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.

Noting it is "tough to sell ski jackets and boots in 60 degree [Fahrenheit] weather," RBC Dominion Securities analyst Scot Ciccarelli said Dick's Sporting Goods Inc. (DKS-N) is the latest U.S. retailer to "succumb" to warmer temperatures.

"Winter seasonal goods have piled up due to the abnormally warm weather and now have to be cleared during the fourth quarter, which will generate significant [year-over-year] margin pressure," the analyst said.

On Tuesday, the sporting goods company reported third-quarter earnings which Mr. Ciccarelli summarized as "a bit weak." Comparable same-store sales came in at 0.4 per cent, with a 0.7-per-cent gain at the flagship Dick's Sporting Goods chain offset by a 2.9-per-cent decline at Golf Galaxy. The overall result missed the analyst's 2.1-per-cent estimate and guidance of 1 to 3 per cent, "due to a sharp deceleration in the back half of the quarter."

The company reported earnings per share of 45 cents, below Mr. Ciccarelli's 47-cent projection but a 4-cent improvement from the same period in 2014.

"As expected, DSG was not immune to the weather headwinds that have pressured third-quarter retail results," he said. "Management noted comps were in-line with the top-end of guidance ... through the back-to-school season, on solid sales of higher-growth categories like athletic footwear and apparel. However, trends weakened later in the quarter as record high temperatures hurt sales of cold-weather apparel (e.g., fleeces, outwear, compression) and hunting gear. While [year-over-year] comp growth and 200 basis point of [gross margin] expansion for the struggling golf category (consolidated) provided a bright spot ... the company was lapping negative [high single digit] comparisons and confirmed that warmer weather boosted trends (thus may not be sustainable). DSG expects increased sales and margin pressure on cold-weather categories in the fourth quarter, as the promotional environment for such products is expected to be intense."

Mr. Ciccarelli lowered his comp estimate for the fourth quarter to 1 per cent from 1.1 per cent, and, accordingly, his EPS projection dropped to $1.16 (U.S.) from $1.44. His 2015 and 2016 EPS estimates declined to $2.90 and $3.42 from $3.20 and $3.58, respectively.

He said: "We believe the company faces fairly sizable challenges, including: 1) aggressive efforts by key vendors to build out their own direct-to-consumer distribution networks; and 2) the potential for increased channel shift toward e-commerce. We believe that both of these challenges could marginalize the value of DSG's store investments over time. Finally, while strong new store productivity is a positive for margins, young stores generate very little incremental comp growth from the typical maturation process, providing Dick's Sporting Goods with very little 'cushion' against a slowdown in sales. As a result, comp growth has averaged only about 2.5 per cent, similar to the industry growth rate, despite robust store growth. Given these longer-term factors, which we think could weigh on the stock's multiple over time, we do not believe that DKS shares currently provide an attractive risk/reward opportunity."

Maintaining his "sector perform" rating, he lowered his price target for the stock to $45 from $56. The analyst average, according to Bloomberg, is $47.57.

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Raymond James analyst Phil Russo said he suspects the market is "unwilling to reward" to Kinross Gold Company (KGC-N, K-T) for the merits of its $610-million (U.S.) purchase of a pair of mines from Barrick Gold Corp. (ABX-T, ABX-N).

Last week, Kinross announced the acquisition of the Bald Mountain mine and the remaining 50 per cent of the Round Mountain property in Nevada. "We view the transaction positively from a strategic sense – the U.S. location of the assets improves Kinross' geopolitical profile, particularly away from its Russian exposure which has weighed on the name since the beginning of 2014, adds reserves and resources, and bolsters its production curve," said Mr. Russo. "However, after incorporating the mines in our model, we remain uneasy at the premium paid."

The analyst acknowledged the land is "large and prospective" and offers "venues to further optimize future value." However, he believes Kinross is unlikely to receive a positive reaction from investors "until the surfacing of the value paid is demonstrated."Accordingly, he downgraded the stock to "market perform" from "outperform."

"Combined with the unknowns surrounding the proposed phased approach at Tasiast (study set for first-quarter 2016 release), the market has justification to continue to sit on the sidelines until then," he said.

Mr. Russo said he values the combined interest in the assets, based on $1,150 per ounce gold, at $305-million. He noted that implies an approximately 2.0-times premium to net asset value (NAV) paid, and it is "notably above recent deals that have ranged from 1.3x to 1.5x."

He said: "While the transaction will utilize the majority of Kinross' current cash balance of $1-billion, with an additional $1.5-billion remaining undrawn on its revolving credit facility, we believe Kinross retains sufficient financial flexibility to pursue a phase 1 expansion at Tasiast [gold mine in Mauritania] in 2016 which conceptually contemplates initial capital of $290-million as well as $483-million in pre-stripping over the next four years – we do not include a phased Tasiast in our current model pending release of the scoping study. Our estimates include a $250-million scheduled debt repayment in 2016. Starting in 2017, Kinross's cash balance is expected to build. "He added: "While we believe the phased approach at Tasiast likely presents the most viable opportunity to advance the project to positive cash flow territory, uncertainty around timing of the project and ultimate economics remains."

Mr. Russo lowered his target price for the stock to $2.50 from $3. The analyst consensus is $3.05.

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Middleby Corp. (MIDD-Q) is "actively" tackling the near-term issues that led to a third-quarter earnings miss, including headwinds that are likely to linger over the next few quarters, according to BMO Nesbitt Burns analyst Joel Tiss.

Following a meeting with the company's management team and tour of a manufacturing facility, Mr. Tiss upgraded his rating for the stock to "outperform" from "market perform," adding "the long-term story remains very much intact."

"We have been patiently waiting for the opportunity to begin building a position in the shares of what is, in our view, a well-managed, high-growth, high-return company for quite some time and believe the recent pullback following the third-quarter earnings miss and growing investor frustration/worries around the Residential Kitchen segment (which we forecast to be less than 15 per cent of total operating profits in 2016) has provided us with that opportunity," he said. "While we aren't expecting the company to return to its old form of significantly beating expectations in the near term, we believe the long-term prospects remain extremely bright as the company maintains its status as the number one consolidator in a highly fragmented industry, as well as an industry leader in innovation across its product lines with significant opportunity to increase both its geographic footprint and penetration with key accounts."In response to the earnings report, Mr. Tiss lowered his 2015 and 2016 earnings per share projections for the food-service equipment company to $3.66 (U.S.) and $4.65 from $3.75 and $4.75. His 2017 forecast, which he called "Street-high," remained unchanged at $6.He maintained his price target for the stock of $102. The analyst consensus, according to Thomson Reuters, is $128.50.

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Canaccord Genuity analyst Bobby Burleson upgraded Cognex Corp. (CGNX-Q) ahead of what he expects to be a resumption of large orders in 2016.

"While another negative estimate revision could come for the first quarter (we are modelling negative seasonality based on China in contrast with consensus for quarter-over-quarter growth), we believe large orders should lead to subsequent positive revisions in the second quarter as logistics and consumer electronics projects resume following delays in 2015," he said. "Valuation looks attractive on historical basis, indicating a solid point of entry at current price levels."

He added: "Last year and into early 2015 CGNX benefited from the receipt of large orders. Large orders have recently dried up as customers push out capital spending amidst macro uncertainty. Exiting 2015, any resumption of large orders would likely drive significant upside to expectations on easier comparisons."

Mr. Burleson said he remains bullish on "secular growth drivers for machine vision," despite recent weakness and near-term challenges. He added that he believes Cognex is poised for long-term growth.

"Based on the sophisticated software content incorporated into its products, CGNX maintains industry-leading margins," the analyst said. "We expect gross margins to be stable throughout the period of macro headwinds, especially following the recent divestiture of the lower-margin [single data stream] business."

His rating moved to "buy" from "hold." He also raised his price target to $42 (U.S.) from $33. Consensus is $41.56.

"Resulting from the recent stock weakness, CGNX is currently trading at attractive multiples relative to the historical average of the past few years," Mr. Burleson said.

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BMO Nesbitt Burns analyst Phillip Jungwirth downgraded the stock of SM Energy (SM-N) to "market perform" from "outperform" after revisiting the rationale for his initial upgrade in September of 2014.

"We find many of the key points carry less weight today than they did late last year, and thus, we believe SM shares no longer warrant an outperform rating," he said. "Our thesis was that shares had indiscriminately underperformed with the collapse in oil prices and that SM's low leverage, hedge position, and underappreciated asset quality positioned it better than most [small-mid-cap exploration and production] peers. Also, valuation was not only attractive (the multiple has always been low), but identifiable catalysts existed in terms of positive inventory (net asset value) revisions in the Eagle Ford with higher-density lower Eagle Ford drilling, plus upper Eagle Ford resource potential."

Mr. Jungwirth said the coming year could be "more difficult" than the last 12 months due to a trio of factors: persistent commodity price weakness; hedge rollovers and modestly higher leverage.

"These challenges are in no way unique to SM," he said. "That said, we think relative outperformance will be driven by those E&Ps that can achieve the best growth with the least amount of outspend. Our 2016-17 outlook (unhedged) for SM finds it to be in line with the SMID-cap E&P median and is reflective of the company's below-average cash margins and recycle ratio. A key point in our prior thesis was that investors underappreciated SM's asset quality, which had the potential to grow in terms of inventory life. While we never viewed SM's acreage as top tier ... we viewed returns as competitive at a reasonable commodity price. That said, against a lower for longer backdrop, we view increased density lower Eagle Ford and upper Eagle Ford development as less of a catalyst to re-rate shares above our target, which translates to a negative risk-reward scenario in terms of delineation success. Bottom line, SM still trades at a discount, but most of our investment thesis has played out, and the catalyst to re-rate shares is less compelling, in our view."

He reduced his price target to $40 (U.S.) from $45. The analyst average is $45.92.

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Lockheed Martin Corp. (LMT-N) continues to be one of the "highest-quality names" in the U.S. defence sector, said Credit Suisse analyst Robert Springarn, however he said the stock is fairly valued at its current multiple.

Following the completion of its $9-billion (U.S.) acquisition of Sirkorsky Aircraft from United Technologies Corp. (UTX-N), Mr. Springarn reinstated coverage with a "neutral" rating.

The analyst said the acquisition, at its $9-billion price, equates to an enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA) multiple of 13.0. Adjusted for a $2-billion tax synergy, the deal price drops to $7.1-billion or 10.3x.

He added the company expects to achieve a run rate of $150-million per year in cost synergies.

"LMT raised $6-billion of new debt and noted in a recent 8-K that the remainder of the purchase price was funded with commercial paper and cash on hand," he said. "Despite the aforementioned pull-forward of some costs into 2015, much of the integration efforts are likely to flow through in 2016, making the acquisition GAAP [or generally accepted accounting principles] dilutive and lowering our earnings per share to $12.00 (Management stated on its Q2 call that the deal would likely be neutral to FCF in 2016). Our 2017 EPS moves slightly higher as the synergies (seen at $150-million per annum) begin to outweigh the deal amortization (guided to $250-million per year) and higher interest. We also embed the $150-million impact to revenue from the fee-on-fee consideration that Lockheed outlined on its second-quarter call and note that, at $100M, our estimate of transaction and integration costs is at the high end of management's $80-100-million range."

His target price is $210 (U.S.), compared to a consensus of $226.53.

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In other analyst actions:

Fulton Financial Corp (FULT-Q) was rated new "neutral" at JPMorgan by equity analyst Preeti Dixit. The target price is $14.50 (U.S.) per share.

Kinross Gold Corp (KGC-N) was downgraded to "market perform" from "outperform" at Raymond James by equity analyst Phil Russo. The 12-month target price is $2.50 (U.S.) per share.

Lazard Ltd (LAZ-N) was raised to "strong buy" from "outperform" at Raymond James by equity analyst Patrick O'shaughnessy. The 12-month target price is $60 (U.S.) per share.

LendingClub Corp (LC-N) was raised to "buy" from "neutral" at Sterne Agee CRT by equity analyst Henry Coffey. The 12-month target price is $16 (U.S.) per share.

Mullen Group Ltd (MTL-T) was raised to "buy" from "hold" at TD Securities by equity analyst Scott Treadwell. The 12-month target price is $21 (Canadian) per share.

Nordson Corp (NDSN-Q) was rated new "sector perform" at RBC Capital by equity analyst Matthew Mcconnell. The 12-month target price is $75 (U.S.) per share.

Perrigo Co PLC (PRGO-N) was raised to "buy" from "neutral" at B. Riley by equity analyst Linda Bolton Weiser. The 12-month target price is $229 (U.S.) per share.

Qorvo Inc (QRVO-Q) was rated new "market outperform" at JMP Securities by equity analyst Alex Gauna. The 12-month target price is $72 (U.S.) per share.

Shopify Inc (SHOP-N) was raised to "outperform" from "market perform" at Raymond James by equity analyst Terry Tillman. The 12-month target price is $33 (U.S.) per share.

Suncor Energy Inc (SU-T) was downgraded to "hold" from "buy" at TD Securities by equity analyst Menno Hulshof. The 12-month target price is $43 (Canadian) per share.

TASER International Inc (TASR-Q) was raised to "buy" from "neutral" at Ladenburg Thalmann by equity analyst Glenn Mattson. The 12-month target price is $24 (U.S.) per share.

Xenia Hotels & Resorts Inc (XHR-N) was rated new "market outperform" at JMP Securities by equity analyst Whitney Stevenson. The 12-month target price is $19 (U.S.) per share.

Exxon Mobil Corp (XOM-N) was downgraded to "underperform" from "market perform" at Raymond James by equity analyst Pavel Molchanov.

With files from Bloomberg News