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A Bank of Montreal location in Toronto.Deborah Baic/The Globe and Mail

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

Bank of Montreal's (BMO-T, BMO-N) "lagging" U.S. segment is hurting its stock valuation, according to Canaccord Genuity analyst Scott Chan.

On Tuesday, BMO announced its third-quarter earnings from its U.S. operations, including Chicago-based lender BMO Harris Bank, were flat from a year earlier at $278-million.

"Recall last quarter, [net income] in this segment was down 7 per cent year over year due to slower commercial loan growth and larger provisions," said Mr. Chan. "In Q3, the former was slightly better, up 2 per cent quarter over quarter, but significantly lower than organic growth of high teens over the past few years. Management stated its commercial loan pipeline was good. Commercial loans are a large driver of their U.S. earnings (i.e. 5:1 book size vs. personal). U.S. expenses were also higher impacting results."

Overall, BMO reported adjusting earnings of $2.03 per share, exceeding the $2.01 average estimate on the Street. However, the U.S. result led the bank's shares to slide 2.6 per cent on the day.

"Last quarter, BMO reported similar consolidated results (i.e. generally inline quarter), but their stock retracted greater-than 3 per cent from negative earnings from its U.S. segment," said Mr. Chan. "This quarter, Royal Bank of Canada (through City National Bank) and Canadian Imperial Bank of Commerce (from PrivateBancorp Inc.) have much better fundamentals down South. Further, U.S. publicly traded Midwest comps have delivered double-digit earnings growth over the LTM, with further expectations of greater-than 10-per-cent EPS growth in 2018 (based on consensus estimates) … It is clear to us that BMO needs to revitalize their U.S. segment (i.e. revert back to double-digit commercial growth, better efficiency ratio, and further margin improvement) to improve their relative valuation versus peers. We await better financial traction on this segment to get more positive on BMO stock."

He added: "While their U.S. operations lags, BMO's Canadian operations had a solid quarter. Canadian banking earnings increased 9 per cent year over year with support from better operating leverage. Management described a strong growth outlook in Canada that should support commercial growth (up 8 per cent year over year), in line with its range of 8-11 per cent over the past few years. NIM [net interest margin] was up 5 basis points quarter over quarter (better than peers) with management offering a stabilized margin outlook near term."

Mr. Chan maintained a "hold" rating for BMO stock, however his target price fell to $99 from $102. The analyst average price target is $101.77, according to Bloomberg data.

"Our $99.00 target price is based on a 12.0 times price/eanings multiple (from 12.2 times) applied to our F2018 EPS estimate of $8.24 (unchanged)," he said. "Our target multiple represents a 2-per-cent premium to the target multiple average of 11.75 times that Canaccord Genuity applies in valuing large Canadian banks."

Elsewhere, calling BMO's results "yankee doodle not so dandy," Desjardins Securities analyst Doug Young lowered his target by a loonie to $100 with a "hold" rating (unchanged).

"We like BMO's more commercial (versus retail) focus in Canada and its exposure to potential increases in the U.S. Fed funds rate," he said. "That said, increased competition in the commercial market could weigh on NIMs and growth over the next year."

CIBC World Markets analyst Robert Sedran lowered his target by a loonie to $100 with an unchanged "neutral" rating.

"Notwithstanding the negative share price reaction on earnings day, we are hesitant to get too carried away with the implications of an in-line quarter," said Mr. Sedran. "Loan losses settled back down as expected after a jump last quarter (and management noted on the conference call that conditions are benign and allowed for a collective allowance reversal). Capital markets revenues were down, by a little more than forecast, but within the margin of error on those lines, especially considering the vanishing trading revenue related to federal budget changes. Expenses were also higher than modeled, but some of that also had a one-time feel to it. On balance, our model revisions are negative, but only modestly so."

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BMO Nesbitt Burns analyst Fadi Chamoun raised his rating for CAE Inc. (CAE-T), noting it is currently trading at its lowest valuation to peers in more than five years.

Seeing a 17-per-cent total return from its current share price level and a lack of a reason for its recent pullback, Mr. Chamoun upgraded the Quebec-based company, which provides training for the civil aviation, defence and security, and health care markets, to "outperform" from "market perform."

"Civil segment leading market indicators remain favorable," the analyst said. "Passenger traffic growth is tracking above historical trends supporting steady rise in the installed base of aircraft globally. Moreover, CAE continues to expand and sharpen the reach of its global network providing best-in-class turnkey training solutions. The regulatory backdrop is favorable and the business aviation market is showing signs of moderate improvement, specifically in terms of rising utilization of existing global fleet.

"Following years of high-single-digit capex as percentage of revenues, capital spending seems to have normalized around the mid-single-digit range, which should continue to support FCF around the same level as earnings. Management continues to see a path to win airline training outsourcing deals, which is an area where we see incremental capital deployment in coming years."

He maintained a price target of $23 for CAE shares, which matches the consensus.

"We estimate nearly 60 per cent of CAE's revenues are recurring and from highly predictable sources, with limited cyclical exposure," said Mr. Chamoun. "We believe the company has headroom to grow into the existing installed base of Civil assets underpinning upside in operating margins and ROCE. We expect EPS growth in the high-single digit and ROIC in the low-double-digit range to be sustainable."

The analyst added: "The company's revenue and operating income have a great degree of visibility relative to other aerospace and defense peers; leading demand indicators remain favorable and valuation is deeply discounted versus peers. Our $23 price target, which remains unchanged, is based on an NAV approach using 9 times EBITDA for Aerospace and 11 times for Defence."

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Citing "weak" free cash flow trends, Canaccord Genuity analyst Yuri Lynk said he's been forced to "the sidelines" on Distinct Infrastructure Group Inc. (DUG-X), downgrading his rating for the stock to "hold" from "speculative buy."

On Monday, the Toronto-based utility and telecom infrastructure contractor reported second-quarter revenue and earnings before interest, taxes, depreciation and amortization (EBITDA) of $20.3-million and $2.4-million, respectively, compared to Mr. Lynk's projections of $18.6-million and $2.3-million.

"DIG beat our revenue estimate as the company's turnkey utilities infrastructure services and iVac services both saw demand beyond what we had expected. However, gross margin was 216 basis points lower than expected, which led to in-line EBITDA and adjusted EPS results," he said. "Gross margin was hindered by weather-related delays, which led to lost field efficiencies and higher direct costs as a percentage of revenue (73.2 per cent this quarter versus 71.2 per cent in Q2/2016).

"Work-in-progress days (WIPD), were 154 (i.e. jobs were in progress for 154 days prior to invoicing) compared to 131 in Q2/2016. Days sales outstanding (DSO) increased from 98 days in Q2/2016 to 121 days in Q2/2017."

Mr. Lynk said the company is experiencing challenges in acquiring work approvals as well as timely payments given its "significant" increase in work volume.

"Management continues to do an excellent job driving and managing growth: Q2/2017 revenue increased organically by 30 per cent year over year, EBITDA increased 47 per cent year over year, and adjusted-EPS increased to $0.03 from nil," he said. "However, every dollar of incremental revenue growth requires an even larger working capital investment as invoice approval at telecom customers remains extremely slow."

He also expressed concern over the amount of cash being consumed by working capital.

"DIG's clients increasingly appreciate its specialized capabilities, modern equipment fleet, highly trained workforce, and superior safety record," the analyst said. " This is resulting in very large telecom clients issuing DIG projects that are larger and of a longer duration. So we would expect some working capital investment to support this growth. However, working capital investments are outpacing revenue growth and the company now has $47-million in non-cash working capital, which is approximately DIG's market cap."

Mr. Lynk reduced his 2017 and 2018 EBITDA projections by 9 per cent and 13 per cent, respectively, noting: "the financial flexibility required to support the growth we previously estimated is lacking outside of a material improvement in cash conversion."

With that reduction, his target price for the stock dropped to $1.45 from $1.95. The analyst consensus price target is $2.16.

"Any improvement in FCF conversion could lead us to be more constructive on DIG shares, all else equal," said Mr. Lynk.

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Though Bank of Nova Scotia's (BNS-T, BNS-N) third-quarter financial results were "largely as expected," BMO Nesbitt Burns analyst Sohrab Movahedi raised his target price for its stock.

On Tuesday, Scotiabank reported cash operating earnings per share of $1.65, excluding almost 4 cents from a real estate gain in Canadian banking. That was a penny below Mr. Movahedi's projection, but it topped the Street's expectation by 1 cent.

"Favorable momentum in Canadian and International Banking segments continued with improving risk-adjusted margins, positive operating leverage, and stable volume growth," the analyst said. "Total bank PCL [provision for credit losses] ratio was 44 basis points (45 bps year to date) with a stable outlook, and BNS's capital position remains strong, with an industry-leading CET1 of 11.3 per cent, unchanged quarter over quarter. BNS increased its quarterly dividend by 4 per cent to 79 cents."

Maintaining an "outperform" rating for the stock, Mr. Movahedi bumped his target to $85 from $83. The analyst average target is $86.71.

He said: "Our Outperform rating on BNS stock is based on expectations of: 1) efficiency improvements from restructuring charges; 2) higher-than-peer earnings growth driven from its International Banking segment, which is augured in the Pacific Alliance region, where credit penetration is less than 50 per cent; and 3) continued positive momentum in domestic banking operations."

Elsewhere, CIBC World Markets analyst Robert Sedran hiked his target to $87 from $85 with an "outperformer" rating (unchanged).

Mr. Sedran said: "Our Outperformer rating on the stock is based on our expectation of strong operating performance in the key segments, a strong capital position and an above-average potential benefit from expense control. This quarter? Check (both Canada and International Banking showed well), check (CET1 sits at the top of the group) and check (expense control ahead of plan, though this last checkmark will need to see more of the benefit migrate to the bottom line to turn pencil into ink). At the close on Aug. 29, the shares traded at 11.0 times our fiscal 2018 EPS estimate compared with the peer average of 10.7 times. That the premium has reappeared is appropriate, in our view."

Desjardins Securities analyst Doug Young kept a "buy" rating and $87 target.

"We like the momentum at BNS's international banking division (a key part of the story), along with management's clear focus on achieving its expense-reduction targets," said Mr. Young.

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Laurentian Bank of Canada's (LB-T) "peer-low valuation has multiple re-rating upside," said Canaccord Genuity analyst Scott Chan, calling its third-quarter results "great."

On Tuesday, Laurentian reported adjusted earnings per share for the quarter of $1.63, exceeding both Mr. Chan's projection of $1.50 and the consensus of $1.49. The result was an increase of 19 per cent year over year.

Mr. Chan pointed to three factors in explaining the beat: "strong" revenue growth (up 8 per cent year over year); improvements to its adjusted efficiency ratio (down 450 basis points year over year) and better credit (with provisions for credit losses down 3 basis points from the previous year).

"Backing out extraordinarily low provisions (7 basis points; we estimate 9-cent impact), normalized EPS growth would have been 12 per cent year over year," the analyst said. "The market rewarded LB stock, up greater than 2 per cent. Even with [Tuesday']s gain, LB's stock has returned negative 9 per cent over the past 4-months, underperforming its Big-6 banking peers by 4.5 per cent (second worst after BMO). Management's transformation plan is progressing better than expected and our 2018 EPS estimate increases 1 per cent (i.e. better cost control and credit). We believe continued positive results should support narrowing LB's significant valuation discount to peers."

Mr. Chan raised his 2017 and 2018 full-year EPS projections to $6.01 and $6.30, respectively, from $5.83 and $6.23.

He kept a "buy" rating for the stock and increased his target to $63 from $61. The average is $59.64.

"Currently, LB shares are trading at a price/earnings (next 12 months) of 8.9 times, which is a 3-per-cent discount to its historical average of 9.2 times," he said. "On a price/book (2018E) basis, LB trades at 1.1 times. This quarter, LB reported adjusted ROE [return on equity] of 13 per cent (12.1 per cent year to date) with progression towards narrowing its ROE gap to peers to 300 bps by 2019. If proved sustainable, we believe this could fetch a P/B valuation multiple of 1.3 times."

"Based on our 2018 BVPS [book value per share] estimate, we believe this would imply a fair value of $64 per share, supporting our revised target price of $63."

Elsewhere, BMO Nesbitt Burns analyst Sohrab Movahedi kept a "market perform" rating and raised his target by a loonie to $57.

"The bank has been making steady progress towards its multi-year transformation plan under a new CEO," said Mr. Movahedi. "LB looks to be on track to deliver its expected expense efficiency gains and improving ROE relative to the industry by 2019 as contemplated under its transformation plan."

Desjardins Securities analyst Doug Young maintained a "hold" rating and $57 target.

Mr. Young said: "LB has made progress on its seven-year transformation plan; however, there remains execution risk with so many initiatives underway. We also believe management's goal of closing the ROE gap versus large-cap peers by 2022 may be aggressive."

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CannTrust Holdings Inc.'s (TRST-CN) joint ventures distinguish it from other medical marijuana producers, providing a "unique" competitive position, according to Echelon Wealth Partners analyst Russell Stanley.

He initiated coverage of the Vaughan, Ont.-based company with a "speculative buy" rating.

"In December 2016, CannTrust finalized an exclusive global joint venture (JV) with Apotex Inc., the seventh largest generic pharmaceutical company globally, and the largest Canadian-owned player in that space," said Mr. Stanley. "Under this JV, CannTrust will provide the raw material (dried cannabis) to support development of novel dosage formats, such as sustained release and other proprietary dose forms. The Company also has a JV with Club Coffee L.P., the largest roaster, contract manufacturer, and distributor of single-serve coffee to Canadians. This JV owns patents on a cannabis-infused single-serve coffee pod, with a near-term sales launch planned for the U.S. market. We believe these pharmaceutical and consumer product partnerships are relatively unique within the cannabis industry, and position CannTrust well for the market's next evolutionary steps."

Mr. Stanley called CannTrust a "well-established producer," adding: "It obtained its cultivation license from Health Canada in June 2014, with direct sales to patients beginning in March 2015. The Vaughan facility provides annualized nameplate capacity of 2,500 kilograms, with a current base of approximately 25,000 patients (versus our estimate of 230,000 registered patients in Canada) and 1,000 referring physicians. The Company is also adapting a greenhouse facility in Fenwick, Ontario, that could add another 40,000 kilograms plus of annualized capacity once it is ramped up, with the first phase of 20,000kg to be completed by the end of September 2017. Our forecast conservatively includes only the fully funded, initial conversion capacity target of 20,000 kilograms, which drives our revenue/adjusted EBITDA forecast of $151-million/$57-million in 2019. This also drives our return-on-invested-capital (ROIC) forecast of 40 per cent in 2018 and 67 per cent in 2019."

Mr. Stanley set a price target of $6.25 for the stock. He's the lone analyst covering the stock currently, according to Bloomberg.

"We continue to view calendar 2019 as the most relevant year for valuation purposes, as that should be the first full year with a legalized recreational/adult-use market in Canada," he said. "While producers place varying levels of strategic emphasis on the recreational market versus the medical market, we believe C2019 is still the basis for investor comparisons. As shown below, enterprise value/EBITDA multiples vary considerably, from a low of 4.8 times to a high of 20.5 times consensus EBITDA. On a YTD basis, the peer group average multiple is approximately 9.0 times, ranging from a high of 12.0 times in January to a recent low of 6.4 times.

On that basis, we use a 10 times EV/EBITDA multiple applied to our estimates for 2019. This represents a premium of 11 per cent to the year-to-date peer group average, which we believe is more than warranted given the company's partnership with Apotex, and the strong validation it provides … This approach implies a value of $6.20 per share, which we round to $6.25 to arrive at our target price."

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