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Wednesday's analyst upgrades and downgrades

Fortress speciality cellulose plant in Thurso, Que.

Fortress Paper Ltd.

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

The recent strength in dissolved pulp prices necessitates an increase in the financial forecasts for Fortress Paper Ltd. (FTP-T), according to Raymond James analyst Daryl Swetlishoff.

With those changes, he upgraded his rating for the North Vancouver-based company to "outperform" from "market perform."

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"DP prices trended largely in-line with our 2016 forecast of $850 (U.S.) per ton for the first half of the year, averaging $847/mt in 1H16," he said. "However, more recently the commodity has traded upwards, rising from $855/mt at the beginning of 3Q16 to a most recent quote of $965/mt (for the week ending Sept. 23). Accordingly, we have updated our 3Q16 estimates to reflect DP pricing to date, and increased our 2017 estimate from $900/mt to $950/mt. The impact on our estimates is considerable, as the stock remains highly sensitive to the fluctuations in DP pricing due to the levered balance sheet (albeit improving) and operational concentration. As a result of the changes our 2017 EBITDA forecast increases 15 per cent to $44-million."

Mr. Swetlishoff added the company's balance sheet continues to be de-leveraged by its buyback program.

"We believe Fortress' balance sheet has been significantly strengthened by the sale-leaseback of the Landqart Mill and the LSQ transaction in recent months," he said. "Further, recent buybacks of the 2016 converts ($4.025-million principal at 97.1-per-cent cost) and 2019 converts ($6.9-million principal at 76-per-cent cost), and the recent share buyback (655.3k shares) are evidence of much sounder financial footing, in our view. We expect the company to continue to be active in their buyback program of shares, and note the company maintains substantial liquidity to repay the Dec-2016 converts ($36.2-million outstanding)."

The analyst raised his 2016 earnings per share projection to a 29-cent loss from a 67-cent loss. His 2017 estimate moved to 80 cents from 32 cents.

His target price for the stock rose to $8 from $5. The analyst consensus price target is $4.75, according to Thomson Reuters.

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ECN Capital Corp. (ECN-T) is a "proven" platform transitioning to "the next chapter," said BMO Nesbitt Burns analyst Tom MacKinnon.

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Last week, shareholders of Element Financial Corp. (EFN-T) voted to approve a decision to split the company into two. Element Fleet Management Corp. is set to become the world's largest publicly traded fleet management services firm, while ECN Capital will run its equipment financing business.

The separation is expected to be completed in early October.

Mr. MacKinnon initiated coverage of ECN Capital with an "outperform" rating.

"ECN is a strategic-positioning story as its experienced management team looks to add, taking advantage of market disruption, a U.S. middle market private debt fund platform to its already-leading Commercial & Vendor, Rail finance, and Commercial Aviation finance platforms," he said. "The new platform, when combined with margin-expansion initiatives and expansion of off-balance sheet funding in its existing business verticals, should create significant shareholder value, in our view, driven primarily by ROE expansion."

Mr. MacKinnon set a target price of $4.60 for the stock.

"We believe it is appropriate for our target price to reflect a greater than 50-per-cent likelihood that ECN will in the near term capitalize in a material way on its stated intentions of buying or building a U.S. middle market finance platform," he said. "Our $4.60 target price represents a 25 per cent/75 per cent blend between a more unlikely $4 scenario (0.95x Q4/17E book value per share of $4.30 with 2017 estimated EPS of 32 cents and a 7.8-per-cent 2017 estimated return on equity), where ECN does nothing in the near term to jump-start itself into its new U.S. private debt finance market vertical, and a more likely $4.80 scenario (1.1x Q4/17E BVPS of $4.35 with $0.37 2017E EPS and a 9.0% 2017E ROE) in which ECN capitalizes on a $2-billion ($1-billion on balance sheet and $1-billion off balance sheet) opportunity in the near term. ECN has disclosed it is currently reviewing three buy and two build opportunities with assets of between $500-million and $5-billion.

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"We assume the purchase of an existing platform, that brings with it an experienced management team, is more likely in the near term. Furthermore, with the capability of issuing up to $300-million in preferred equity, we believe such an acquisition is possible even absent the up to $220-million in proceeds from IAC, although with IAC proceeds excess on balance sheet capacity after such an acquisition would be much greater (estimated $2.2-billion with IAC proceeds versus $1.4-billion without)."

Mr. MacKinnon said an improving ROE over the next several years will drive a higher valuation multiple.

"Assuming the ROE moves to the 10-11-per-cent range, which could very well happen as ECN expands its private debt business and also expands off-balance sheet funds in both aviation and rail, we believe the P/BV multiple could increase to 1.2-1.4x over the next couple of years," he said.

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On the heels of the recent Euroconsult Satellite Business Week conference in Paris, BMO Nesbitt Burns analyst Thanos Moschopoulos reduced his estimates and target price for MacDonald Dettwiler and Associates Ltd. (MDA-T), citing a "challenging" market conditions due to supply/demand imbalances for data services.

"We continue to like the long-term story based on our view that MDA's entry into the U.S. government/defence market should, over time, prove to be a very significant growth driver for the company," said Mr. Moschopoulos. "The U.S. government is the largest buyer of space technology on a global basis, and we believe that MDA should be well positioned to capture a meaningful share of this spending over time (or, at least meaningful in relation to MDA's current revenue base) given its world-class technology in areas such as space robotics, earth observation, and communications satellites. We are, however, taking a more conservative view with respect to our outlook for the near-term prospects of MDA's commercial business.

"It's not exactly news that several operators are experiencing competitive pressures and slowing, or negative, revenue growth, driven by an oversupply of certain types of satellite capacity in several regions; this is evident from the recent financial results, and share price performance, of operators such as Intelsat and Eutelsat. Despite these issues, industry forecasts suggest that the demand for new commercial GEO satellites is likely to be stable over a long-term basis due to the fact that operators will need to continue buying replacement satellites to stay in business, and will also need to continuously upgrade their fleets, lest they be stuck with obsolete and uncompetitive infrastructure. However, we see some incremental risk with respect to near-term demand. In addition to the current supply/demand imbalances, the ongoing issues with the U.S. Export-Import Bank, the recent SpaceX launch failure, and the fact that operators are still trying to make sense of all the tremendous technological changes that have been happening in the industry (e.g., flexible payload technology, 1- Terabit satellites, and LEO constellations) are all factors that, in our view, could potentially weigh on near-term order activity."

Though Mr. Moschopoulos said there continues to be a "high" level of industry request for information and request for proposal activity for new commercial geostationary-orbit (GEO) satellites, the sales cycles are getting longer. Among the issues affecting the process is "the rapid pace of technological change, which is causing operators to spend more time evaluating technical alternatives."

"2016 seems poised to be another soft year for GEO orders, although the industry is expecting a seasonal uptick in Q4/16 and stable longer-term demand," the analyst said. "There have been 11 GEO awards across the industry YTD, and the industry consensus seems to be for perhaps 17 orders in 2016 (vs. 19 in 2015, by our count). SS/L [a subsidiary] is forecasting 19.5 industry GEO awards per year, on average, between 2017-2020 (versus 19/year from 2011-2015), and Euroconsult's forecasts also call for demand to be relatively stable over the next decade."

Mr. Moschopoulos lowered his 2016 and 2017 earnings per share projections to $6.17 and $6.35, respectively, from $6.23 and $6.77.

Maintaining an "outperform" rating for the stock, he lowered his price target to $89 from $94. Consensus is $96.13.

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Despite the naysayers, Nike Inc. (NKE-N) "soldiers on," said Citi analyst Kate McShane.

On Tuesday, the company reported first-quarter 2017 earnings per share of 73 cents (U.S.), ahead of Ms. McShane's projection of 54 cents and the 56-cent consensus. She pointed to stronger top-line growth as well as lower expenses and tax rate and an accelerated share buybacks. Revenues increased 7.7 per cent year over year, while gross margins slide 2 per cent.

She noted the company left its full-year guidance largely unchanged, expecting high-single-digit to low-double-digit- revenue growth.

"Despite recent investor concerns regarding the increasingly competitive and promotional environment, basketball hiccups, and futures slowdown, Nike showed solid signs of improvement in Q1 following recent headwinds," said Ms. McShane. "Positive takeaways from Q1, in our view: 1) N. America sales re-accelerated to 6 per cent year over year from flat in Q4, w/ a healthier level of inventories in the marketplace going forward & strong reads on the upcoming pipeline, including basketball, running, & lifestyle product. While North American futures of up 1 per cent were weaker than our 4-per-cent estimate, we were encouraged by management's guidance that reported revs should outpace futures on stronger sell-throughs (higher quality) & that they remain confident in their long-term fiscal 2020 target of high-single digit annual domestic growth; 2) Continuation of solid int'l sales & futures, led by double-digit currency neutral growth in China, Japan, EM, and up 9 per cent in Western & C/E Europe; 3) While less visible to the consumer, NKE's ongoing supply chain & product investments (lean manufacturing, automation, partnerships with Flex, Apple & more) are starting to pay off and should contribute meaningfully to revenues and gross margin expansion longer term."

Ms. McShane raised her 2017 and 2018 EPS estimates to $2.48 and $2.90, respectively, from $2.40 and $2.85.

Keeping her "buy" rating, she raised her target price for the stock to $64 from $61. The analyst average is $64.06, according to Bloomberg.

"We think pushback to our thesis will continue to be: strong momentum and threats to NKE's leading share from adidas and other lifestyle/athletic brands, confusion around the disconnect between futures and reported revenues, and doubts around North America," she said.

Elsewhere, Brean Capital analyst Eric Tracy downgraded the stock to "hold" from "buy" while keeping his $62 target.

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Ahead of its analyst day on Oct. 5, CIBC World Markets analyst Dave Popowich upgraded Surge Energy Inc. (SGY-T) to "sector performer" from "sector underperformer."

"All things considered, Surge has had a productive 2016 drilling season so far," he said. "Recent Shaunavon wells are demonstrating stronger performance than in prior years, adding [approximately] 1,600 barrels per day d of new production in July. Surge has also shown good discipline on the cost front - we estimate capitalized drilling & completion costs (on a perwell basis) are down 40 per cent compared to what the company reported last year.

"In addition to the production growth, we are pleased with the progress Surge has made in expanding its margins over the past several quarters. As of Q2/16, Surge showed the strongest margin improvement (relative to the same period last year) of any oil-weighted company in our coverage universe. As the Street has moved to price-in Surge's improved margin structure, the stock's valuation has improved dramatically."

Saying he's "gaining comfort" with its consolidated portfolio, he maintained a target price of $2.75. Consensus is $3.17.

"Taking into account Surge's recent operational progress and discounted valuation, we find it increasingly difficult to argue the stock is over-valued at this point," said Mr. Popowich. "Provided the company can maintain recent margin gains, we are optimistic that Surge should at least be able to hold production flat through 2017, without compromising the balance sheet."

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In other analyst actions:

- Imperial Oil Ltd. (IMO-T) was upgraded to "outperform" from "market perform" by FirstEnergy Capital analyst Michael Dunn. He raised his target by a loonie to $44. The analyst average is $45.50.

Mr. Dunn downgraded MEG Energy Corp. (MEG-T) to "market perform" from "outperform" and lowered his target to $6 from $7. The average is $8.38.

- Interfor Corp. (IFP-T) was raised to "buy" from "neutral" by Dundee analyst Stephen Atkinson. He raised his target to $20 from $16, compared to the average of $17.47.

At the same time, National Bank analyst Rupert Merer downgraded the stock to "sector perform" from "outperform" and raised his target to $17 from $16.

- Wedbush analyst James Dix downgraded Alphabet Inc. (GOOGL-Q) to "underperform" from "neutral" and cut his target to $700 (U.S.) from $880. The average is $933.45.

"Paid search monetizes better than other digital because its traffic is a good proxy for 'self-identified consumers,'" Mr. Dix said. "GOOGL's recent mobile search ad changes push the traffic mix to paid from organic, which has decelerated sharply."

- Saying its business fundamentals have "deteriorated significantly," Twitter Inc. (TWTR-N) was downgraded to "underperform" from "neutral" by Mizuho analyst Neil Doshi with an unchanged target of $15 (U.S.). The average is $16.72.

- ProMetic Life Sciences Inc. (PLI-T) was rated new "speculative buy" by TD Securities analyst Lennox Gibbs with a 12-month target price of $4.50 (Canadian). The average is $5.15.

- Macy's Inc. (M-N) was downgraded to "neutral" from "outperform" at Credit Suisse by analyst Michael Exstein. He maintained a target price of $40 (U.S.), versus the average of $40.21.

- AT&T Inc. (T-N) was cut to "neutral" from "buy" by UBS analyst John Hodulik, citing lower EPS growth and increased wireless competition. His target dropped to $43 (U.S.) from $46. The average is $43.46.

- Distinct Infrastructure Group Inc. (DUG-T) was rated new "speculative buy" at Cormark Securities by analyst Gavin Fairweather. He set a 12-month target price of $1.60 (Canadian). The average is $1.99.

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About the Author
Globe Investor Content Editor

David Leeder is a content editor in the Report on Business. He was previously Deputy Sports Editor and Weekend Digital Editor at The Globe.  He holds an undergraduate degree from McMaster University and a graduate degree from Ryerson University. More

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