Skip to main content

The Globe and Mail

Wednesday’s analyst upgrades and downgrades

File photo of CN Rail.

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

Traffic for both Canadian National Railway Co. (CNR-T, CNI-N) and Canadian Pacific Railway Ltd. (CP-T, CP-N) shows "definitive signs of a recovery," according to Raymond James analyst Steve Hansen.

In a research report on the industry, Mr. Hansen pointed to a first-quarter revenue ton mile (RTM) increase of 11.7 per cent for CN and a decline of 1.7 per cent for CP, which he said both marked "healthy" improvements over their fourth-quarter performances.

Story continues below advertisement

"Spring is often associated with a pleasant rejuvenation of colour and life following winter's frigid dormancy," he said. "In this context, while Canada has recently endured a late-season arctic blast, the country's two Class 1 railroads have already witnessed early signs of 'spring shoots' emerging across the landscape (of multiple varieties), with healthy signs of traffic improvement evident not only in the QTD aggregate data, but also in the breadth of end-markets contributing to these gains."

"We also continue to monitor the 'great divergence' in traffic metrics between these two carriers, with CN clearly enjoying the benefit of recent contract wins, new mine restarts, and fewer lingering headwinds. That said, we still expect this gap to narrow in 2Q17 as CP's largest headwinds fade (i.e., crude-by-rail, port issues), and we begin to lap the demonstrably lower hurdles established last year (i.e., empty CDN farm bins, Alberta wildfire disruptions, etc.). That said, while CP has already demonstrated significant improvements in its trailing 4-week data, we note that the absolute spread between CN and CP has actually widened a smidge (CN: up 13.0 per cent, CP: up 1.3 per cent). We will continue to monitor this great divide with interest."

Mr. Hansen said bulk traffic remains a "healthy" tailwind for both companies, which he expects to accelerate in the second quarter as year-over-year "grain hurdles shift demonstrably lower (Canadian farm bins were largely empty during the second quarter of 2016."

He added: "At the same time, we also highlight several recent observations/nuances worth flagging: (1) U.S. grain continues to outperform Canada — with the latter's drag primarily owing to winter and port-related challenges that have reportedly impacted Vancouver terminals (& CP) disproportionately (CN's unique access to Prince Rupert is proving invaluable); (2) Canadian coal mixed/volatile—despite sustained (lofty) met coal pricing, CP's CDN coal volumes have been similarly impacted by weather and port-related issues (quarter to date cars: down 8.7 per cent year over year), a stark contrast versus the dramatic gains enjoyed by CN thanks to the recent start-up of two Conuma coal mines in northeastern BC (note: while CN's QTD coal cars are down 8.6 per cent year over year, total RTMs are reportedly up 64.9 per cent year over yearr – see below for more detail); and, (3) potash exports remain solid (for both carriers)—with Canpotex recently indicating they are sold out through April, and robust Saskatchewan-originated tonnage reportedly moving both westbound (via both carriers, with the majority on CP) and eastbound (exclusively via CN)."

Mr. Hansen reiterated his "outperform" ratings for both companies.

He raised his target price for CN to $110 from $104. The analyst consensus price target is $88.46, according to Thomson Reuters.

He maintained a target of $230 for CP stock. Consensus is $217.23.

Story continues below advertisement

"Given the macro/traffic backdrop described, we are comfortable reiterating our OP2 ratings on both CN and CP at this juncture," he said. " At the same time, we argue that the 'great divergence' described herein (in both traffic & share price performance) has given rise to fairly distinct value propositions for each carrier. Specifically, we argue that CN's outsized recent traffic momentum remains broadly underappreciated by the Street and investors—particularly when we contemplate its ability to carry (strongly) into 2Q17—thus supporting our decision to increase our target price today to C$110 (versus $104.00 prior). Conversely, CP represents a solid 'value' story, in our view, trading at just 15.0x our 2018E estimate, a sizeable discount to both CN (16.7 times) and the broader S&P 500 (16.9 times). We expect a forthcoming inflection point in CP's traffic to help narrow this valuation discount in the coming weeks/months (2Q17)—thus keeping us demonstrably positive at this juncture."


The lower-than-expected third-quarter 2017 fiscal results for Alimentation Couche Tard Inc. (ATD.B-T) represent a mere "slight hiccup" as its outlook remains "bright," said Canaccord Genuity analyst Derek Dley.

On Tuesday, the convenience store operator reported adjusted earnings per share of 53 cents (U.S.), missing the projections of both Mr. Dley (74 cents) and the Street (67 cents) though in line with its result of a year ago. Fuel margins in the United States of 18.3 cents per gallon missed the analyst's 20-cent expectation, causing a 5-cent drag on EPS in his estimation.

"Q3/F17 results were below our expectations; however, the company continues to make improvements to the top line and gross margin on a consolidated basis," said Mr. Dley. "Additionally, Couche-Tard has continued to deliver, and in fact exceed, synergy targets from recent acquisitions. The company was impacted by the unfavourable impact from hurricane Matthew, which impacted over 500 stores during the quarter."

Based on the results, Mr. Dley reduced his 2017 and 2018 EPS estimates to $2.20 and $2.61, respectively, from $2.44 and $2.78.

Story continues below advertisement

He maintained a "buy" rating for the stock and lowered his target to $72 (Canadian) from $78. The analyst average target price is currently $74.08, according to Bloomberg.

"Our revised target price represents 20.5 times our lowered 2018 EPS estimate of $2.61 (from $2.78), which we convert into Canadian dollars to account for the company's TSX listed share price," said Mr. Dley. "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."

Elsewhere, Desjardins Securities analyst Keith Howlett did not change his "buy" rating or $76 target, but he lowered his EPS projections for 2017 and 2018 to $2.27 (U.S.) and $2.52, respectively, from $2.40 and $2.70.

"The overall environment for convenience and fuel retailers in the U.S. has softened over the last several quarters," said Mr. Howlett. "Management is executing well on integration of acquisitions and realization of synergies. The financial benefit of ongoing major internal projects designed to increase foodservice sales and gross margin rate is less visible. Higher margin private-label sales are also not yet visibly improving gross margin rate. The tobacco category (approximately 40 per cent of convenience sales in the U.S.) still overwhelms the impact of improvements in other convenience categories. Volatility and unpredictability in quarterly fuel margins is a facet of the business. Management's new challenge is to successfully execute impactful change across a very large, multi-regional business. Financial returns, such as return on equity (22.6 per cent), remain attractive. Management is well-proven."


The market's "overreaction" to the fourth-quarter results and year-end reserves from Cardinal Energy Ltd. (CJ-T) "spells opportunity" for investors, said Canaccord Genuity analyst Sam Roach.

Calling its valuation "oversold," Mr. Roach said: "CJ is trading 1.5 standard deviations below its historical average trading multiple, the cheapest it has traded since December 2015, when oil was in the mid-$30s. We believe this presents a compelling entry point for investors."

The Calgary-based company's stock fell as much as 10 per cent on Tuesday following the release of its earnings report, closing down 8.3 per cent on the day.

Cardinal reported production and cash flow of 14,616 barrels of oil equivalent per day and 22 cents per share, versus Mr. Roach's estimates of 14,641 and $0.25 per share. Net debt at year end of $120-million was higher than his $115-million projection.

"The primary reason for the Q4 cash flow miss was higher than expected operating costs," said Mr. Roach. "This was because management increased its workover budget to offset delayed drilling and frac operations in late 2016. We still expect 2017 operating costs to average $20 (Canadian) per barrel, particularly as the company looks for operational synergies on recently acquired assets."

"We believe Cardinal can comfortably maintain its dividend at sub-$50 (U.S.) per barrel WTI. By our estimates, it would take two years of $43 per barrel oil to threaten Cardinal's current dividend policy, and even then we would expect capital spending reductions would occur before a dividend cut. Specifically, we think Cardinal can keep production flat with just $25-million of capital, and the current dividend commitment is $32-million annually therefore $40 per barrel would suffice in 2017 to keep the dividend sustainable."

Mr. Roach lowered his 2017 and 2018 cash flow per share projections to $1.19 and $1.66, respectively, from $1.23 and $1.72 in order to "reflect higher net debt, updated hedging and the suspension of the DRIP and SDP."

He kept a "buy" rating for the stock and lowered his target by $2 to $10.50. Consensus is $11.56.


Apple Inc.'s (AAPL-Q) service business has the potential to both lift the tech giant's gross margins and reduce cyclicality, according to RBC Dominion Securities analyst Amit Daryanani.

Adding the business, which includes Apple Music, iTunes, App Store, iCloud, Apple Pay, AppleCare and licensing, can "further strengthen the Apple ecosystem and expand the range of strategic alternatives at management's hand," Mr. Daryanani raised his target price for Apple shares.

"There has been increased focus on AAPL's services business over last 12-plus months and recently the company noted that they intend to double the business in the next 4 years ($48-50-billion target by fiscal 2020)," he said.

"AAPL expects Services to be the size of a F100 company by FY17 ($28-billion in revenues) and double by FY20 ($48-50-billion size). This implies AAPL anticipates 18-per-cent Services CAGR [compound annual growth rate] over the next 4-years (versus 21-per-cent historical 5-year CAGR). Furthermore, assuming the install base grows by 8 per cent, it would imply either ARPU [average revenue per user] growth is 10 per cent or AAPL needs to do sizable M&A to achieve their target. If growth is organically driven by ARPU, we could see that as a powerful driver for multiple expansion. FY16 was the first year when ARPU grew significantly and Services growth was greater than install base growth."

Mr. Daryanani said the services division's gross margins, in the range of 60 per cent, are ahead of the corporate average. If 18-per-cent CAGR is possible, he said it should provide 40-60 basis points of annual gross margin tailwind.

Mr. Daryanani has an "outperform" rating on Apple stock. He increased his target price to $155 (U.S.) from $140. Consensus is $142.24.

"We believe AAPL's current stock price creates an attractive entry point for investors to benefit from its ability to return to revenue and EPS growth in FY17," he said. "We believe multiple catalysts remain as the company benefits from: (1) iPhone ramps; (2) Mac/iPad refresh cycle; (3) potential iTV launch or other major product lines; and (4) improvements in capital allocation policy. We believe the fundamental reality remains that AAPL's valuation is materially sub-par to what we anticipate is its long-term revenue and EPS potential."

"We believe AAPL's true differentiation is its unique computing ecosystem: iOS. iOS provides users with an integrated, scalable, and seamless experience across multiple devices, which we believe will be difficult for competitors to replicate in scale. Simplistically, the scale of users attracts application developers, which in turn bolsters the number of users. We believe this cycle results in a captive consumer base that transitions more data and usage via iOS on Apple devices."


Calling it a "sweet spot growth story," CIBC World Markets analyst Robert Bek said Spin Master Corp. (TOY-T) should be a core holding for Canadian investors.

On Monday, the Toronto toy company reported fourth-quarter net sales of $338.4-million, ahead of the Street's projection of $300.5-million by 12 per cent as well as Mr. Bek's forecast of $295.6-million. Adjusted earnings before interest, taxes, depreciation and amortization of $22.9-million topped the Street by 9 cent ($21-million) and Mr. Bek ($21.5-million). Earnings per share of 9 cents met projections.

"Underlying these numbers was very strong growth in Europe (up 60 per cent year over year) and Rest of the World (up 35 per cent), both of which were ahead of expectations," Mr. Bek said. "This bodes well for the story seeing that increasing exposure to higher growth international markets is an important lever for the long-term growth algorithm at TOY."

He called the company's guidance "strong," suggesting "continued" momentum into the 2017 fiscal year.

"Spin Master is targeting organic gross product sales (including the Swimways acquisition) in the 'low-teens' relative to 2016, which was ahead of Street models heading into the quarter," the analyst said. "Adjusted EBITDA margins are expected to be flat year over year, but given the revenue pick-up, street EBITDA estimates will also need to increase."

Mr. Bek raised his 2017 EPS projection to $1.45 from $1.40. His 2018 estimate is $1.54.

With an "outperformer" rating, he raised his target to $41 from $36. Consensus is $40.53.

"Toy shares currently trade at 11.2 times 2018 estimated EBITDA, and 17.8 times EPS, compared to Hasbro at 11.7 times 2018E EBITDA, and 19.4 times EPS (Mattel now trades at a discount owing to Mattel-specific issues)," he said. "Our $41 price target implies a target 2018 FCF [free cash flow] yield of 5 per cent, 2018 enterprise value/EBITDA of 12.2 times, and 2018 price-to-earnings of 19.5 times - a valuation that is more in line with Hasbro."


Calling it a "better company than stock," Credit Suisse analyst John Pitzer downgraded Intel Corp. (INTC-Q) to "neutral" from "outperform."

"What remains is a positive view on the company, especially longer term, but a solidly neutral view of the stock at least until we find evidence of peaking rates of investments and/or more significant and sustainable revenue growth and operating leverage," he said. "We see the stock mostly range-bound, with a floor at $33, or 3.3-per-cent dividend yield, and a ceiling at less-than $40, or [approximately] 20 times calendar 2017 enterprise value to free cash flow."

Mr. Pitzer lowered his target to $35 (U.S.) from $45. The average is $40.27.


Industrial Alliance Securities analyst George Topping downgraded Osisko Mining Inc. (OSK-T) to "speculative buy" from "buy." He raised his target to $5.25 from $4.10, compared to the average of $4.59.

"Osisko Mining has been aggressively drilling since our January initiation, and has returned impressive intersections at its Windfall project in Quebec," he said. "We are increasing our target price ... based on exploration success that points to a larger operation at Windfall than previously modelled. In the absence of an updated resource and with the increased valuation, we move to a Speculative Buy."


In other analyst actions:

Alta Corp Capital analyst Thomas Matthews upgraded Bonterra Energy Corp. (BNE-T) to "outperform" from "sector perform" with a target of $34. The analyst average is $32.25.

GMP analyst Martin Landry initiated coverage of Emblem Corp. (EMC-X) with a "buy" rating and $3.25 target. The average is $4.15.

Mr. Landry gave Aurora Cannabis Inc. (ACB-X) a "buy" rating and $3 target. The average is $3.08.

He also gave Cronos Group Inc. (MJN-X) a "buy" rating with a target of $4.25. The average is $3.92.

Profound Medical Corp. (PRN-X) was rated a new "buy" at Echelon Wealth Partners by analyst Douglas Loe with a target of $4. The average is $2.97.

CSX Corp. (CSX-Q) was raised to "overweight" from "neutral" by Atlantic Equities analyst Lindsay Bettiol with a target of $57 (U.S.), up from $40. The average is $52.16.

Netflix Inc. (NFLX-Q) was upgraded to "hold" from "underperform" at Jefferies by analyst John Janedis. He raised his target to $135 (U.S.) from $95, while the average is $152.54.

Report an error Editorial code of conduct Licensing Options
As of December 20, 2017, we have temporarily removed commenting from our articles. We hope to have this resolved by the end of January 2018. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to If you want to write a letter to the editor, please forward to