Wednesday's analyst upgrades and downgrades

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

The current valuation of Manitoba Telecom Services Inc. (MBT-T) and limited upside to the stock's target price warrant a "more neutral view," said Desjardins Securities analyst Maher Yaghi.

Accordingly, he downgraded his rating for the stock to "hold" from "buy."

"Our bullish stance on MBT was built upon the idea that a potential sale of Allstream and a restructuring at MTS would improve relative valuations," said Mr. Yaghi. "Since our upgrade in May 2015, the stock has moved from trading at a discount of 1.9 times enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA) to now trading at negative 0.3 times. While management certainly deserves this result after delivering on its restructuring strategy, we do not see a reason at this point that would push the stock to trade at a premium to peers.

"We continue to believe that in the long term, MBT could be acquired by a larger incumbent local exchange carrier (ILEC); however, our accretion models lead us to believe that a transaction would not be imminent at this point given the regulatory issues that such a deal would face. Eventually, Shaw's interest in building a wireless network in Manitoba could offer a solution; however, at this point, Shaw has more pressing issues in B.C. and Alberta."

Mr. Yaghi called MTS' valuation "less than attractive" at current levels, give a discount to peers has closed. He said he does not believe it will trade at a premium to peers given the company's lower growth profile compared to other ILECs, like BCE Inc. (BCE-T) and Telus Corp. (T-T).

"Given the stock's significant outperformance versus peers post the sale of Allstream and cost-cutting at MTS, we have a hard time seeing further clear upside except for a possible takeover bid by BCE or Telus," he said. "Since we do not expect such an event to occur in the short term due to financing and regulatory risks, we prefer to take a neutral position."

The analyst maintained a target price of $33. The analyst consensus is $30.09, according to Thomson Reuters.

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The growth outlook for Alaris Royalty Corp. (AD-T) is "as strong as it has ever been," according to Raymond James analyst Michael Overvelde.

"Alaris' deal pipeline is as firm and varied as it has ever been, its internal deal-making capacity has increased, it recently launched a smaller-cap investment initiative, and it is armed with a recently expanded credit facility that features plenty of unused headroom," he said.

"We believe a recent increase in the number of 'watch list' investments requiring distribution deferrals or cancellations has pressured Alaris' valuation, and we expect the favourable resolution of several of these situations in 2016 to at least partially unwind this source of valuation overhang."

Mr. Overvelde resumed coverage of Alaris with a "outperform" rating."

"With distributions from 15 distinct and diverse partner companies currently contributing to revenues, Alaris' portfolio is as large and diversified as it has ever been, with the generally uncorrelated nature of its various distribution streams contributing to the overall stability of its own cash flows," he said. "The downside to the evolution of its portfolio is that as investments season over time, the risk of deterioration in distributions and earnings coverage ratios can increase, and Alaris has recently experienced an increase in the number of partners requiring distribution deferrals. We consider this sort of development normal in the context of a portfolio that has also included some material winners for Alaris, but acknowledge that the risk level of its revenues has risen moderately in recent quarters."

Calling the Calgary-based company that provides alternative financing to a range of private businesses in North America "a dividend growth story," Mr. Overvelde noted it has raised its dividend nine times in the past six years and by a compound annual growth rate (CAGR) of 11.6 per cent.

"Supported by average forecast normalized EBITDA per share growth of 22 per cent through 2017, we forecast dividend per share growth of 12 per cent in 2016 and 13 per cent in 2017 despite our assumption of a declining payout ratio," he said.

He has a price target of $31 for the stock. The analyst consensus target, according to Thomson Reuters, is $33.61.

"In addition to the ever-present possibility of new investment announcements (and associated dividend increases) to remind investors of Alaris' continuing accretive growth potential, we see several other potential near-term valuation catalysts including an expected resolution of [partner] SMi's outstanding legal case in the first half of 2016 allowing for full repayment of amounts owed to Alaris and improving its revenue outlook, and a restructuring of [partner] KMH that would restore productivity to Alaris' $35-million carried investment which is not currently accruing any yield," Mr. Overvelde said.

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Supply-side efficiencies could be a source of earnings upside for Restaurant Brands International Inc. (QSR-N, QSR-T) in the near future, said RBC Dominion Securities analyst David Palmer.

Following better-than-expected fourth-quarter 2015 results, Mr. Palmer raised his 2016 and 2017 earnings per share projections for the Tim Hortons and Burger King owner to $1.36 (U.S.) and $1.60 from $1.30 and $1.53, respectively.

"While forex headwinds are likely to persist this year, we expect continued outperformance by Tim Hortons in Canada, slightly positive trends at BK U.S. and Canada, and more robust international growth for BK in 2016," the analyst said. "Our model also reflects cost savings within Tim Hortons distribution business, which we believe was a significant source of EPS upside versus our estimates over the last two quarters."

He added: "During second half of 2015, distribution margin (cost of goods sold as a percentage of distribution sales) expanded nearly 350 basis poinys year over year to 18.3 per cent due to supply-chain efficiencies and to a lesser extent unwinding of legacy variable interest entity (VIE) contracts. While much of the focus since the merger has been on RBI's remarkable ability to find G&A savings, we wonder whether Tim Hortons warehouse business will provide another source of EPS upside in the near future. We note that EBITDA growth for the Tim Hortons segment increased 17 per cent during 4Q, outperforming the BK segment's 5-per-cent growth. In our model, we estimate that Tim Hortons distribution margin expands from 16.5 per cent to 17.5 per cent in 2016, which follows 200 basis points of expansion last year."

Maintaining his "sector perform" rating for the stock, Mr. Palmer raised his target price to $38 from $36. The analyst average is $40.31, according to Bloomberg.

"Our $38 price target equates to 24 times our 2017 EPS estimate of $1.60 (an increase of 18 per cent year over year)," he said. "However, we believe it is more appropriate to value the company on 2018 earnings, as at that time the company will have the opportunity to optimize its capital structure by refinancing its $3-billion of 9-per-cent preferred equity with traditional term debt. Using this framework, our $38 target equates to 19 times the present value of our 2018 EPS estimate."

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Canaccord Genuity analyst Yuri Lynk expects "tough" fourth-quarter 2015 results and "underwhelming" guidance from Stantec Inc. (STN-T, STN-N).

The Edmonton-based company reports financial results on Feb. 25.

"Notwithstanding Stantec's ample growth opportunities in community development, water, transmission and distribution (T&D), and environmental services, we believe the 20 per cent of its business exposed to oil and gas mining capex will disproportionately weigh on Q4/15 results and management's initial 2016 outlook," the analyst said. "Furthermore, we see downside risk to consensus 2016-2017 estimates."

"We expect management to guide to a 2016 organic gross revenue contraction given recent pressure on oil and gas and mining capex budgets that will be only partially offset by stronger fundamentals in the US. Furthermore, our checks indicate new awards in the buildings and infrastructure businesses have been slow to materialize in Alberta (20 per cent of Stantec's overall business) possibly leading to an incrementally more cautious tone from management."

Mr. Lynk is forecasting net revenue growth of 11 per cent year over year to $576-million, an EBITDA rise of 16 per cent to $79-million and an earnings per share increase of 5 per cent to 42 cents. He notes those three estimates fall 2 per cent, 2 per cent and 5 per cent below the consensus projections, respectively.

He also expects the company's board to announce a 10-per-cent increase in its quarterly dividend, "demonstrating Stantec's favourable long-term fundamentals, excellent free cash flow generating ability, and solid balance sheet."

Keeping his "hold" rating for the stock, he lowered his price target to $31 from $33. Consensus is $36.62.

"Stantec trades at 9.3 times estimated 2016 EBITDA compared to the group at 8.1 times and its mid-cycle multiple of 8.7 times," he said. "Thus, the stock's valuation appears rich on both measures, in our view. We value Stantec using an 8-times multiple, which is down from 9 times previously to account for increased macro risks, applied to 2017 estimated EBITDA."

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Hormel Foods Corp. (HRL-N) is the "Energizer bunny that just keeps going and going," said BMO Nesbitt Burns analyst Kenneth Zaslow.

On Tuesday, the U.S.-based multinational manufacturer and marketer of food and meat product reported first-quarter 2016 earnings per share of 43 cents (U.S.), ahead of Mr. Zaslow's projection of 38 cents. It also raised its 2016 full-year EPS guidance to $1.50-$1.56 from $1.43-$1.48.

"Hormel continues to consistently generate the highest sustainable growth with the lowest volatility across our entire coverage space, reflecting stellar execution, a strong/diversified business mix, high market shares, and favorable fundamentals," the analyst said. "HRL is poised to deliver its third consecutive year of double-digit EPS growth and thirteenth consecutive year of EBIT growth (at least three out of five segments increased profits every year over the past decade).

Maintaining his "market perform" rating, Mr. Zaslow raised his price target for the stock to $44 from $41. The analyst average is $41.38.

Despite the target increase, Mr. Zaslow said: "We stay on the sidelines as we remain uncertain of 1) the appropriate premium valuation to reward Hormel for its consistency and 2) internal earnings growth in 2017 and beyond, as HRL may fall victim to its tremendous success in FY2016. In fact, we struggle to reach the low end of HRL's long-term EPS growth guidance even when assuming 5-per-cent sales growth and the top end of the long-term margin guidance range. HRL likely will need to increase its divisional margins, particularly in turkey/specialty, and/or may rely more on acquisitions to achieve its long-term growth target in FY2017."

Elsewhere, Jefferies analyst Akshay Jagdale downgraded the stock to "hold" from "buy" while increasing his target to $43 from $42.50.

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In other analyst actions:

BELLUS Health Inc (BLU-T) was rated new "speculative buy" at Mackie Research Capital by equity analyst Andre Uddin. The 12-month target price is $2.80 (Canadian) per share.

Capstone Infrastructure Corp (CSE-T) was downgraded to "sector perform" from "outperform" at RBC Capital by equity analyst Nelson Ng. The 12-month target price is $4.90 (Canadian) per share.

DISH Network Corp (DISH-Q) was raised to "hold" from "sell" at Wunderlich by equity analyst Matthew Harrigan. The 12-month target price is $48 (U.S.) per share.

Genuine Parts Co (GPC-N) was downgraded to "neutral" from "outperform" at Wedbush by equity analyst Seth Basham. The 12-month target price is $91 (U.S.) per share.

Juno Therapeutics Inc (JUNO-Q) was raised to "buy" from "neutral" at Guggenheim Securities by equity analyst Charles Butler. The 12-month target price is $41 (U.S.) per share.

Southern Copper Corp (SCCO-N) was downgraded to "neutral" from "overweight" at JPMorgan by equity analyst Rodolfo Angele. The 12-month target price is $28 (U.S.) per share.

Whole Foods Market Inc (WFM-Q) was rated new "market perform" at Wells Fargo by equity analyst Zachary Fadem.

Yangarra Resources Ltd (YGR-T) was raised to "buy" from "hold" at Paradigm Capital by equity analyst Ken Lin. The 12-month target price is 75 cents (Canadian) per share.

With files from Bloomberg News