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Air Canada planes sit on the tarmac at Pearson International Airport in Toronto in this file photo.MIKE CASSESE/Reuters

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

A pair of equity analysts upgraded their ratings for Air Canada (AC-T) on Tuesday in reaction better-than-anticipated fourth-quarter financial results.

On Friday, the airline reported a profit of $8-million, or 2 cents a share, versus a net loss of $179-million, or 66 cents a share, for the same period a year ago. The company added 30 routes globally through the 2017 fiscal year, leading to a record 48 million travelers, which raised its passenger revenue by 10 per cent.

That growth led Macquarie analyst Konark Gupta to raise Air Canada shares to "outperform" from "neutral," expressing surprise at the muted reaction to the results from the market.

Believing its margin concerns are abating, Mr. Gupta raised his target price to $35 from $28.

Scotia Capital analyst Turan Quettawala upgraded the stock to "sector outperform" from "sector perform" and increased his target by $3.25 to $32, which is currently the average among analysts covering the stock, according to Bloomberg data.

Though growth globally drew the most attention, the quarterly results showed Air Canada's "strong" domestic market, said Beacon Securities analyst Ahmad Shaath.

"The quarter was highlighted by the strength in yields, which came in at an increase of 4.0 per cent year over year on a stage-length adjusted basis," said Mr. Shaath. "This was helped by a strong showing in the domestic market, where yields were up 3.7 per cent (unadjusted) as capacity additions were successfully absorbed by the market (domestic load factor was up 0.2 points year over year on modest [up 1.3 per cent year over year] capacity additions). Continued strength in business-cabin and solid 6th-freedom traffic were also supportive."

Though the "solid" results exceeded his expectations, Mr. Shaath lowered his fiscal 2018 earnings per share projection for the airline to $3.53 from $4.74, believing its cost guidance "might prove to be aggressive" given current foreign exchange rates.

Elsewhere, Raymond James' Ben Cherniavsky kept a $24 target and "market perform" rating.

Mr. Cherniavsky said: "We believe the stock will continue to trade at a discount to U.S. airline peers for as long as its profitability and leverage ratios remain inferior. Furthermore, we believe that Air Canada's disproportional capacity growth since 2013 will present the airline with disproportional challenges if oil prices continue their ascent and/or economic growth decelerates."

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Citing new concerns over the profile of its core operations, Industrial Alliance Securities analyst Dylan Steuart downgraded Echelon Financial Holdings Inc. (EFH-T) to "hold" from "buy."

On Feb. 15, the Toronto-based insurance provider reported an operating loss of 51 cents per share, well below Mr. Steuart's expectation of a 18-cent profit and the 40-cent gain in the fourth quarter of 2016. The result was due largely to $12.3-million in underwriting losses from its 'personal lines' segment, which the analyst called "by far the worst result on record."

"Management attributed the weakness to unusual severity of claims in Atlantic Canada and increased frequency of claims in Ontario," he said. "While industry trends regarding auto insurance have been challenged, the weakness in this quarter is a considerable outlier. Management has been granted rate increases in Atlantic Canada and is looking to revamp certain product lines to improve profitability in 2018."

Though he said the performance of its 'commercial lines' segment "somewhat" mitigated the poor overall result, Mr. Steuart lowered his financial expectations due to the struggles of the 'personal lines' business. His 2018 EPS projection fell to 66 cents from 98 cents.

Mr. Steuart's target Echelon stock fell to $13 from $16.50. The analyst average is $14.50.

"Overall, [the results were] a clear miss from expectations and will likely stall the positive momentum that was generate from the recent divestiture of the challenged international segment," he said. "EFH is now trading at 1.1 times on a price-to-book basis, higher than the 0.9 times average, and near the highest level since the credit crisis."

Elsewhere, BMO Nesbitt Burns analyst Tom MacKinnon lowered the stock to "underperform" from "market perform" with a $13 target, down from $14.50.

"Recent CR deterioration is due to personal auto," said Mr. MacKinnon. "While recently filed rate hikes should help, the impact is uncertain and will take time. With 75% of its book in personal auto, EFH is heavily exposed to the highly regulated and volatile non-standard personal auto market. Given continued CR uncertainty and 6-8-per-cent ROE, we believe a 0.95 times P/BV multiple is appropriate."

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Despite its fourth-quarter results coming in "light" versus his expectations, CIBC World Markets analyst Mark Jarvi upgraded his rating for Capital Power Corp. (CPX-T) based on a bullish view of its potential.

"Our upgrade is not related to Q4 results (were slightly soft versus our forecast), nor solely premised on calling the bottom on a higher-yield stock following a sell-off in defensive stocks (though valuation is attractive). Rather it is based on our constructive near- to medium-term outlook," he said.

"The Alberta power market is firming up (spot prices have stepped up in Q1 as expected, forward curve remains strong, capacity market clarity coming) and CPX should be able to realize better pricing and cash flow over the coming quarters. Further, we believe CPX can deliver at the upper end of its affirmed 2018 AFFO guidance. CPX has put in place an updated NCIB — we want to see CPX be active on buybacks, which could drive stronger investor sentiment compared to recent capital allocation decisions."

On Feb. 16, the Edmonton-based  power generation company reported quarterly adjusted funds from operations of $91-million, missing Mr. Jarvi's estimate of $97-million. Normalized adjusted EBITDA of $172-million was in line with his projection ($170-million) and the Street ($172-million). He noted "strong" U.S. results "compensated for softness in Alberta merchant operations and higher corporate costs."

"Our outlook is incrementally more positive, with key 2018 and 2019 estimates up 2 per cent," the analyst said. "Alberta power pricing and forwards are slightly ahead of our forecast— average pricing in Q1/18 to date is $38/MWh vs. our $36/MWh estimate, and the forward curve remains strong (2018 averages $57/MWh vs. our more conservative $53/MWh forecast). Coupled with weak gas pricing (helping spark spreads), we've taken up our forecast modestly on lower costs (but left our power price assumptions unchanged). There are small changes to hedging — pricing ranges are unchanged but percent hedged in 2019-20 was trimmed (added more market exposure) to 37 per cent and 20 per cent (from 45 per cent and 25 per cent), respectively. Capital Power reiterated its 2018 AFFO guidance of $360 million-$400 million — our forecast aligns with the company's message that is expected to be above the midpoint."

Moving the stock to "outperformer" from "neutral," Mr. Jarvi cut his target to $27 from $27.50. The average is $27.67.

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In the wake of its proposed $3.9-billion merger with Choice Properties REIT, BMO Nesbitt Burns analyst Heather Kirk downgraded Canadian Real Estate Investment Trust (REF.UN-T) to "market perform" from "outperform."

"The initial reaction to CREIT's potential merger with Choice has been mixed, as investors mourn the loss of a REIT with coveted characteristics: top-tier management team, low payout ratio, low leverage, high free cash flow and consistent NAV/FFO growth," she said. "While we understand the angst and concerns over a greater weighting to retail, we believe that, led by Johnson/Diamond/Barrafato, Choice can become CREIT 2.0 levering off a stable portfolio base, significant intensification potential and lower leverage and payout ratio over time."

Ms. Kirk raised her target price to $53.60 from $52 to reflect the offer, which is slightly above the $53.19 analyst average.

"The new REIT will provide greater geographic diversification with less weighting to CREIT's slow-growth Calgary Office portfolio market while adding a stable portfolio of Loblaws anchored shopping centres," she said. "The retail weighting increases from 56 per cent to 78 per cent; however, we expect that to decrease over time. Although the non-core market weighting will increase, the exposure is almost exclusively stand-alone grocery stores under long-term leases."

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SEMAFO Inc.'s (SMF-T) updated mine plan for its Mana project in Burkina Faso brought a negative reaction from the Street on Friday.

Shares of the Montreal-based mining company fell 10 per cent after the release of the plan, which included pre-feasibility study (PFS) results for its Siou underground deposit,

"The updated mine plan for Mana was SEMAFO's opportunity to address concerns about what is looking like an ageing asset with no material exploration success since the Siou discovery. However, the new mine plan failed to live up to expectations, with reduced open pit economics and an underground operation that is yet to show potential for scale," said Desjardins Securities analyst Raj Ray in a research note released Monday.

"Is the sell-off done? Incorporating the updated mine plan and making other small adjustments to our assumptions, our base-case NAVPS decreases by 14 per cent to $3.80. With SEMAFO's shares declining by 10 per cent on Friday (Feb. 16), the current level more or less reflects the impact of the announcement."

Mr. Ray kept a "buy" rating and lowered his target by 50 cents to $5, which is 24 cents below the average.

However, Clarus Securities analyst Nana Sangmuah took a more positive view, raising his rating for the stock to "buy" from "accumulate" with a $5.75 target (unchanged).

"Upon successful execution of the mine plans we estimate US$1.0-billion of FCF to be generated over the next five years with the cash balance topping US$1.0-billion by 2024," said Mr. Sangmuah. " This positions the Company to take advantage of growth opportunities in the sector, reinstate an attractive dividend policy or become an attractive target for other industry players to fund their growth pipelines."

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Though Barrick Gold Corp. (ABX-T, ABX-N) has a more favourable short-term outlook than its peers, it faces similar strategic and reinvestment challenges moving forward, said Desjardins Securities analyst Josh Wolfson.

"Overall, Barrick is forecast to provide attractive relative FCF [free cash flow] in 2018/19, but thereafter this will decline to a more normalized level," said Mr. Wolfson in response to the company's updated guidance, released on Feb. 14 with its year-end results.

The analyst said the key change to the outlook was slightly higher production at a slightly higher all-in sustaining cost.

"This cost outlook varies from historical guidance (ie AISC in 2019–22 now US$750– 875 per ounce versus historical 'aspirational' greater-than US$700/oz), but is closer to our more conservative estimates," he said. "Other key items include material positive reserves changes at various core assets, offset by a large increase in reclamation liability (up US$0.77-billion)."

Based on the guidance, Mr. Wolfson lowered his earnings per share projections for 2018, 2019 and 2020 to 74 US cents, 55 US cents and 46 US cents, respectively, from 76 US cents, 70 US cents and 55 US cents.

"A key historical ABX concern was aggressive prior cost guidance objectives, which were unlikely to be achieved. Following updated guidance, this risk has diminished," he said. "However, we anticipate capex will trend higher over time compared with guidance. Based on a guided average US$1.1–1.5-billion per year from 2019–22, and assuming aggressive zero inflation to US$1-billion per  year sustaining capital, implied project capital spending is US$0.1–0.5b/year. This is inconsistent with outstanding outlined (but not yet approved) projects over these four years of US$1.8-billion (Goldrush US$1.0-billion, Cortez Deep US$0.15-billion, Lagunas Norte US $0.64-billion and Turquoise Ridge US$0.3-billion), plus other general project spending which historically has totalled US$0.1–0.3-billion per year."  

Maintaining a "hold" rating for Barrick shares, Mr. Wolfson's target fell to $19 (Canadian) from $19.50. The average is $21.63.

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Credit Suisse analyst Jamie Cook reiterated Deere & Co. (DE-N) as his "top pick" following "solid" quarterly results and better-than-anticipated 2018 guidance.

Shares of the Moline, Ill.-based farm equipment maker jumped 1.6 per cent on Friday after it posted a net loss of US$535.1-million, or $1.66 US per share, including a US$965-million charged related to U.S. tax reform. Adjusted EPS of US$1.31 exceeded the Street's expectation of US$1.20 with sales rising 27 per cent year over year to US$5.974-billion, which fell 7 per cent below the consensus estimate of US$6.418-billion.

Deere raised its 2018 net income guidance by US$250-million to US$2.85-billion. Sales are expected to jump 29 per cent year over year (up from a previous estimate of a 22-per-cent rise).

"The key from the call was that the $2.85-billion net income guide does not assume the benefit from a lower tax rate in the remaining three quarters," he said. "As such, the net income guide is really $3.065 or $9.50 in earnings vs. the street estimate of $8.40. More importantly, the $250-million in net income or $0.75 EPS increase is from better fundamentals/operations versus initial thoughts the guide increase was largely tied to tax benefits. This is withstanding supply chain and production issues, which reduced DE's Q1'18 topline by roughly 8 points. We walk away very encouraged as the order book for DE's NA large AG (tractors) equipment is 6 weeks out on higher production increases. This is key as it is DE's higher margin business. Furthermore, the C&F order book has visibility through Q2'18 and is up 40 per cent. Also, DE's FCF guide is increased to $4.4-billion or $600-million higher providing opportunity to pay off Wirtgen early and after which likely pay dividends and buy back stock."

Mr. Cook raised his EPS estimates for 2018, 2019 and 2020 to US$9.61, US$12.00 and US$15.05, respectively, from US$8.05, US$10.42 and US$13.12.

Keeping an "outperform" rating, his target for Deere shares rose to US$231 from US$198. The average on the Street is US$186.59.

Meanwhile, RBC Dominion Securities analyst Seth Weber hiked his target to US$210 from US$190 with an "outperform" rating.

Mr. Weber said: "We see DE's 1Q18/outlook as consistent with our Jan. 10 upgrade to Outperform. Firming/improving farm equip mkts, strong construction demand, and cost/efficiency measures are all contributing to higher ests and supporting opportunity for further share appreciation."

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Eight Capital analyst Jacques Wortman said there is a dearth of pure-play investment vehicles that offer nickel and cobalt exposure.

Believing Sherritt International Corp. (S-T) offers "strong" leverage to both, he initiated coverage with a "buy" rating.

"Despite the diversity of the company's overall operations, Sherritt International is fundamentally a nickel and cobalt investment vehicle via its 50-per-cent interest in the Moa JV," said Mr. Wortman. "We estimate that Sherritt's share of attributable production in 2018 will total approximately 35 mm lbs of nickel and 4 mm lbs of cobalt, or 0.75 per cent and 1.8 per cent of global supply, respectively. Sherritt's Moa JV interest makes it one of the largest producers of cobalt among investment vehicles domiciled in North America. In addition, Sherritt also holds a 12-per-cent interest in Ambatovy, although no dividends from this interest are expected until 2027 due to significant precedent debt (~$4 billion) at the JV level."

He set a $2.20 target, which sits above the consensus of $1.97.

"Given the recent announcements by automakers and growing awareness of electric vehicle (EV) technology, Sherritt shares have seen increased demand in the last six months," the analyst said. "Despite the recent correction, we believe that coming demand for cobalt and nickel associated with EVs will potentially eclipse market forecasts within the next 5 - 10 years and that the cobalt price, followed by the nickel price, could exceed consensus and our estimates. As a result, the re-rating of S shares is expected to continue."

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In other analyst actions:

Believing its turnaround is gaining traction, Cowen analyst Cai Von Rumohr upgraded Bombardier Inc. (BBD.B-T) to "outperform" from "market perform" with a target of $4.90, rising from $2.70. The average target is currently $3.96.

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