Wednesday’s analyst upgrades and downgrades

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Inside the Market's roundup of some of today's key analyst actions. This file will be updated often during the trading day so check back for new details.

The scandal swirling around Volkswagen AG is likely to stall the European margin recovery for Magna International Inc. (MGA-N, MG-T) and slow earnings growth, according to CIBC World Markets analyst Todd Coupland, who downgraded the stock Wednesday.

Though Magna does not produce the diesel engines that have sparked the automaker's ongoing problems, Volkswagen AG is one of its largest customers, accounting for 11 per cent of its 2014 revenue according to Bloomberg.

"At the moment, we do not know the flow-through impact and neither does Magna which they readily admit," said Mr. Coupland. "VW's share loses could go onto other Magna programs or they may not. For the sake of our analysis, we assume Magna loses $500-million in European production sales. This compares to the at-risk sales for a number somewhat less than $1.75-billion. While only time will tell if these assumptions are specifically correct, we believe directionally they are right. With VW Group being a large customer, we believe Magna's VW sales will be moving downwards. Replacing all of Magna's VW revenue seems unlikely in the near term. Longer term, they could very well benefit from the market share shift away from VW to other OEMs."

Accordingly, Mr. Coupland downgraded his rating for Magna stock to "sector perform" from "sector outperform."

"We thought rising euro margins and a material share buyback would drive 19 per cent growth in 2016," said Mr. Coupland. "The uncertainty surrounding VW Group's sales could delay this thesis."

The analyst's EPS forecast now assumes European margins of 3.5 per cent. It was previously 5 per cent in comparison to Magna's goal of 4.75 to 5.25 per cent. His 2016 and 2017 European production sales estimate was lowered by $500-million (U.S.), and his 2016 EPS forecast to $5.17 from $5.61 (consensus is $5.57). His 2017 forecast fell to $6.37 from $6.61.

Mr. Coupland also expects the company to be active with share buybacks given the current price weakness. He estimated 20 million shares will be repurchased (down from 40 million) from free cash flow and the sale of its interiors business.

He also reduced his target price for the U.S. issue of the stock to $52 (U.S.) from $62.50. The analyst consensus is $66.69, according to Thomson Reuters.

"Slowed EPS momentum will still benefit from modest increases in U.S. and European light vehicle sales," he said. "Growth should improve beyond 2016 based on new programs and sorting out the VW Group issue."

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A recent sell-off in shares of Agrium Inc. (AGU-T;AGU-N) has "substantially improved the implied risk-reward proposition," said Raymond James analyst Steve Hansen.

However, Mr. Hansen said he continues to "advise patience given the flurry of prevailing macro headwinds" which the company faces in the near term.

On Tuesday, during a conference in Toronto, the agriculture company kept its 2015 earnings per share guidance in the $7 to $7.50 (U.S.) range but "seemingly" pointed to a weak third quarter in comparison to the expectations of the Street. Mr. Hansen pointed to a second-half guidance ($1.99-$2.49) which is expected to be split 30 per cent to 70 per cent between the third and fourth quarters. That guidance would be approximately 68 cents and $1.58, compared to a consensus estimate of $1.06 and $1.52.

"As we reflect on Agrium's lacklustre first half of 2015 results and sluggish third quarter 2015 print on the horizon, we cannot help but highlight that Mother Nature is a fickle, hard-to-predict business partner," said Mr. Hansen. "Throw into the mix terribly weak crop prices, a retrenchment in farm-level spending, and the recent hyper-volatility in key macro-related factors … and it's little wonder, in our view, that Agrium's near-term guidance has gone astray of late. Still, as we contemplate Agrium's back-end weighted guidance, which includes a robust fourth quarter print versus past seasonal comparisons, and the broader macro climate, which remains demonstrably challenged , we are thus inclined to keep our fourth quarter estimates at the conservative end of the spectrum. At the same time, given Agrium's recent pattern of underwhelming results -- even if through no fault of their own --we have similarly elected to ratchet down our 2016 forecasts."

Maintaining his "market perform" rating for the stock, he lowered his price target for the U.S. issue to $105 (U.S.) from $115. The average analyst target is $112.83.

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Emera Inc.'s $10.4-billion (U.S.) purchase of Teco Energy "dramatically increases its size and scale in an accretive fashion," said Credit Suisse analyst Andrew Kuske.

He reinstated coverage of Emera (EMA-T) with an "outperform" rating, noting the company's expectation that the acquisition is 5-per-cent earnings per share accretive in 2017 and more than 10 per cent accretive in 2019.

"Clearly, some parts of the financing plan remain open and inherent variability exists in our forecasts," he said. "Yet, our estimates intend to represent conservatism and will be revisited as the financing plan progresses. Ultimately, Emera remains our preferred pure utility idea in our coverage universe."

He added: "The TE deal provides another avenue of growth for EMA. Prior to this deal announcement, we viewed EMA as being in the midst of a re-rating largely driven by the ongoing Nalcor related transmission projects. EMA's business goes well beyond that meaningful project and now faces relatively interesting opportunities across major business groups. In relation to changing North American natural gas flows, we believe EMA has multiple points of positioning that may translate into future opportunities. Many of the opportunities revolve around existing asset positioning of power plants, pipelines and utilities in New England and Atlantic Canada.

"With EMA's New England asset base of power plants, utilities, pipelines and high voltage electricity transmission projects, there are multiple levers to pull for investment positioning. The power plants and utility assets can help support anchoring certain activities behind pipelines which is a potentially key factor in further expanding the company's New England infrastructure presence. Given the Marcellus basin's large production growth, EMA's service territories and existing asset base is an attractive target for that natural gas. With the addition of TE, a few more areas of geographic exposure may position EMA for longer term growth from asset extensions and network impacts."

Mr. Kuske increased his EPS estimates for 2015, 2016 and 2017 to $2.40, $2.60 and $2.85 from $2.39, $2.35 and $2.45, respectively.

He set a price target of $50 (Canadian). Consensus is $48.50.

"We view this transaction as being similar to the Fortis play for UNS Energy," the analyst said. "The scale and accretion figures are laudable and 2017 as the first full year with TE under the EMA umbrella is a critical year. Obviously, in our view, the relative scale of the U..S business will create a new amount of foreign exchange volatility in EMA's financials. Additionally, TE gives another avenue of growth for EMA beyond the existing Northeast infrastructure story and Nalcor related transmission assets."

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Since Industrial Alliance Securities analyst Neil Linsdell raised his rating for North West Company Inc. (NWC-T) on Sept. 11, shares have appreciated by 8.5 per cent.

In the wake of that rise, Mr. Linsdell has again changed his rating, lowering it to "hold" from "buy."

With the release of its third-quarter results on Sept. 10, the analyst said the retailer's quarterly dividend has increased more than expected, rising by 2 cents to 31 cents. He expects it will stay at this level for the next six quarters.

"The dividend remains a significant support for the share price, although at the current yield of 4.3 per cent, the share price has reached the upper end of the typical trading range," he said.

He maintained his price target of $28 (Canadian). The consensus is $27.83, according to Thomson Reuters.

"As the company continues to focus on its Top 40 Market and Top Categories initiatives, we are expecting additional market share gains in the coming years while simultaneously focusing on more lower-risk merchandise and services," said Mr. Linsdell. "The International operations in the Caribbean and Pacific regions appear to be on a positive trajectory, boosted by higher tourism spend, lower energy costs, and the benefit of the U.S. dollar foreign exchange translation. NWC shares trade within a range and are supported by the dividend yield.

"With the recently increased annual dividend of $1.24, we expect the share price to be well supported in the $25 to $29.50 range."

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Following reports of Biomed Realty Trust Inc. (BMR-N) has reached out to Morgan Stanley to advise on the possibility of selling itself, possibly to Blackstone Group LP, Canaccord Genuity analyst Paul Morgan upgraded his rating for the company to "buy" from "hold."

Mr. Morgan said he sees "sufficient upside" in the stock, down 10 per cent since the release of second-quarter earnings in late July, for a ratings change even in the absence of a M&A deal.

"We expect the takeout reports, however, to crystallize the valuation discussion for BMR on the company's discounts to [net asset value] and to peers, diluting the focus on the nearer-term earnings issues of asset sales and lease terminations that had us on the sidelines previously," he said.

Biomed has "significantly" underperformed its only REIT peer, Alexandria Real Estate (ARE-N), over the past year, according to the analyst. He pointed out it currently trades at a three times funds from operation multiple discount and a 100 basis point implied cap rate premium, "much wider than the two companies' historical valuation gap."

"BMR currently trades at a 17-per-cent discount to consensus NAV [net asset value], and while earnings noise such as the lease terminations and the potentially dilutive $300-million asset sale in DC are near-term concerns, in the context of a potential takeout, the focus will likely shift to less transitory phenomena and toward the broader context of a highly-differentiated biotech lab platform with a real estate portfolio that is concentrated in many of the best markets in the United States," said Mr. Morgan. "Our preliminary takeout valuation of $25 could prove conservative in the event of a competitive M&A process, depending significantly on the platform value that could be assigned to reflect management's relationships and expertise in lab real estate."

He raised his price target to $23 (U.S.) from $21. The average analyst target, according to Bloomberg, is $22.56.

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In other analyst actions:

BioMed Realty Trust Inc (BMR-N) was raised to "buy" from "hold" at Canaccord Genuity by equity analyst Paul Morgan. The 12-month target price is $23 (U.S.) per share.

Chevron Corp (CVX-N) was rated new "Underperform" at Macquarie by equity analyst Iain Reid. The 12-month target price is $65 (U.S.) per share.

Enerflex Ltd (EFX-T) was raised to "sector outperform" from "sector perform" at CIBC by equity analyst Jon Morrison. The target price is $16.50 (Canadian) per share.

Finish Line Inc (FINL-Q) was raised to "outperform" from "market perform" at FBR Capital Markets by equity analyst Susan Anderson. The 12-month target price is $30 (U.S.) per share.

Fiera Capital Corp (FSZ-T) was rated new "buy" at TD Securities by equity analyst Lemar Persaud. The 12-month target price is $14 (Canadian) per share.

Guyana Goldfields Inc (GUY-T) was downgraded to "hold" from "speculative buy" at TD Securities by equity analyst Daniel Earle. The 12-month target price is $5.50 (Canadian) per share.

CarMax Inc (KMX-N) was downgraded to "Market Perform" from "Outperform" at Oppenheimer by equity analyst Brian Nagel.

Raytheon Co (RTN-N) was raised to "outperform" from "market perform" at Bernstein by equity analyst Douglas Harned. The 12-month target price is $132 (U.S.) per share.

Trican Well Service Ltd (TCW-T) was downgraded to "sector underperform" from "sector perform" at CIBC by equity analyst Jon Morrison. The target price is $1.50 (Canadian) per share.

Exxon Mobil Corp (XOM-N) was rated new "inderperform" at Macquarie by equity analyst Iain Reid. The 12-month target price is $60 (U.S.) per share.