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

Given the unexpected outcome of the British referendum, Finning International Inc. (FTT-T) is exposed to the expected changes in the U.K. market, said CIBC World Markets analyst Jacob Bout.

Pointing out 17-per-cent of its revenue and 12-per-cent of its EBITDA comes from the U.K., Mr. Bout downgraded his rating for the stock to "sector underperformer" from "sector performer."

"Due to Brexit, Finning will be exposed to wider currency fluctuations and also reduced investment/market activity," he said. "Some of the likely impacts for Brexit include: Decline in new sales as all equipment is denominated in U.S. dollars, which is likely to strengthen against the pound; decline in volumes due to weaker U.K. housing market investment. The U.K. market for equipment is primarily driven by construction versus mining; negative impact due to the translation effect as Finning reports financials in Canadian dollars, which is also expected to strengthen against the pound."

Mr. Bout also incorporated the impact of the Alberta wildfires into his financial projections for the company, lowered his 2016 and 2017 earnings per share estimates to 96 cents and $1.32, respectively, from $1.24 and $1.52.

"Finning's focus remains on managing working capital, particularly in procurement planning," he said. "FTT expects to exceed its $150-million SG&A reduction target as the company reduced its Canadian workforce (by 1,300 people), facilities footprint (by 600,000 square feet), and annual SG&A by 20 per cent between 2014 and 2016. The new management has been doing well and its efforts translated into positive FCF [free cash flow] of $30-million in Q1/16, which has historically been a negative FCF quarter."

Mr. Bout lowered his target price for the stock to $20 from $20.50. Consensus is $20.70.

"Our overall thesis remains the same: Finning's new management has been doing well containing costs but macro headwinds (lower commodity prices and now U.K. headwinds) have more than offset the turnaround efforts," he said. "The risk to this recommendation is primarily a materially higher oil price environment."

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Investors are likely to wait on the sidelines for Valeant Pharmaceuticals International Inc. (VRX-N, VRX-T) "to see how the dust settles," said BMO Nesbitt Burns analyst Gary Nachman.

"While many investors may question how much lower VRX stock could go from here, we also question what it will take to get new money into the stock even at these levels," he said. "The debt remains a substantial overhang, the fundamentals of its businesses have changed dramatically, and guidance has come down hard and fast. Valuation may appear compelling on certain metrics if the numbers have truly bottomed and management improves execution."

Mr. Nachman assumed coverage of the stock with a "market perform" rating and a target price of $26 (U.S.). The analyst average price target is $35.11, according to Bloomberg.

"VRX is in a major transition with a lot of moving parts; thus, it is very challenging to get comfortable with the underlying fundamentals and it may take at least a couple of quarters of execution to have a better sense of that," he said.

The analyst noted Valeant is "saddled with significant debt" of $31-billion. Accordingly, he said it is unclear what the company's cash flow "will look like (including potential divestitures of non-core assets) and how VRX will be able to service that debt."

He added: "VRX has a number of core franchises (Salix, B&L, dermatology, consumer) that we believe have meaningful value and the new CEO hopes to better optimize them; several hurdles remain, though, including increasing pressure from payers and fixing some of the issues with Walgreens.... VRX's business model is out of favour right now; the company has suffered reputational damage that could take several years to recover from, so despite what some may argue is an attractive valuation, there are other stocks in our coverage with depressed valuations that we believe offer better risk/reward profiles at this time."

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A "great investment entry" currently exists for Keyera Corp. (KEY-T), according to Alta Corp. Capital analyst Dirk Lever.

"Whether it be return on capital employed, conservative use of leverage and payout ratios, and per share dividend (and cash flow) growth, Keyera has a long history of top tier performance, which we believe provide investors with a significant margin of safety in turbulent times," said Mr. Lever.

The analyst said the Calgary-based midstream company has earned the title of "Canada's Diluent Kings" due to "its interconnections to incoming and outgoing diluent flows (pipeline and rail) as well as its significant underground storage capacity … and key operating locations."

"Coupling Keyera's top tier performance with its location to stacked pay geology in an improving natural gas (and liquids) commodity price environment and fee for service or take or pay agreements, we believe Keyera's downside risk is minimized," he said. "In addition, with important new projects being completed, we believe the market is under-estimating Keyera's 2017 operations."

Mr. Lever lowered his estimates for Keyera to account for the scheduled maintenance closure of its Edmonton iso-octane facility in September. His EBITDA projection now sits $50-million lower in 2016 (at $639-million), while he increased his 2017 estimate by $11-million to $762-million.

He maintained his "outperform" rating and $45 price target. Consensus is $43.67.

"Keyera remains one of our favourite names in the midstream sector," he said. "Though smaller than many other players, Keyera is a solid operator with some interesting niche operations. Mindful of prices paid for capital acquisitions, Keyera has an enviable history of high returns on capital employed (averaging 16 per cent since 2015)."

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Stantec Inc.'s (STN-T, STN-N) recent acquisition of MWH Global Inc. increases its exposure to the U.K., said CIBC World Markets analyst Jacob Bout.

"On a pro forma basis, the U.K. now represents 10 per cent of overall revenues," said Mr. Bout in a research note previewing the second quarter. "MWH has primarily regulatory-driven work in the country for municipal and industrial water treatment. Hence, we expect Brexit to have a minimal impact on MWH. Indirect impacts of Brexit are weaker oil prices and a stronger U.S. dollar."

When the company reports quarterly results, Mr. Bout said he expects synergies from the acquisition to increase from the previous $25-million (U.S.) projection. He also expects MWH's organic growth rate to increase from flat to the industry average of 4 per cent to 5 per cent.

Maintaining his "sector performer" rating, he raised his target price to $36 from $34. Consensus is $35.71.

"Overall, the outlook for Stantec remains positive for the next 12-18 months as the recent diversification strategy should drive revenue growth (i.e., U.S. southwest tuck-ins and the recent MWH acquisition)," he said.

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Though he is optimistic about the potential of its cholesterol-lowering pill, RBC Dominion Securities analyst Michael Lee expressed caution about Esperion Therapeutics Inc. (ESPR-Q), given the regulatory hurdles it faces.

Esperion stock plummeted Tuesday after the company said the experimental drug may not receive U.S. Food and Drug Administration approval on its ability to cut cholesterol. The company said it is planning to start a pair of studies to back its claims and submit the results to regulators by 2022.

In reaction to the news, Mr. Lee downgraded his rating for the stock to "sector perform" from "outperform."

"We think ETC-1002 is an attractive, unpartnered Phase III asset that could be a blockbuster; however, it will take a while to get key answers and clarity on accelerated approval," the analyst said. "It seems clear FDA isn't sure what to do yet and it will take 'time' (i.e., specific datapoints later in 2017-18) to get answers and conviction on near-term material stock upside."

Mr. Lee said the drug's approval "is the key debate," and, given the lengthy wait for further information, he also dropped his target price for the stock. His target is now $15 (U.S.) from $30. The analyst consensus target is $47.46, according to Thomson Reuters.

"On the positive (bull case), in after-hours trading, ESPR is $12 (U.S.), or $270-million cap and EV [enterprise value] of $50-million, which is cheap for a Phase III, unpartnered potential blockbuster," he said. "It could also do an EU partnership once the industry has more visibility on the LDL [low-density lipoprotein] hypothesis. Thus, long-term risk/reward is skewed to upside. However, from a stock standpoint this will take time to play out, as key catalysts won't be until 2017-18 for Phase III data and more discussions with FDA and likely an AdCom panel."

Elsewhere, Credit Suisse analyst Vamil Divan downgraded the stock to "underperform" from "neutral" with a target of $10 (from $23).

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Newfield Exploration Co.'s (NFX-N) renewed emphasis on its asset portfolio and timely capital markets transactions have kept its balance sheet in "tip-top shape," according to Canaccord Genuity analyst Stephen Berman.

He initiated coverage of the Texas-based energy company with a "buy" rating.

"NFX has a leading position in the Anadarko Basin SCOOP and STACK plays of Oklahoma, of which, pro forma for a pending acquisition, 85 per cent is in the STACK, a rising star in U.S. unconventional onshore plays," said Mr. Berman. "The company is executing not only in STACK and SCOOP but also in the Williston Basin (WB). Costs have declined dramatically on both the D&C [drilling and contractor] and operating sides."

He said the "prolific" SCOOP and STACK plays delivered 50-per-cent increases year over year in both reserves and production in 2015. They are projected to add 20-per-cent-plus growth this year.

"The company is seeing significant efficiency gains in its drilling and completion operations," the analyst said. "In 2015, the average cost to drill and complete a lateral foot in the STACK declined to $867 with 'best-in-class' performance less than $750/foot. NFX estimates $700-$750/foot in 2016, which we believe is beatable based on four recent wells coming in at under $700/foot. Operating costs are also coming down, with Q1/16 LOE [lease operating expenses] 40 per cent lower versus Q1/15 and G&A expected to be down $50-million year over year in 2016."

He added: "Helped by non-core asset sales and timely equity raises, NFX has been able to maintain a strong financial profile, with net debt/EBITDA 2 times. The company's revolver is unsecured, and total liquidity is $2-billion. Over the past five years, NFX has raised $2.6-billion from non-core asset sales. The company's Eagle Ford position is currently being marketed, and the Uinta, Arkoma, China and even WB positions could all be future sources of funds. NFX has aligned 2016 capex with cash flow expectations, which we expect to continue in 2017. We are modelling free cash flow both this year and next."

Mr. Berman set a price target for the stock of $48 (U.S.). Consensus is $45.31.

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In other analyst actions:

Penn West Petroleum Ltd.
(PWT-T, PWE-N) was downgraded to "sell" from "neutral" by Dundee Securities analyst Brian Kristjansen. He maintained a price target of $1.30 (Canadian). The analyst average is $1.82.

TD Securities analyst Daniel Earle downgraded both First Majestic Silver Corp. (FR-T, AG-N) and MAG Silver Corp. (MAG-T, MAG-N) to "hold" ratings from "buy." For First Majestic, he raised his target price to $18 from $16.50, compared to an average of $14.69. He maintained a price target of $21 for MAG, versus an $18.99 average.

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