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.

BMO Nesbitt Burns analyst Tim Long is "positive on the merger synergies moving forward by a year" for both Alcatel-Lucent SA (ALU-N) and Nokia Oyj (NOK-N).

He upgraded his rating for both stocks to "outperform" from "market perform."

Last week, Nokia announced it remains on track to complete its $17-billion (U.S.) takeover of its French rival, with the deal likely to be completed in the first quarter of 2016. Coinciding with the reporting of its third-quarter earnings, Nokia released its €900-million cost-savings target for the deal by 2018.

Mr. Long said he believes there will be upside to that target.

"Specifically, we believe NOK will be able to improve ALU gross margins meaningfully," he said. "The NOK management team was able to improve Networks gross margins by over 1,000 basis points in a three-year period, and we believe there is ample opportunity to replicate this trend at ALU. Also on [intellectual property rights] while we remain cautious on hockey stick growth, we are going to add in a contribution from Samsung in 2016. Even at half NOK's typical royalty rate, Samsung should add over €100-million to technology revenues."

On Nokia, he said: "As we approach the close of the acquisition of ALU, we believe NOK shares are poised for another run. Similar to the past, we believe margins will be the main stock driver. We expect gross margin upside for the next few years, which should be positive even if it means NOK being more selective on revenues. We believe cash flow generation will improve as well, and the recently announced capital return program should be sustainable. Last, we believe adding the breadth of products offered by ALU will provide additional revenue opportunities."

He raised his target price for the stock to $10 (U.S.) from $8. Consensus is $8.86.

On Alcatel, he said: "We are positive on the merger, believe the synergies can be even bigger than what was announced, and are adding some contributions from Samsung IPR payments to the NOK model."

"We believe NOK and ALU shares are poised for a run. As the acquisition close nears, we believe signs of even better margins will emerge, and this should remain a driver of the stocks."

He raised his target for Alcatel to $5.50 from $4.40. Consensus is $4.39.

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Canaccord Genuity analyst David Tyerman said it is unclear how WestJet Airlines Ltd. (WJA-T) can achieve a higher valuation "given the potential for adverse competitive developments for a prolonged period of time."

On Tuesday, the airline reported "strong" third-quarter results, including earnings per share of 82 cents which were "nicely" above Mr. Tyerman's 76-cent estimate and the 75-cent consensus.

"EPS was up a very strong 24 per cent on a fuel tailwind," the analyst said, "The beat was on unit revenues and margins, but it is hard to read much into this given guidance of [revenue per available seat mile] deterioration and implied margin compression in [the fourth quarter]. Q4  guidance was better than we expected Q4 capacity, RASM and fuel guidance were all stronger than we expected, partially offset by worse-than-expected [cost per available seat mile] excluding fuel and profit sharing (adj CASM)."

He said the company's growth guidance "is relatively high" with 8-11-per-cent capacity growth, measured by available seat mile, for 2016 in line with his expectations. He said that "high" growth is due to its global expansion initiative.

"We think this raises the risk for negative competitive outcomes as WJA and Air Canada (AC) and others jockey for market share across the globe," he said. "This could result in negative margin or valuation developments (and in fact, may already be affecting valuations, given the weak share prices of the two stocks [in the second half of 2015] despite very strong results)."

He lowered his price target to $27 from $31. The average is $30.21.

"We recommend buying WJA shares to benefit from the company's good mid-term prospects from 1) margin expansion initiatives, 2) Encore regional, 3) on-going U.S. and international growth and, 4) new wide body launch," said Mr. Tyerman. "However, we think WJA's global growth ambitions increase the potential for adverse competitive impacts on WJA profit. These impacts could be exacerbated by the absence of fuel tailwinds or fuel headwinds in the future. Accordingly, we have cut our valuation … to reflect these risks."

Meanwhile, RBC Dominion Securities analyst Walter Spracklin downgraded the stock to "sector perform" from "outperform" and dropped his target to $24 from $32. He cited the airline's expansion of European flights.

"Unlike Encore, which enjoyed a cost advantage as it went into previously monopoly-served routes in Canada, WestJet will not enjoy the same cost advantage, and the international routes they are entering are much more competitive, making a price-discounting strategy harder to implement," he said.

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Wajax Corp. (WJX-T) management will likely take the necessary steps to adjusting the firm's cost structure, said Desjardins Securities analyst Benoit Poirier.

However, following "weak" third-quarter results and the expectation of continued near-term struggles, he downgraded the stock to "hold" from "buy."

Wajax reported third-quarter revenue of $291-million, a decline of 19 per cent year over year and below both Mr. Poirier's estimate ($330-million) and the consensus ($334-million). Earnings per share of 38 cents came "well below" the analyst's projection of 64-cents and the 57-cent consensus.

"Wajax reported weak 3Q results, as it was significantly impacted by a further deterioration of market conditions in western Canada (related to the increasingly difficult energy sector and other related markets), which meaningfully affected earnings and revenue," he said. "On the other hand, management said the programs implemented in other regions partially offset the softness in western Canada, although they did not provide the expected results due to strong competition and weaker fundamentals. As a result, the company does not expect an improvement in working capital (led by inventory reduction) and debt reduction until 2016 versus the previous expectation of 2H15. To respond to this challenging environment, management reduced the workforce by [about] 15 per cent in the western Canadian equipment and power systems operations during the quarter. In addition, Wajax is currently in the process of reviewing additional areas to reduce costs (mainly in the industrial components and power systems segments), which are expected to take effect in 2016. In our view, these restructuring steps are necessary to protect margins and the balance sheet, and to give management enough flexibility to realize its '4 Points of Growth' long-term plan."

Mr. Poirier noted the company's reiteration of a "very cautious outlook as end-market conditions deteriorated in 3Q and the company expects this weakness to continue for the remainder of the year." He expects restructuring will likely continue in early 2016.

He reduced his adjusted EPS estimates for 2015 and 2016 "given the more challenging market environment." His projections fell to $1.61 and $1.72 from $2.20 and $2.32, respectively.

He also reduced his target price to $21 from $29. The analyst average is $21.58, according to Bloomberg.

"While we are confident that Wajax will take the appropriate steps to adjust its cost structure, we would wait for further evidence of margin improvement and a recovery in end markets before buying the shares," he said.

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The announcement by Rubicon Minerals Corp. (RMX-T, RBY-A) that it is suspended underground development at its Phoenix Gold project is a "significant negative for the company's outlook and for the share price," said Desjardins Securities analyst Michael Parkin.

In the wake of Tuesday's announcement, Mr. Parkin downgraded the stock to "sell" from "hold."

Rubicon said it plans to do further analysis on the deposit in order to determine how to most effectively mine it going forward. The move included the decision to lay off 200 employees and 110 contractors, or approximately 87 per cent of the Ontario project's work force. 

"The company has 11,000 tonnes of ore stockpiled with an estimated grade of 4.0 grams per tonne, which it expects to process in November; this should help create some incoming cash flow as it carefully manages its $23-million in working capital (as of Oct. 31)," said Mr. Parkin. "Rubicon believes that this is sufficient capital to sustain the company while it executes on this plan, which is scheduled for completion in 2Q16. We know that the bulk of the layoffs are deemed temporary in nature and thus allows the company to avoid severance payments for up to 35 weeks."

The analyst lowered his target price to 25 cents per share from 85 cents based on a lower net asset value estimate. The analyst average, according to Bloomberg, is 37 cents.

"With the complete halt of all mining operations and the need to redevelop a mine plan, we see considerable risk to the name and thus maintain our speculative risk qualifier," said Mr. Parkin. "We believe there is strong potential for the company to require additional capital over the near term."

Elsewhere, BMO Nesbitt Burns analyst Brian Quast lowered his rating to "underperform" from "speculative outperform." He maintained a 26-cent target.

"While it is possible that another Canadian producer might want to own the Phoenix project, it seems likely that any potential acquirer would wait until the [Phoenix Project Implementation Plan ] is issued, and we expect the stock to drift lower over this period," said Mr. Quast.

National Bank Financial analyst Stephen Parsons downgraded the stock to "underperform" from "sector perform" and moved his target to 15 cents from 90 cents.

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Ahead of the release of its fourth-quarter results on Nov. 11, Desjardins Securities analyst Maher Yaghi said he expects CGI Group Inc. (GIB.A-T) to report an in-line quarter with "sequential improvement in revenue growth."

Based on "strong" management, "improving" fundamentals and "good valuation support," he upgraded his rating for the stock to "buy" from "hold."

"We have had a hold rating on the stock for two main reasons: we believed revenue growth was going to be muted to negative in the [2015 fiscal year] and the prospects for M&A were slim," he said. "As we enter FY16, our view is that revenue will begin to increase year-over-year starting in 2Q FY16, which coupled with share buybacks and small margin improvement, should offer upside to the current stock price. While M&A is still hard to predict, we believe the company is in a stronger financial position to bid on large candidates such as Dell's Perot Systems if it comes to market."

Mr. Yaghi said he expects "muted" results for the quarter "as the company slowly continues to improve revenue trends." He projected total revenue of $2.48-billion, in-line with the result from the same quarter in 2014 and a 2.9-per-cent decline from the third quarter of this year. His adjusted EPS estimate is 79 cents, a penny better than the third quarter and 5 cents better than the same period a year ago.

"We believe the major themes of the quarter will be continued improvement in the U.S. commercial and European businesses, a glimmer of hope for longer-dated and larger U.S. federal government awards, and sluggish Canadian results," he said. "While M&A remains difficult to call, the company reduced indebtedness over the last year and began to undertake share buybacks more aggressively in 4Q FY15 as management became more confident in the cash flow strength of the operations (stock is currently trading at about 8-per-cent forward cash yield)."

He raised his target price for the stock to $58 (Canadian) from $53. Consensus is $56.20, according to Thomson Reuters.

"Dell's Perot Systems could be an attractive asset if Dell decides to sell it to finance the EMC acquisition," he said. "We believe that CGI, given its good relationship with Dell, could be in a good position to look at this asset, which we view as attractive. However, we remind investors that our target and our earnings estimates do not include M&A transactions at this point."

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A third-quarter miss by Louisiana-Pacific Corp (LPX-N) presents a "compelling opportunity" for investors, said RBC Dominion Securities analyst Paul Quinn.

Saying shares of the U.S. building product manufacturer are being "unfairly discounted by an overly conservative [oriented strand board] outlook and weak Q315 results," Mr. Quinn upgraded his rating for the stock to "top pick" from "outperform."

The company reported adjusted earnings before interest, taxes, depreciation and amortization of $11-million, lower than both Mr. Quinn's estimate of $28-million and the consensus of $20-million. Its normalized earnings per share were a loss of 12 cents, compared to Mr. Quinn's estimate of a loss of 2 cents and the consensus of a 6-cent loss.  The analyst noted the miss was due larger from a lower EBITDA in OSB and siding.

He called the OSB pricing outlook "positive" with third-quarter benchmark prices rising 3.6 per cent from the previous quarter. He added the siding miss was "due to one-timers."

"LP commented that the OSB price gains were likely driven by poor weather (constraining supply) and the inventory drawdown in [the first half of 2015,]" he said. "With the help of a mild fall, LP believes the rally could continue into 2016. CEO [Curt] Stevens highlighted that he expects higher activity levels in all segments based on conversations with customers."

He raised his target price to $22 (U.S.) from $20. Consensus is $17.17.

"We expect the U.S. housing market to continue to improve at a more rapid pace since it picked up steam in [the second quarter], resulting in improved demand for the company's core products," said Mr. Quinn. "LP has strengthened its balance sheet, cut costs, and improved operations since suffering very poor results through the housing downturn. LP has decreased the margin gap with its largest competitor over the past two years or so, as it focuses on cutting overhead costs and running fewer assets more efficiently."

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In other analyst actions:

American International Group Inc (AIG-N) was downgraded to "underweight" from "neutral" at Atlantic Equities by equity analyst John Heagerty. The 12-month target price is $57 (U.S.) per share.

Bloomin' Brands Inc (BLMN-Q) was downgraded to "outperform" from "strong buy" at Raymond James by equity analyst Brian Vaccaro. The 12-month target price is $22 (U.S.) per share.

Cabela's Inc (CAB-N) was rated new "overweight" at Barclays by equity analyst Matthew Mcclintock. The target price is $50.00 per share.

DSW Inc (DSW-N) was downgraded to "neutral" from "buy" at MKM Partners by equity analyst Patrick Mckeever. The 12-month target price is $23 (U.S.) per share.

Frank's International NV (FI-N) was downgraded to "neutral" from "outperform" at Credit Suisse by equity analyst James Wicklund. The target price is $18 (U.S.) per share.

Hewlett Packard Enterprise Co (HPE-N) was rated new "neutral" at JPMorgan by equity analyst Rod Hall. The target price is $15 (U.S.) per share.

HP Inc (HPQ-N) was downgraded to "neutral" from "overweight" at JPMorgan by equity analyst Rod Hall. The 18-month target price is $14 (U.S.) per share.

Louisiana-Pacific Corp (LPX-N) was raised to "top pick" from "outperform" at RBC Capital by equity analyst Paul Quinn. The 12-month target price is $22 (U.S.) per share.

Matthews International Corp (MATW-Q) was downgraded to "neutral" from "outperform" at Macquarie by equity analyst James Clement. The 12-month target price is $56 (U.S.) per share.

NuStar Energy LP (NS-N) was downgraded to "neutral" from "overweight" at JPMorgan by equity analyst Jeremy Tonet. The 18-month target price is $59 (U.S.) per share.

North West Co Inc (NWC-T) was downgraded to "hold" from "buy" at TD Securities by equity analyst Michael Van Aelst. The 12-month target price is $30 (Canadian) per share.

Pioneer Natural Resources Co (PXD-N) was raised to "hold" from "sell" at Societe Generale by equity analyst John Herrlin. The 12-month target price is $150 (U.S.) per share.

SolarWinds Inc (SWI-N) was downgraded to "market perform" from "outperform" at FBR Capital Markets by equity analyst Daniel Ives. The 12-month target price is $60.10 (U.S.) per share.

Timmins Gold Corp (TMM-T) was downgraded to "speculative buy" from "buy" at TD Securities by equity analyst Steven Green. The 12-month target price is 50 cents (Canadian) per share.

ZCL Composites Inc (ZCL-T) was raised to "strong buy" from "outperform" at Raymond James by equity analyst Ben Cherniavsky. The 12-month target price is $9 (Canadian) per share.

With files from Bloomberg News