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Wednesday’s analyst upgrades and downgrades

A CIBC sign is shown in the financial district in Toronto in this file photo.

Nathan Denette/THE CANADIAN PRESS

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

Scotiabank analyst Sumit Malhotra is "moving to the sidelines" on National Bank of Canada (NA-T) after an "impressive run."

In a research note released Wednesday previewing the sector's fourth-quarter earnings season, Mr. Malhotra lowered his rating for the bank's stock to "sector perform" from "sector outperform."

"Since our June 2016 upgrade of NA shares we have watched the bank assuage market concerns regarding its Energy exposure and capital position/allocation decisions, consistently execute on its key areas of fundamental focus, and even benefit from a boom in the famously 'no boom, no bust' Quebec economy," the analyst said. "However, with the price-to-earnings discount on the stock having narrowed significantly (from 18 per cent to the current 7 per cent) and our view that operating outperformance is set to normalize in the near-term (in part reflecting its larger Wholesale earnings reliance), we are 'taking profits' on NA by moving down to a SP-rating and would view [Canadian Western Bank, CWB-T] as the preferred 'Canadian pure play' option."

Mr. Malhotra emphasized he does not see "any particularly worrisome fundamental concerns," however he feels outperformance, both operationally and in terms if valuation, may prove more difficult in the near term, citing its reliance on Wholesale earnings.

He did raise his target price for National Bank shares to $68 from $65. The analyst consensus target is currently $63.75, according to Thomson Reuters data.

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That increase came after Mr. Malhotra hiked his 2018 and 2019 operating earnings per share estimates for the entire sector prior to the start of earnings season, driven largely by changes to his net interest income and expense assumptions.

"The BoC's 25 basis point rate hike in September prompted us to modestly increase our Canadian P&C NIM [net interest margin] estimates for the group which in turn helped lift our forecast for core NII in 2018E-2019E, though this was somewhat offset by the move lower in interest rates during the quarter," he said. " Meanwhile, slowing capital markets activity has tempered our expectations for underwriting and advisory and trading moving forward, causing us to reduce our market-sensitive revenue estimates for 2017E-2019E (similar trends have been seen in the U.S.). Bottom line, as a result of these revisions, the aggregate industry impact on our numbers sees the 2018E-19 estimated EPS increase by 1 per cent each."

On the sector's stock, he said: "It is often the case, the strong earnings performance of the Canadianbanks (operating EPS for the sector is up 10 per cent in 2017) has been closely matched by the run-up in the stocks, as the TSX Bank Index enters Q4/17 reporting season at an all-time high and having climbed the very same 10 per cent. With most of the key operating fundamentals for the sector trending well (the suddenly sluggish capital markets activity levels being the near-term exception), even with a healthy dose of conservatism our 2018-19 estimates for the group envision EPS growth of a solid 6 per cent. After the 1-per-cent increase in our numbers (our 2018 estimate for the group has now risen 4 per cent year-to-date) the stocks trade at 12.2 times our 2018 estimate and 11.4 times our 2019 estimate, and as we did for the lifecos earlier this month we are raising our bank target prices as we roll-forward our valuation to 2019."

Accordingly, he made the following target price changes:

Bank of Montreal (BMO-T "sector outperform") to $112 from $101. Consensus is $103.47.

Bank of Nova Scotia (BNS-T, "sector outperform") to $95 from $88. Consensus is $88.93.

Canadian Imperial Bank of Commerce (CM-T, "sector perform") to $128 from $118. Consensus is $120.20.

Canadian Western Bank (CWB-T, "sector outperform") to $42 from $38. Consensus is $35.73.

Laurentian Bank of Canada (LB-T, "sector perform") to $67 from $62. Consensus is $61.36.

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Royal Bank of Canada (RY-T, "sector perform") to $110 from $101. Consensus is $105.67.

Toronto-Dominion Bank (TD-T, "sector outperform") to $83 from $76. Consensus is $76.19.

"Canadian bank stocks enter Q4/17 reporting season trading at 12.2 times our 2018 estimate, 11.4 times our 2019 estimate, 1.99 times last reported BVPS [book value per share], and offering an average yield of 3.63 per cent," the analyst said. "A year ago at this time – when the group was putting the remnants of the Energy downturn in the rear-view mirror while also benefiting from the valuation lift that banks globally were receiving post the U.S. election – the comparable parameters were 11.8 times our 2017 estimate, 11.1 times our 2019 estimate, 1.84 times BVPS, and an avg. yield of 3.85 per cent. In other words, though valuation has moved higher over the past year, it certainly has not been the biggest part of the story, as both EPS growth (12 per cent year over year thus far in 2017) and ROE [return on equity] expansion (15.7 per cent year-to-date) have reflected a very strong fundamental year.

"While there are still 'off-the-field' issues that have the potential to push sector valuations higher (passage of tax or health care reform in the U.S., continued Bank of Canada tightening that does not stall economic growth), it is reasonable to believe that, as has been the case in 2017, the bulk of the heavy lifting when it comes to bank stock performance in 2018 will have to come from earnings power, and we note that our 2018 estimate for the group have increased by 4 per cent since the start of the year. With our estimates for 2018/19 embedding what we consider to be the 'normal' growth estimate of 6 per cent, we continue to favour those names that we believe have the potential for both positive revisions and relative multiple expansion, and as such our 'preferred half' in the group has Sector Outperform ratings on TD, CWB, BNS, and BMO."

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Meanwhile, Canaccord Genuity analyst Scott Chan also raised his financial expectations across the Canadian banking sector, citing stronger results and guidance.

"Since solid Canadian banks fiscal third-quarter results (average EPS surprise of 4 per cent), [the] Big-6 banks (average) have outperformed, returning 12 per cent versus the TSX Composite of 8 per cent. As a result, Canadian banks are trading at a price-to-earnings (next12 months) of 11.9 times and showcasing 0.7 times multiple expansion from the start of FQ3 results.

"In a recent report, we increased our Group bank P/E multiple to 12.25 times (from 11.75 times). Thus, we have made no changes to our ratings or target prices. This suggests potential further multiple expansion over the next year."

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Mr. Chan raised his EPS growth expectation for the group to 6 per cent year over year from 5 per cent.

He attributed the change to: "(1) expecting better credit trends with positive read throughs from Canadian lending peers (i.e. HSBC Canada, HCG. EQB, Desjardins, ATB) and US mega banks (i.e. JPM, C, BAC, WFC); and (2) robust year-over-year advisory revenue should be mostly offset by continued softness in FICC (fixed income and currency trading) based on U.S. mega cap banks' Q3/F17 results. CWB was our largest upward Q4 EPS revision at 5 per cent, mostly benefiting from our increased NIM estimate (i.e. 50-per-cent commercial book variable to benefit from recent rate hikes) and lower PCL ratio estimate. For Q3/17, ATB reported lower PCL ratio (down 32 basis points year over year), which we believe is a positive read through for CWB. For BMO, we expect a reinsurance charge (estimated 8 cents per share) related to U.S. hurricanes in the quarter."

Mr. Chan's targets and ratings for the banks are:

Bank of Montreal (BMO-T) "hold' and $103. Consensus: $103.47.

Bank of Nova Scotia (BNS-T) "buy" and $92. Consensus: $88.93.

Canadian Imperial Bank of Commerce (CM-T) "buy" and $121. Consensus: $120.20.

Canadian Western Bank (CWB-T) "hold" and $35. Consensus: $35.73.

Laurentian Bank of Canada (LB-T) "buy" and $67. Consensus: $61.36.

National Bank of Canada (NA-T) "buy" and $66. Consensus: $63.75.

Royal Bank of Canada (RY-T) "hold" and $105. Consensus: $105.67.

Toronto-Dominion Bank (TD-T) "buy" and $78. Consensus: $76.19.

"Over the past 11 quarters, all Canadian banks have reported positive EPS surprises, with the average ranging from 1.8 per cent to 5.5 per cent," said Mr. Chan. "BMO and CM ranked at the top of the list. In the two most recent quarters, TD and NA had the biggest EPS surprises at 9 per cent and 4 per cent, respectively. This is consistent with their YTD stock performance outpacing peers. In general, we believe further EPS surprises could come from: (1) stronger than expected volume (OSFI data up until September supports growth); (2) benign credit trends; (3) better than expected cost control efforts; (4) upside surprises from Other income support from Capital Markets and Wealth management; and (5) lower than expected tax rate."

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A recent dip in share price for Pan American Silver Corp. (PAAS-T) presents investors with an enticing buying opportunity, according to Credit Suisse's Robert Reynolds.

Following the company's Investor Day on Tuesday, the analyst upgraded his rating  to "outperform" from "market perform."

"We are upgrading PAAS as the 4-per-cent share price underperformance since Q3 results (and also down 4 per cent year-to-date) provide an attractive valuation at which to buy into a high quality precious metals producer ahead of upcoming catalysts," said Mr. Reynolds. "The investor day emphasized PAAS' return on investment focused capital allocation framework and the experienced management team's track record of delivering against guidance, mine building and exploration success. Catalysts are the December Joaquin project update, three year guidance in January which we expect to show improved costs for 2018-2019 and higher production in 2019 versus the prior outlook, and a 2018 FCF inflection which provides capital allocation flexibility through M&A or a higher dividend."

The analyst said Pan American provides investors "enhanced exposure to silver by leveraging its competitive advantages to grow low-cost, un-hedged silver production."

He added: "Competitive advantages are PAAS' experienced management team (average 20+ years of experience with significant in-house operating and mine building expertise), long-life portfolio of mines that are predominately underground and have a track record of replacing mined ounces, and a strong balance sheet with $186-million in cash and $7-million in debt at Q3/17.

Mr. Reynolds raised his target for the  stock by a loonie to $25. The average targer on the Street is $21.28.

Elsewhere, BMO Nesbitt Burns analyst Ryan Thompson bumped his target to $21 from  $20 with an "outperform" rating (unchanged).

Mr. Thompson said: "PAAS is a higher-quality name that has recently delivered solid execution on two major expansion projects. Looking ahead, we see continued production growth, with potential upside at Manantial Espejo, with the additions of COSE and Joaquin."

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Touting its "world-class" Tres Quebradas lithium brine project in Argentina in a "compelling" macro environment, Canaccord Genuity analyst Eric Zaunscherb initiated coverage of Neo Lithium Corp. (NLC-X) with a "speculative buy" rating.

"In an investment environment in which we expect the demand for battery materials to ramp dramatically, Neo Lithium has discovered and is advancing the world-class Tres Quebradas lithium brine project in Catamarca province, Argentina," he said. "Production from lithium brines currently meet approximately one half of global lithium demand."

The analyst said the growth of electric vehicles is likely to drive up the demand for lithium. He's projecting a EV penetration rate of 13 per cent by 2025, leading total annual lithium demand to increase from 2017 to 2025 by 234 per cent (a compound annual growth rate, or CAGR, of 14.5 per cent."

"We expect continued tight market conditions into 2018 and possibly into 2019," he said. "We expect a transient market surplus from 2019 to 2023 but recognize challenges in project financing and slow ramp-ups encountered to date, potentially mitigating surpluses and supporting prices."

"High grade and purity make Tres Quebradas world-class. Recently the subject of a robust preliminary economic assessment (PEA), Tres Quebradas is world-class in terms of scale and lithium grade, as well as favourable metallurgy due to extremely low impurity levels. The PEA generated an after-tax net present value (10 per cent) of $859-million, 24.4-per-cent IRR [internal rate of return], and 2-year payback period."

He added: "Neo Lithium is drilling to expand the Tres Quebradas resource, which should feed a resource update by late 2018. We expect a feasibility study in early 2019 to support a production decision leading to commencement of production in 2021, leaving the company well positioned to meet mounting lithium demand."

Believing a "conservative valuation leaves Neo Lithium highly leveraged to advancement," Mr. Zaunscherb set a $3.20 target for its shares. The average target on the Street is $2.88.

"Bear case scenarios (e.g. higher costs, lower pricing and greater equity dilution) suggest an 83-cent target NAVPS [net asset value per share] in line with Neo Lithium's 52-week low," he said. "Bull case scenarios (e.g. stronger pricing, de-risking and leverage) point toward a $5.81 target NAVPS. With the delivery of a positive feasibility study and further de-risking, we can foresee the company applying 50-per-cent debt leverage, thereby lowering the WACC toward 10 per cent, resulting in a hypothetical target NAVPS of $6.71.

"[It is] trading attractively. Neo Lithium trades at an implied 19-per-cent discount rate or 0.30 times normalized price-to-NAV(5 per cent), versus the 0.45-times mean for covered peer companies.

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Descartes Systems Group Inc.'s (DSGX-Q, DSG-T) recent $107-million (U.S.) acquisition of MacroPoint LLC may fuel third-quarter upside, according to RBC Dominion Securities analyst Paul Treiber.

"MacroPoint is a [Software as a service] business that provides 'Uber'-like visibility into freight shipments, with 70-per-cent average organic growth over the last three years," he said. "The addition of MacroPoint may lead to Q3 results above Street estimates and Descartes' baseline. Also, the shipping environment appears healthy, another tailwind to Descartes' growth."

In a research note previewing the Waterloo, Ont.-based tech company's third-quarter financial results, scheduled for release on Nov. 29, Mr. Treiber said he's projecting revenue to increase 21 per cent year over year to $62.2-million (U.S.) with adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rising 18 per cent to $20.9-million. Both estimates exceed the Street's projections of $60.2-million and $20.4-million, respectively.

His earnings per share expectation of 11 cents also topped the consensus (by a penny).

Mr. Treiber said he expects Descartes to exhibit "healthy" organic growth, noting: "Our outlook calls for 2.6-per-cent constant currency organic growth Q3, stable with last quarter (2.7 per cent). We believe Descartes is benefiting from revenue synergies from prior acquisitions as it cross-sells new trade content (e.g., CUSTOMS Info, MK Data, Datamyne) into its customer base, augmenting demand for omni-channel retailing solutions and growing global trade. Wins/expansions announced during the quarter include McCombs Supply, BASF, Ferrellgas (Blue Rhino), and Manuport Logistics. Regarding acquisitions, we assume that acquisitions (MacroPoint, PCSTrac, ShipRush, Datamyne, 4Solutions, and Appterra) contribute $8.4-million revenue Q3, up from $5.7-million Q2."

Maintaining an "outperform" rating for Descartes stock, he raised his target price to $35 (U.S.) from $32. The analyst average target is $30.85.

"Our Outperform thesis on Descartes reflects: 1) strategic acquisitions fuel network effects; 2) consistent margin expansion and FCF growth; and 3) large, untapped acquisition opportunity," he said.

"Over the last year, Descartes' valuation has increased from 20 times forward 12 month enterprise value-to-EBITDA to 26 times currently, whereas the valuation of peers has increased just 2 times, from 24 times to 26 times. Multiple expansion reflects, in our view, the company's record pace of acquisitions, along with consistent financial results. Descartes has deployed $188MM capital on acquisitions trailing 12 months (TTM), compared to $46-million in the prior TTM period and more than double TTM FCF (estimated $68-million). Management has indicated that its M&A pipeline still remains healthy; further M&A may lead to an increase in leverage (currently 0.2 times net debt /forward 12-month EBITDA) or a potential equity raise."

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Andrew Peller Ltd. (ADW.A-T) is an investment opportunity that "should pair well with your portfolio," said Laurentian Bank Securities analyst John Chu.

He initiated coverage of the Grimsby, Ont.-based wine maker with a "buy" rating.
 
Mr. Chu believes the company is in prime position to take advantage from expansion of the Canadian market, noting the country is one of the world's fastest growing regions in wine consumption.

"Wine has been gaining market share in the Canadian and global alcoholic beverage sector for the past 10-plus years and recent trends suggest no signs of letting up; Canadian wine sales volume per capita is up over 30 per cent during that period while total alcohol sales, along with beer and spirits sales volumes were essentially flat (or in the case of beer, down) during that same period," he said. "Canadian whisky sales growth was twice that of the spirits category and cider saw explosive growth, twice that of the cider/cooler/other category.

"Wine outlook is positive with upside: LCBO forecasts are calling for continued strong sales momentum through to 2018/19. Recent trends also suggest Canadian consumers are moving to higher priced wines and domestically produced as well, which should benefit ADW."

Mr. Chu is projecting Andrew Peller to see sales growth that reflects that trend, adding new products and recent M&A, including the $95-million acquisition of three B.C. wineries in September, should provide "additional momentum"

"The company has its own retail distribution network (the Wine Shop, Wine Country Vintners, Wine Country Merchants) in addition to the provincial liquor agencies, the recent addition of grocery stores as well as its wineries and direct to customer capabilities (online, club memberships etc.)," he said. "Sales growth is driven by ongoing wine market share gains, new wine products, new distribution channels (grocery), and recent new product introductions into the fast-growing cider category as well as the spirit category (with Wayne Gretzky-branded whisky)."

"The company has made strong strides recently to improve its margins through cost cutting initiatives and a focus on higher margin products. We expect this trend to continue driven by ongoing efficiency improvements as well as through recent high-margin acquisitions."

He set a price target of $15.50 for its shares. The average is $15.25.

"Industry valuations have been trending higher since hitting trough levels in mid-2009 and have been hovering at the upper end of its historical range since early 2013," said the analyst. "Industry consolidation and rising wine market share are likely key contributors to this trend. We also note that ADW has been trading at a discount to the peer group but has been narrowing the gap for the past couple of years and more so the past few months."

"Our valuation multiple is based more on competitor multiples of 15.5 times forward enterprise value/EBITDA than on ADW's trading history, given the run up in its valuation and narrowing gap with its peer group. We believe a 2-times multiple discount is appropriate and conservative at this time to reflect ADW's lower margin profile vs. its peers. We also take into consideration recent industry transactions (Ontario Teachers Pension Plan acquiring Constellation Brands Canada for 12 times forward EV/EBITDA). As such, we believe our 13.5-times forward EV/EBITA target multiple is appropriate."

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Expecting "growth across the board," Canaccord Genuity analyst Derek Dley raised his target price for shares of BRP Inc. (DOO-T) ahead of the release of its third-quarter results on Dec. 1.

Mr. Dley is projecting quarterly revenue for the Quebec-based company recreational vehicle maker of $1.29-billion, an increase of 5 per cent from the previous year. However, his EBITDA projection of $194-million is below the consensus of $197-million and is a 1-per-cent decline year over year. His 95-cent earnings per share estimate sits in line with the Street and up 2 per cent from the same quarter in fiscal 2017.

He is expecting a "strong" quarter for the company's year-round products, forecasting 7-per-cent growth with $411-million in revenue, driven largely by new products. He said those introductions should allow BRP to continue to gain market share.

"These elements resulted in North American market share gains throughout 2017, and we expect this momentum to continue in throughout F2018 and into F2019," he said. "We note BRP's SSV [side-by-side vehicle] sales increased 50 per cent year over year during Q2/F18, outpacing the low double-digit industry growth. Following the introduction of several innovative products at the company's recent Club Event in mid-September, we expect BRP will continue to gain market share over the course of our forecast period.

"We are forecasting 2.0-per-cent year-over-year growth in Seasonal products revenue to $425 million. While we expect PWC sales to remain strong, given the unseasonable low snow coverage witnessed last year, BRP entered Q3/F18 with a 6-per-cent higher inventory position at its retail dealers, and we believe the company will focus on clearing out the inventory position ahead of Q4/F18."

Mr. Dley increased his fiscal 2018 EPS projection to $2.38 from $2.34, while his 2019 estimate also rose by 4 cents to $2.63.

With a "buy" rating (unchanged), his target for BRP shares rose by a loonie to $51. The average is currently $45.23.

"Our target price represents 10.1 times our fiscal 2019 EBITDA estimate of $618-million, which we revised upwards from $612 to account for a stronger gross margin assumption going forward," he said. "In our view BRP is well positioned to capture additional market share in a growing powersports market, as it introduces new products, and extends its reach into complementary product lines."

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Acumen Capital analyst Brian Pow is projecting  "reasonable" growth for Stella-Jones Inc. (SJ-T) through 2019 and beyond.

Mr. Pow raised his target price for shares of the Quebec-based manufacturer of pressure treated wood products following marketing meetings with its management in Calgary this week, which he said confirmed his "positive" outlook.

"Gross margin underperformance in 2017 was due to oversupply of ties and the sale mix for poles," he said. "Management appears to be chasing many acquisition opportunities (more than we originally anticipated) which could lead to an active 2018 for the Company. SJ has directed FCF in 2017 to pay down debt, providing plenty of balance sheet capacity to fund acquisitions.

"Management appeared to be optimistic about 2018 (especially the back half of the year as tie prices improve)."

Mr. Pow raised his fiscal 2017, 2018 and 2019 earnings per share projections to $1.97, $2.36 and $2.45, respectively, from $1.95, $2.31 and $2.40.

With a "buy" rating, his target for Stella-Jones shares rose to $55 from $50.50. The average is $52.88.

"While the shares have seen a nice move post the Q3/17 report, we see additional upside to the share price based on our updated estimates," he said. "Management continues to identify interesting opportunities that translate into added value delivered to the customer. We believe the lingering headwinds for the tie business will be more than offset by growth in other segments of the business."

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In other analyst actions:

Despite reporting third-quarter results that exceeded the Street's expectations, Roth Capital Partners analyst Richard Baldry downgraded Salesforce.com Inc. (CRM-N), a cloud-based software maker, to "neutral" from "buy" with a $112 (U.S.) target. The average target is $107.24.

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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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