "outperform" on Nov. 27, he has now lowered his rating to "market perform."

"We have now had two weeks to digest the company's 3Q financial release. And since then, we believe performance has deteriorated relative to expectations," said Mr. Johnson. "As the critical holiday season has progressed it has become increasingly clear that the overall toy and collectibles industries have performed below our initial expectations. We think U.S. retail sales of toys (and pop culture collectibles) are running down low-to-mid-single digits percent for the season. In our recent channel checks we have noticed a build-up of Funko's inventory levels at retail, particularly of the company's flagship Pop! collectibles line. We have already begun to see clearance sales, something Funko's core collector customers are very sensitive to. Secondary market prices for Pop! collectibles are up over the last six months, though we began to see a decline in the values in mid-November, which we consider a warning sign for the health of this collectibles market."

Mr. Johnson lowered his 2017 and 2018 earnings per share projections to 29 cents (U.S.) and 55 cents, respectively, from 32 cents and 60 cents.

His target for its stock fell to $7.50 from $10. The average is $12.21.

"We have moderated our estimates and fear there could still be risk to further downward revision," the analyst said. "To account for this additional risk, we are lowering the multiples with which we use to value Funko shares to a 12 times price-to-earnings multiple (from 13.5 times) on our 2019 EPS estimate of 60 cents (from 75 cents). We are reducing our enterprise value-to-EBITDA multiple to 5.5 times (from 6.0 times) our 2019 EBITDA estimate of $109-million (from $121-million) These lower valuation multiples are more in line with what a small-cap toy company would trade at. The closest comparable in this case would be JAKKS Pacific (JAKK-Q; "market perform"), a small-cap toy company with a reliance on licensing others' intellectual property."

=====

Citi analyst Kate McShane upgraded its rating for Wal-Mart Stores Inc. (WMT-N) to "buy" from "neutral." The firm moved its target to $117 (U.S.) from $106. The average is $100.68.

Ms. McShane said: "We sat on the sideline with this name in '17, which proved to be a big mistake. Despite the stock's run-up, we think there is even more to come, particularly considering HD and COST are trading at a premium to WMT. Our belief that its aggressive omnichannel strategy will continue to drive significant sales growth and WMT's ecommerce operations are emerging as a true challenger to Amazon, both factors that could fuel further multiple expansion."

Believing it's "back in the game," Ms. McShane upgraded Dick's Sporting Goods Inc. (DKS-N) raised to buy from neutral, believing expectations for 2018 are set "relatively low." Ms. McShane hiked her target for its stock to $35 (U.S.) from $28. The average is $28.17.

=====

In other analyst actions:

Cormark Securities analyst Richard Gray downgraded Torex Gold Resources Inc. (TXG-T) to "market perform" from "buy" with a target of $14, down from $25. The average is $20.90.

Macquarie analyst Caroline Levy upgraded Colgate-Palmolive Co. (CL-N) to "outperform" from "neutral" with a target of $81 (U.S.), rising from $71. The average target is now $75.84.

Cormark Securities analyst MacMurray Whale initiated coverage of Cobalt 27 Capital Corp. (KBLT-X) with a "buy" rating and $13 target. The average target is $11.60.

--

With a file from Bloomberg News