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Wednesday's analyst upgrades and downgrades

A woman leaves a Bank of Montreal branch in downtown Vancouver, in a March 22, 2011 file photo.

DARRYL DYCK/THE CANADIAN PRESS

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

Credit Suisse analyst Nick Stodgill is forecasting 4-per-cent earnings per share growth in the fourth quarter year over year for Canadian banks.

In a research note previewing the earnings season for the sector, which begins on Nov. 29, Mr. Stodgill said that growth is in line with the 5-per-cent result for the year to date, noting it is also above the 4-year-low of 3 per cent from the second quarter. His projection is 1 per cent ahead of the consensus estimate.

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He cited the following earnings drivers for the banks this quarter: "Double-digit growth in Capital Markets versus the prior year (albeit down from a strong Q3); mid-to-high-single digit growth in Wealth driven by higher equity markets; and low-single digit growth in Canadian banking, constrained by ongoing NIM [net interest margin] pressure and modestly higher PCLs [provisions for credit losses], increasing from trough levels. On a consolidated basis, we forecast PCLs to rise 24 per cent from last year."

Mr. Stodgill upgraded his rating for Bank of Montreal (BMO-T) to "neutral" from "underperform."

"Although it may take several quarters to regain confidence following the Oct. 4 downward revision to capital ratios, which reduced BMO's CET1 ratio to 10.0 per cent from 10.5 per cent, we believe an Underperform rating is no longer warranted," he said. "(1) BMO's premium valuation has declined [approximately] 400 basis points to a 2-per-cent premium from [about] 6 per cent; (2) its U.S. business has leverage to higher rates (BMO discloses 100 bps parallel increase in U.S. and Canada would increase revenue by $175-200 million in the first year); and (3) we see the potential for BMO to get back to a 10.5-per-cent CET1 ratio faster than expected, potentially driven by its recently announced sale of its Moneris U.S. business for $425-million (U.S.) (50/50 JV with RY) and the introduction of a 2-per-cent discount on shares issued under the DRIP. Concurrent with results, we forecast BMO will increase its quarterly dividend by 2 cents per share or 2.3 per cent."

He maintained a target price of $93 per share. The analyst average is $88.21, according to Bloomberg.

Mr. Stodgill did not change his ratings or target prices for the following stocks:

- Bank of Nova Scotia (BNS-T) "neutral" and $78. Consensus: $75.24, according to Thomson Reuters.

- Canadian Imperial Bank of Commerce (CM-T) "underperform" and $112. Consensus: $107.34.

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- Canadian Western Bank (CWB-T) "underperform" and $27. Consensus: $26.81.

- Laurentian Bank of Canada (LB-T) "underperform" and $52. Consensus: $53.18.

- National Bank of Canada (NA-T) "neutral" and $51. Consensus: $52.08.

- Royal Bank of Canada (RY-T) "outperform" and $100. Consensus: $87.21.

- Toronto Dominion Bank (TD-T) "outperform" and $69. Consensus: $62.82.

"With the Canadian banks up 20 per cent year-to-date and on track for the best performance since 2009, the focus has shifted beyond Q4 results to 2017 growth drivers," the analyst said. "Our attention will be directed towards: 1) Interest rate sensitivity, particularly in the U.S., with 4 of the 6 banks having direct exposure (BMO, CM, RY, TD); 2) Expense management – a continued focus on efficiency and innovation is expected to offset slower top-line growth in Canada, with cumulative restructuring charges of $2.3-billion for the group driving a 90 bps improvement in noninterest expense ratios year-to-date; and 3) Canadian housing – with ongoing regulatory changes expected to slow growth in residential mortgage growth (up 6 per cent year over year in September) and potentially increase capital requirements."

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"The banks are currently trading at 11.9 times [last 12 months price-to-earnings], above the short-term average valuation of 11.5x but below the long-term average of 12.6x. We estimate multiple expansion has driven 80 per cent of the increase in share prices this year with higher earnings accounting for the remaining 20 per cent."

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CIBC World Markets analyst Mark Petrie lowered his 2017 and 2018 financial estimates for Alimentation Couche-Tard Inc. (ATD.B-T) despite "solid" second-quarter results that exceeded his expectations.

Mr. Petrie said the highlight of the results, released Tuesday, was the company's U.S. performance with same-store fuel volumes rising 3.5 per cent, above his estimate of 2.5 per cent and up 7.4 per cent year over year. Its same-store merchandise sales growth was up 2.3 per cent, topping his projection by 1.2 per cent and up 5.2 per cent year over year.

"Though ATD has increasingly become a global player, the U.S. segment still drives the majority of revenues and gross profits (LTM [last 12 months] 67 per cent and 64 per cent respectively)," he said. "Acquisitions push this mix around, but it is fair to say that ATD will go as the U.S. goes. In that market, lower fuel prices have been a material tailwind. The relationship between fuel prices, volumes and in-store traffic is opaque, but directionally obvious - lower prices mean more people at the pump that are more open to buying merchandise. But while fuel prices appear to have bottomed, we do not foresee a spike, and believe stability still leaves ATD plenty of room to post modest organic growth as the in-store business continues to improve and evolve."

Mr. Petrie decreased his full-year 2017 and 2018 earnings per share projections to $2.30 and $2.82, respectively, from $2.41 and $3.01 to account for lower same-store sales growth and gross margins estimates as well as a higher tax rate.

"Execution remains excellent," he said. "The global Circle K rebrand and the implementation of new food and beverage programs continue with positive results, particularly in Europe. Perhaps most importantly, cost control remains fierce. This will be more challenging if merchandise sales slow, though we believe ATD can tap its increasing scale to minimize opex growth."

Maintaining his "sector outperformer" rating, he lowered his target to $76 from $78 to account for lower expectations. Consensus is $82.65.

"Though ATD will remain M&A-driven and activity will likely be subdued until leverage falls, we still see it as a top-quality name at a fair price," he said.

Elswhere, Canaccord Genuity analyst Derek Dley kept his "buy" rating for the stock with an unchanged $78 target. He said: "In our view, Couche-Tard offers investors an attractive combination of both organic and acquisitive growth, which coupled with management's track record, and opportunities abroad, will allow the company to capitalize on accretive growth opportunities."

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Mr. Petrie raised his target price for shares of George Weston Ltd. (WN-T) in reaction to third-quarter 2016 results that met his expectations.

On Tuesday, the Toronto-based company reported earnings before interest, taxes, deprecation and amortization of $101-million, barely above his projection of $100-million.

"Volume growth from capacity increases have started to flow through, and volumes were the primary driver of 4-per-cent revenue growth in the quarter," said Mr. Petrie. "With all new frozen lines now up and running (by the end of Q3), the impact should accelerate in Q4 and into 2017. However, these volume gains are being moderated by continued weakness in the fresh segment, which remains in overall decline and will hold back more material top-line growth.

"Margins have been pressured for several years as a result of these investments, as well as increased pressures from both customers and competitors. The Q3 result marked the first period of EBITDA margin expansion in five years, though profitability has been reset materially lower. We expect margins to improve in the coming quarters, but given the 'new reality,' we do not believe they will approach historical levels."

He kept a "sector performer" rating for the stock and bumped his target to $124 from $122. Consensus is $127.

"Our forecasts increase modestly on the stronger GM% [gross margin percentage] performance and an expectation that continued volume growth should support better leverage of operating expenses in time," the analyst said. "Expectations for a stronger USD also support earnings growth. Our valuation continues to be based on a 7 times EV[enterprise value]/EBITDA multiple on the bakery business, and the published price targets for Loblaw and Choice Properties."

"The bakery business is trading at an implied multiple of 5.2 times based on 2017 estimates. We see this as decent value, though see better upside in the shares of Loblaw."

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Calling it "the best mix shift story in media," BMO Nesbitt Burns analyst Daniel Salmon said stock of CBS Corp. (CBS-N) is now fairly valued.

Expecting CBS to become a "deal stock" with Viacom Inc. (VIAB-Q) soon as merger rumours continue to swirl, he downgraded his rating for the stock to "market perform" from "outperform" with it approaching his target price of $63 (U.S.).

"To be sure, that outcome is not 100 per-cent yet and we would be fundamentally productive on CBS in the mid-$50s," he said. "But we also believe the stock has worked through several catalysts, including an accelerated buyback this quarter. Patient investors can hold and work through a merger, or we recommend FOXA if fundamental investing is still the priority. New Media pecking order: Twenty-First Century Fox Inc. (FOXA-Q), Time Warner Inc. (TWX-N), CBS, VIAB, Walt Disney Co. (DIS-N)."

Mr. Salmon said its current valuation "reflects the strength of a resilient TV ad market, the solid (if lumpy) syndication pipeline, and, most importantly, CBS' continued success in growing its fee-based revenues, starting with the motherlode (retransmission fees and reverse comp), but also the important future digital revenues from skinny bundles and direct-to-consumer apps like CBS AllAccess and Showtime OTT."

He added: "We estimate that advertising will have declined from 65 per cent of revenue in 2010 to [approximately] 45 per cent by 2018 following the spin-off of the radio business. Were we confident CBS was to remain a standalone company, we might very well be making an argument for re-framing future valuation in light of this mix shift. But instead we expect CBS to move beyond formal examination of a deal with Viacom to formal engagement and so viewing these assets on a standalone basis makes less sense and the fact that CBS is a clear secular winner in media (i.e., no exposure to the basic cable bundle) will become much less relevant once a potential deal is announced."

Mr. Salmon said it appears 2017 will end up as a "very successful" year for CBS, noting: "CBS has also worked through a number of catalysts lately including: 1) outperformance of political spending in 2016 as CBS has benefited from issues spending, particularly in California, where the company owns three TV stations; 2) based on recent investor conversations, we believe the radio IPO is now in most investors' thinking, if not quite in their models yet; 3) while final results are still pending as the process continues, we also think investors have increasingly baked in some expectation for proceeds from the reverse spectrum auction; and 4) most importantly, we expect the accelerated buyback of $1-billion (in addition to the 'usual' $500-million) CBS announced on November 4 is mostly complete (back-of-the-envelope math within)."

He maintained his target price of $63. The analyst consensus price target is $64.67.

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Sunoco Logistics Partners LP's (SXL-N) $21-billion (U.S.) all-stock deal to acquire Energy Transfer Partners LP (ETP-N) fails to "address the structural cost of capital burden that hampers the distribution growth outlook beyond 2017," according to BMO Nesbitt Burns analyst Danilo Juvane.

In the wake of the merger, which is expected to be immediately accretive to the new entity, Mr. Juvane downgraded both stocks to "market perform" from "outperform."

"Without a doubt, ETE is the clear winner from the transaction, but only near term. Owing to continued MLP subsidies in 2017, specifically, $655-million of IDR [incentive distribution rights] waivers, we estimate 2017 DCF [discounted cash flow] of $1 per unit, which corresponds to coverage of 0.87 times," he said. "However, as IDR waivers shrink significantly in 2018 and beyond, we forecast coverage to improve to [about] 1.5 times for the 2018-2021 period, potentially setting the stage for the resumption of distribution growth; specifically, we forecast five-year distribution CAGR [compound annual growth rate] through 2021 of 8 per cent . . . but longer-term, we think ETE will need to provide additional support to the pro forma SXL/ETP entity.

"The benefits accrued to ETE notwithstanding, we don't think the transaction sufficiently addresses long-term problems inherent in the underlying pro forma MLP. While we forecast 2017 distribution growth of 13 per cent to $2.28/unit accompanied by (declared) coverage of 1.2 times -all consistent with management's stated objectives--coverage parity for the remainder of our forecast thru 2021 results in flat distributions at $2.40/unit. In other words, we see the MLP's burden from incentive distribution rights (IDRs) as an issue that still needs to be addressed by the GP longer term (i.e. we forecast 41 per cent effective GP take beginning in 2018), and note that potential solutions may be dilutive to ETE's aforementioned transaction benefits. In short, the SXL/ETP merger provides an improved financial outlook for ETE, but it doesn't screen as a sufficient catalyst for us to hold a more constructive view on the stock."

Mr. Juvane lowered his target price for stock of ETP to $39 per unit from $49. The analyst average is $44.59, according to Bloomberg.

He lowered his target price for SXL to $26 from $35. The average is $30.53.

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In other analyst actions:

Valeant Pharmaceuticals International Inc. (VRX-N, VRX-T) was downgraded to "underperform" from "neutral" at Mizuho Securities USA by analyst Irina Koffler with a target of $11 (U.S.), down from $25. The analyst average is $23.38.

With near-term liquidity concerns removed by recent financing, Savanna Energy Services Corp. (SVY-T) is likely to outperform in the short term, said GMP FirstEnergy analyst Ian Gillies. He upgraded the stock to "buy" from "hold" and raised his target to $2.75 from $2.25. The average is $2.28.

Integra Gold Corp. (ICG-X) was rated new "outperform" at BMO Capital Markets by analyst Andrew Mikitchook. He set a target price of $1.25 per share. The average is $1.20.

Lundin Gold Inc. (LUG-T) was rated new "speculative buy" by TD Securities analyst Daniel Earle with a target price of $8.50. The average is $7.86.

Cervus Equipment Corp. (CVL-T) was cut to "hold" from "buy" by Laurentian Bank analyst John Chu. He kept a target price of $16. The average is $16.25.

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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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