Tuesday’s analyst upgrades and downgrades

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

It is clear Canadian National Railway Co.'s (CNI-N, CNR-T) first quarter has been challenging, according to Bank of America Merrill Lynch analyst Ken Hoexter, citing its weak performance and volume metrics.

A day after Luc Jobin was ousted as the company's chief executive officer amid a rail-freight backlog, Mr. Hoexter downgraded his rating for CN stock to "underperform" from "neutral."

In a release announcing the move, the company's management acknowledged "the immediate operational and customer service challenges the company has been facing since Fall 2017 - led by high demand and insufficient network resiliency, coupled with severe winter weather conditions."

Quarter-to-date revenue-ton miles have declined by 5 per cent, which is below Mr. Hoexter's expectation of a 1-per-cent increase. That led him to lower his estimate to a 4.7-per-cent decline.

Believing its institutional bounce-back capability appears to have taken a pause due to an overwhelmed network, Mr. Hoexter's target for CN shares fell to US$72 from US$84, believing the search for a new CEO will be an overhang for the stock in the near term.

The average target on the Street is US$83.16, according to Bloomberg data.

Elsewhere, RBC Dominion Securities analyst Walter Spracklin lowered his target for the TSX-listed stock to $105 from $112, keeping an "outperform" rating.

Mr. Spracklin said: "We attribute the company's operating issues as a result of too much growth, too quickly; culminating in the Board decision to replace the CEO. The focus now will be on rebuilding executive leadership and grinding through congestion issues. We advise investors be opportunistic as we maintain our positive view on the company's core asset base and the attractive dynamic of the industry in which it operates."

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Spin Master Corp.'s (TOY-T) $79-million acquisition of Gund provides increased global distribution opportunities that will likely drive further international growth, said Canaccord Genuity analyst Derek Dley.

On Monday, Toronto-based Spin Master announced the deal with Enesco LLC, a portfolio company of Balmoral Funds, for Gund, the world's largest plush toy manufacturer. Gund's annual gross sales are approximately $65-million, which Mr. Dley projects generates EBITDA of $9.8-million, leading to a transaction value of 8.1 times EBITDA.

"Gund helps to diversify Spin Master's product line, providing them with increased exposure to a plush toy category that grew 6 per cent globally in 2017," he said. "We expect Spin Master to provide more details regarding the acquisition on its Q4/17 earnings call on Wednesday March 7.

"In our view, Spin Master is well positioned to remain a key consolidator in the highly fragmented toy products industry. Pro-forma the Gund acquisition, we estimate the company remains in a very healthy balance sheet position. Spin Master has commented it would prefer to remain under 1.5 times net debt/EBITDA, but would leverage up to 2.5 times if an accretive, transformational acquisition were to present itself. Therefore, we believe Spin Master has plenty of 'dry-powder' available to continue its consolidation strategy."

Spin Master is scheduled to unveil its quarterly financial report on Wednesday after market close. Mr. Dley is projecting adjusted EBITDA of $43-million, above the consensus on the Street of $41-million and "well" above last year's $23-million result for the same quarter.

"We expect management will provide an update on the impact of the Toys "R" Us bankruptcy filings in the U.S. and Canada," he said. "In our view, any impact will be short-term and relatively minor as Spin Master will closely monitor credit risk and shipments to the retailer. In addition, we are confident Spin Master will be able to offset a potential reduction in shipments to Toys "R" Us by placing product through alternative sales channels."

In response to the Gund acquisition, Mr. Dley increased his 2018 earnings per share projection to $1.93 from $1.88.

Keeping a "buy" rating for its stock, his target rose to $63 from $53. The average on the Street is $59.44.

"Our target represents 15.0 times(13.1 times previously) our 2018 EBITDA estimate of $330-million ($323-million previously) which is converted into Canadian Dollars to account for the company's TSX listed share price," he said. "We are increasing the multiple to account for continued consolidation in what we believe is a still fragmented market. While not inexpensive, we believe a premium valuation is warranted as Spin Master offers investors robust top-line growth, a healthy balance sheet which will allow for accretive acquisitions, and robust free cash flow generation."

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Raymond James analyst Johann Rodrigues raised his target for shares of Park Lawn Corp. (PLC-T) in response to a "very timely" marketing day in Toronto last week following the announcement of its US$50-million acquisition of CMS Mid-Atlantic.

With the deal, Park Lawn gains the seven cemeteries in New Jersey and New York that CMS currently operates. It also an agreement in place to purchase 78 acres of land in the Township of Lafayette, N.J.

"Management feels there is significant upsize by pushing pre-need marketing, which the previous ownership group hadn't relied on as much, and thus low double -digit organic growth," said Mr. Rodrigues. "The acquisition was non-brokered as the owner of CMS was introduced to management by the owner of Saber."

"The purchase price multiple of 9.4 times (on US$5.2-million of run-rate EBITDA) is similar to the Saber acquisition in mid-2017, though management expects it to drop to 8 times in 24 months. The portfolio has 158k developed burial plots and sees roughly 3k burials annually (50 years of inventory). Given that it will be funded with cash and debt, leverage, pro-forma, will be 2.0 times debt-to-EBITDA, which is the top end of where Park Lawn likes to be. The run-rate EBITDA for the portfolio is estimated to be $30-million annually once the deal closes later this month."

Mr. Rodrigues said the company's management was working with their biggest acquisition pipeline ever, even prior to the deal, which he said was due largely to the retirement of many funeral and retirement home operators.

"The portfolio was dragged down in 2017 by the Michigan assets, although management will employ Saber sales tactics in 2018, hoping to improve results from that asset group (pre-need sales are currently 55-60 per cent, when they should be 75-80 per cent)," he said. "Both Saber and CMS will pull up Park Lawn's 2018E margins (15-16 per cent ex those two). Management expects 2018 organic growth to accelerate to the 6-8 per cent."

Keeping an "outperform" rating for Park Lawn shares, he hiked his target to $30 from $25. The average is $29.29.

"Park Lawn currently trades at 27.3 times and 20.1 times our 2018 and 2019 adjusted EPS estimates, a premium to U.S. death care peers which trade at 18.9 times and 17.4 times consensus 2018 and 2019 EPS, respectively," he said. "We are reiterating our Outperform rating and our new $30.00 target price is based on 23.0 times our revised 2019 adjusted EPS estimate, a premium to peers given the company's growth prospects."

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BMO Nesbitt Burns analyst Ray Kwan downgraded Raging River Exploration Inc. (RRX-T) to "market perform" from "outperform" in response to Monday's announcement it has commenced a formal process to initiate a strategic repositioning.

"We are surprised by the strategic repositioning announcement, as the company was in a similar process last year that ended abruptly with no sale or alternatives proposed," said Mr. Kwan. "Unfortunately, we believe this review will create more questions than answers, particularly around the rationale for the process and what alternatives can be done to enhance shareholder value, given previous attempts by the company. We didn't see any issues with its current organic growth strategy, which was more than able to self fund. In fact, our rate of change thesis on Raging River was driven by the East Duvernay play, which, if successful, will act as a step change for the company's growth profile."

Mr. Kwan lowered his target to $7 from $10. The average is $10.33.

"One thing we agree with Raging River on is valuation," he said. "The stock is inexpensive, trading below its 3P NAV (strip) of $9.48 per share ($3.91 per share 2P NAV) and at 4.4 times 2018 estimated enterprise value-to-EBITDA (strip). We also see no value being attributed to its significant Duvernay land position, which we value at $2.14 per share. Unfortunately, despite management being committed to shareholders, we see investors shying away from the name until a clear go-forward strategy is espoused. Despite holding management, the assets, and the upside in the Duvernay in high regard, we are downgrading Raging River shares."

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Mylan NV (MYL-N) is separating itself from its peers, according to Morgan Stanley analyst David Risinger.

Expecting "differentiated" growth prospects and pipeline catalysts to drive stock outperformance, he upgraded his rating for U.S. pharmaceutical giant to "overweight" from "equal-weight."

"Mylan is well positioned to gain U.S. generics share relative to competitors," he said. "Beyond its strong pipeline of new products, Mylan has opportunities to gain share relative to generic competitors which are facing challenges. No. 1 market player Teva is in the process of restructuring and cutting 25 per cent of its global workforce, No. 3 player Sandoz's U.S. oral generics unit is reportedly up for sale, and No. 8 player Apotex has faced leadership challenges."

"First of 18 biosimilar candidates approved by FDA in December; we expect investor enthusiasm for Mylan's large biosimilar pipeline to rise over time. FDA approved MYL's first candidate, a biosimilar version of Herceptin, in December. Launch could occur in 2019-2020 (exact timing TBD given confidential patent lawsuit settlement). We view Mylan as the best positioned U.S. generics company to capitalize on biosimilars via its industry-leading partnerships with Biocon and Momenta. Biosimilars are often high value, limited competition opportunities. By way of reference, #1 player Teva has just two biosimilar projects. Next candidate to watch is biosimilar Neulasta, which could be approved in 2018."

Citing "slight" revenue increase, margin expansion and lower share count, he raised his 2018 earnings per share projection by 4 per cent to US$5.41, his 2019 estimate by 9 per cent to US$5.96 and his 2020 expectation by 12 per cent to US$6.38.

His target for Mylan shares jumped to US$50 from US$39. The average target is US$49.86..

"We have not recommended MYL shares since 2015, and it is our only 'over-weight'-rated generic stock," he said.

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Credit Suisse analyst Jason West lowered his estimates for McDonald's Corp. (MCD-N) after a check of three U.S. franchisees found slowing sales trends.

"Franchisees cited 3 key reasons for sales slowdown versus 4Q: 1) The new 1 2, 3 Dollar Menu (launched in early Jan) has not performed up to expectations, 2) the Big Mac trio promotion has not been as impactful this year, and 3) winter weather has been more of a drag on sales this year than last year," said Mr. West.

Based on his survey, he lowered his first-quarter U.S. same store sales growth forecast to 1.5 per cent from 3.5 per cent. The consensus on the Street is currently 3.6 per cent.

His earnings per share projection for 2018 fell to US$7.47 from US$7.50, while his 2019 expectation fell to US$8.00 from US$8.03.

Mr. West said: "While this 1Q update is disappointing, we remain optimistic that sales can improve in coming qtrs. due to: 1) less weather impact going forward (hopefully), 2) improved traction as the new 1, 2, 3 value menu gains awareness, 3) easing compares on a 3- yr. basis, 4) roll-off of the Big Mac trio promotion (starting in March) which made for a tough compare in 1Q, and 5) launch of fresh beef nationally in May '18 (franchisees remain excited about this product). We also believe MCD lost some momentum due to the supply outage for the new chicken tenders late last year. The supply problem has now been fixed, but the product has been slow to rebuild as MCD's marketing effort has been focused elsewhere."

Maintaining an "outperform" rating for the stock, his target dropped to US$175 from US$191. The average target among analysts covering McDonald's is currently US$187.77.

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In other analyst actions:

TD Securities analyst Vince Valentini upgraded Cogeco Communications Inc. (CCA-T) to "buy" from "hold" with a target of $89 (unchanged), which is below the average on the Street of $91.25.

Mr. Valentini also upgraded Cogeco Inc. (CGO-T) to "buy" from "hold" with a $96 target. The average is $85.67.

TD Securities analyst Graham Ryding downgraded Sprott Inc. (SII-T) to "reduce" from "hold" with a target of $2.75. The average target is $2.95.

Scotia Capital analyst Orest Wowkodaw upgraded Taseko Mines Ltd. (TKO-T) to "sector perform" from "sector underperform," keeping a target of $1.60. The average target is $2.70.

Keefe, Bruyette & Woods analyst Kyle Voigt upgraded TD Ameritrade Holding Corp. (AMTD-Q) to "outperform" from "market perform" with a target price of US$66.50. The average is US$64.74.