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The Hydro One Pleasant Transfer Station in Brampton, Ont.

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

The negative sentiment toward Ford Motor Co. (F-N) has taken its valuation to attractive levels, according to Morgan Stanley analyst Adam Jonas, who believes it will benefit from increased infrastructure and construction spending south of the border.

After four years of an "underweight" call on the U.S. auto maker, Mr. Jonas upgraded its stock by 2 levels to "overweight."

"Ford's out-of-favor status has brought valuation to where the F-150 may be worth greater-than 150 per cent of its EV," said Mr. Jonas. "We believe consensus is bottoming and raise our underlying forecasts for the first time in more than 2 years. Restructuring and strategic redeployment could halt years of underperformance."

"We had been Underweight Ford since 2014, drawing investor attention to earnings risk stemming from its car-heavy product footprint, costs of switching to an aluminum bodied truck, financial services/credit exposure, rising development costs, and unprofitable foreign operations. Over the past year earnings momentum went from stallspeed to retrograde while sentiment reached a cyclical low. The company has made significant changes to senior management but investors lack confidence in Ford's ability to address chronically loss-making businesses and its potential to pivot into areas of growth (shared, autonomous)."

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Believing Ford has room to improve its performance versus its peers, he raised his financial estimates for the company and hiked his target price for Ford shares to match a Street-high of US$15, which is above the average of US$12.26.

"While Ford still has a lot of room to improve its performance versus peers, we believe our estimates may have bottomed," the analyst said. "In fact, we are raising our underlying earnings forecasts by the greatest amount in nearly five years. The inflection to our forecast is driven by an upward revision in our U.S. SAAR forecast and anticipated restructuring cost savings that we now expect in our base case. Our revised target gives Ford credit for adjusting its global portfolio to emphasize its strong position in U.S. pickup trucks, where the company has outsized exposure."

UBS' Colin Langan also has a US$15 target with a "buy" rating.

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Chesswood Group Ltd. (CHW-T) is likely to see "sustained" loan growth and earnings per share accretion driven by the impact of a reduced tax burden in its core U.S. market in 2018, said Industrial Alliance Securities analyst Dylan Steuart.

After a "solid" close to fiscal 2017, he raised his rating for the Toronto-based financial services company to "buy" from "speculative buy," citing an improved risk-return proposition for investors following recent share price weakness.

"CHW's niche positioning and outsized exposure to the U.S. market continue to set the firm apart from domestic lending peers," said Mr. Steuart.

On Monday, Chesswood reported adjusted EPS for the fourth quarter of 2017 of 24 cents, excluding $9.4-million of tax recoveries, exceeding Mr. Steuart's estimate by 2 cents. The result was due largely to better-than-anticipated credit provisions ($4.9-million versus a projection of $6.7-million).

"Overall, CHW closed out the year exhibiting strong loan growth with signs that a measured approach to underwriting is paying off," said Mr. Steuart.

With the results, he raised his financial estimates for 2018, including an EPS bump of a penny to $1.21, based on a lower effective tax rate due to U.S. changes, higher credit provisions based on the impact stemming from IFRS 9 accounting standard changes, and "continued solid" loan growth.

"Despite the positive  move in the stock [Tuesday] (up 10.8 per cent), valuation remains attractive," the analyst said.

"While  the  implementation  of  IFRS  could  increase  the  variability  of  credit  provisions  in  the  coming  year,  the  underlying  delinquency  and  charge-off  trends  remain  positive. Solid  growth  opportunities  combined  with a stable  dividend  payout (producing a 7.8-per-cent yield) currently lead to an attractive opportunity for investors."

Mr. Steuart maintained a target of $14 for Chesswood shares. The average is currently $13.67.

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Raymond James analyst David Quezada reiterated Algonquin Power & Utilities Corp. (AQN-T, AQN-N) as his top pick in the Canadian power and utilities sector, emphasizing its  "attractive" growth platforms in its regulated utility, renewable power and international segments.

"On Nov. 1, 2017 AQN announced the acquisition of a 25-per-cent stake in Atlantica Yield and the initiation of a JV with Spain based EPC contractor Abengoa. Dubbed Algonquin-Abengoa Global Energy Solutions ('AAGES') this JV will target international clean energy and water infrastructure asset development opportunities," he said. "This represents Algonquin's initial foray into international markets and we take a positive view of this pair for transactions for several reasons: 1) The JV structure represents a low risk means of accessing international markets; 2) AQN can leverage Abengoa's presence, pipeline, and expertise to scale its international footprint over time; 3) the investment in Atlantica comes at an attractive valuation (a discounted 9.5 times EV/EBITDA) which we view as temporary now that its sponsor Abengoa is on more stable footing and it has access to drop downs from AAGES, and 4) it provides color on the next chapter of Algonquin's growth."

"Not to be forgotten in the midst of the company's international initiatives, we highlight Algonquin's robust organic growth opportunities in North America still represent the majority of an ambitious (yet achievable) $7.7-billion capex program. The regulated utility portion of the capital plan includes investments in distribution, generation, and transmission while the renewable power segment represents as much as 711 MW of potential development by 2020. We believe the 'greening' of the regulated generation fleet remains an important opportunity with 800 MW of potential wind development in the US Midwest while noting AQN maintains US$44.9-million in pending rates cases to be implemented which equates to $0.13/share (pro-forma)."

Mr. Quezada said he thinks the stock currently trades at a "marked" discount to its North American peers despite its "robust" growth strategy.

"At 17 times 2018 price-to-earnings, we believe this discount is almost 2.0 times as compared to other NA peers with comparable forecast earnings growth," he said.

Maintaining a "strong buy" rating for Algonquin shares, he raised his target to $16.50 from $16. The average is $15.60.

"In a sector that has long seen valuations negatively impacted during rising rate environments, we believe AQN stands out as a company that is able to grow at a sufficient pace as to largely offset this headwind," he said. "We highlight the company's large capex plan as the key driver of this earnings and dividend growth.

"At the company's Dec. 17 investor day in Toronto, Algonquin unveiled a new $7.7-billion 5-year capex program with key elements including investments in the company's regulated rate base (60 per cent), North American renewable energy (20 per cent) and international expansion (20 per cent). Algonquin's wealth of organic investment opportunities has long been core to our constructive thesis on the name, and we highlight this new, upsized capex plan as confirmation that these opportunities remain abundant. … We believe metrics position AQN firmly atop its NA utility peer group in terms of growth. Our estimates, which currently extend to 2019 also show AQN at the top of the NA utility group while the stock continues to trade at a material discount to the U.S. mid-cap utility peers. As Algonquin continues to deliver on its capex targets and raises its profile among the U.S. investor base we expect to see the trading multiple move in line with the higher growth U.S. utility peers."

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With benchmark rates rising, Industrial Alliance Securities analyst Jeremy Rosenfield suggests it's time to buy independent power producers and regulated utilities "on weakness for the long term."

"Amidst economic growth, key policy rates and benchmark bond yields are expected to continue to rise through 2018 and into 2019," said Mr. Rosenfield in a research report released Wednesday. "Rising interest rates can be fundamentally positive companies in the Power & Utilities (via rising prices/inflation adjustment, higher regulated ROE [return on equity).

"Rising rates are also decidedly market-negative to relative valuation (via funds flow out of the sector, compressing valuation multiples, weaker cost of capital), and stock performance in the sector has reflected as much. The sector sell-off has been remarkably similar to the recent previous period of dislocation in 2013 (10-12-per-cent decline in 6 months), as well as other periods of shifting market expectation surrounding the pace of central bank normalization)."

Mr. Rosenfield emphasized that fundamentals remain "solid" and have proven to be relatively resilient despite both increasing yields and negative stock performance.

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Accordingly, he feels the pullback in price has lowered the cost of investing in growth.

In the note, he tweaked his valuation assumptions for the sector based on the macro outlook. With those changes, his target prices for stocks fell slightly.

His changes to utilities companies were:

  • Algonquin Power & Utilities Corp. (AQN-T, AQN-N) to $16 from $17 with a “strong buy” rating. The average target on the Street is $15.60.
  • Canadian Utilities Ltd. (CU-T) to $40 from $41 with a “hold” rating. Average: $40.32.
  • Emera Inc. (EMA-T) to $55 from $57 with a “buy” rating. Average:  $48.54.
  • Hydro One Ltd. (H-T) to $26 from $28 with a “buy” rating. Average: $24.18
  • Valener Inc. (VNR-T) to $24 from $26 with a “buy” rating. Average: $23,17.

Fortis Inc. (FTS-T, FTS-N) remains at $50 with a "buy" rating, versus a $47.33 average.

His changes to independent power producers were:

  • Boralex Inc. (BLX-T) to $24 from $25 with a “hold” rating. Average: $25.75.
  • Capital Power Corp. (CPX-T) to $30 from $31 with a “buy” rating. Average: $27.85.
  • Innergex Renewable Energy Inc. (INE-T) to $18 from $20 with a “strong buy” rating. Average: $16.63.
  • Northland Power Inc. (NPI-T) to $28 from $30 with a “strong buy” rating. Average: $26.90.
  • TransAlta Renewables Inc. (RNW-T) to $14 from $15 with a “buy” rating. Average: $14.10.
  • TransAlta Corp. (TA-T, TAC-N) to $8 from $9 with a “hold” rating. Average: $8.39.


Brookfield Renewable Partners LP
(BEP.UN-T, BEP-N) remains a "buy" with a US$36 target (versus a US$34.44. average), while Pattern Energy Group Inc. (PEGI-T, PEGI-Q) remains a "buy" with a US$23 target (versus US$22.25.)

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Gamehost Inc.'s (GH-T) fourth-quarter financial results show the benefit of a "slow, yet increasingly improved" economy in Alberta, said Acumen Capital analyst Brian Pow.

On Tuesday, the Red Deer-based casino operator reported earnings per share of 18 cents, in line with Mr. Pow's expectation and flat year over year. Earnings before interest, taxes, depreciation and amortization (EBITDA) of $7.2-million exceeded his estimate by $0.1-million and represented an improvement of $0.4-million from the previous year, due largely to a better-than-anticipated gross margin percentage (43.5 per cent versus a 41.7-per-cent  projection).

"Fort McMurray is still experiencing effects from the 2016 wildfires with a significant amount of the populous remaining displaced and full rebuild expected to take three to four years," said Mr. Pow. "Making up for the loss in Fort McMurray operations is Grande Prairie, which is benefiting from the increased oil and gas activity form the Montney and Duvernay plays. Deerfoot in Calgary showed year-over-year improvements from operating efficiencies and will likely show improvements as the economy improves.

"With oil prices and the Alberta economy showing signs of life again, we are optimistic of GH's abilities to increase year-over-year financial performance in 2018, and to a larger degree in 2019. Although we expect Deerfoot to show step change improvements quarter over quarter in 2018, the majority of GH's performance will likely be carried by strong Grande Prairie activity, offset by a drag from Fort McMurray."

Mr. Pow raised his 2018 EPS estimate to 71 cents (from 67 cents), saying: "We note with the recent increase to WTI and a decrease in unemployment rates from peak 2016 levels, and if sustained, we could see meaningful job creation which would help drive disposable incomes- ideally towards GH properties."

With these heightened expectations, he upgraded his rating for the stock to "speculative buy" from "hold" and raised his target to $11 from $10.50. Mr. Pow is currently the only analyst on the Street covering the stock, according to Bloomberg.

"We remain of the view that GH has a strong gaming franchise in a closed market," he said.

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RBC Dominion Securities analyst Steven Cahall said he fears The Walking Dead when evaluating the investment case for AMC Networks Inc. (AMCX-Q).

"Around 40 per cent of AMCX's revenue comes from advertising, with The Walking Dead by far the biggest series with 8 million viewers (Live +SD) in the current season," he said. "TWD's shadow looms even larger due to long-term agreements for SVOD [subscription video on demand] revenue. As such, the stock remains highly levered to TWD viewership, and with season 8 ratings down 25-30-per-cent year-over-year investors are concerned that ad revenue growth will remain negative in the coming years and be a drag to revenue and earnings. Content investments remain paramount at AMC, so AMCX will likely struggle to grow earnings as long as TWD remains in steep decline. We see limited scope for re-rating until TWD ratings declines become less severe."

Mr. Cahall thinks the U.S. network's "very modest" 6.5 times calendar 2018 price-to-earnings multiple indicates investors are taking a "cautious view" toward its current programming, which has seen ratings declines "continue to accelerate." He called current ratings pressures the top concern of investors.

"Ex-TWD, our scenario analysis suggests ad revenue needs to grow 1-2-per-cent-plus for AMCX to make 2018 numbers, and while that's achievable it's also far from certain," he said. "With TWD ratings declines accelerating it casts further doubt onto 2019-20 consensus estimates, and we see this overhang keeping the multiple from expanding."

Initiating coverage of the company with a "sector perform" rating, Mr. Cahall called AMC a "top-notch" content creator, pointing to past hit shows, like Mad Men and Breaking Bad, as well as The Walking Dead. He said such offerings create inherent value during what he refers to as the current "content gold rush," suggesting both the network and AMC Studios have take-out target appeal.

"However, we think it's currently without a dance partner as pretty much everything in traditional media is tied up," he said. "Other prospective suitors may include Sony, AMZN, AAPL, NFLX, etc., but we don't think there's credible evidence to build a take-out thesis. And, management probably wants to appreciate the stock organically before selling.

"When do we get more positive? AMCX's track record suggests they'll have another huge hit show in the coming years (or decelerating ratings declines), and while we don't see it arriving in 2018, we're watching for the inflection point. Major Media M&A deals will be consummated or deleveraged by 2019 and this arguably makes AMCX more in-play. Finally, splitting the company between the studio and the networks and/or expanding the studio to projects for 3rd parties would make us more bullish on FAANG M&A. As and when these catalysts arrive, we believe AMCX would be a great opportunity."

He set a price target for AMC stock of US$57. The average target is US$59.83.

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Global Mining Research analyst David Cotterell downgraded a trio of Canadian mining companies on Wednesday.

Mr. Cotterell lowered both Semafo Inc. (SMF-T) and Torex Gold Resources Inc. (TXG-T) to "hold" ratings from "buy."

His target for Montreal-based Semafo fell to $3.70 from $4.20, below the consensus on the Street of $5.30.

His target for Torex, based in Toronto, rose by a loonie to $19, which is 55 cents higher than the average.

Mr. Cotterell dropped his rating on Osisko Mining Inc. (OSK-T) to "sell" from "hold" with a target of $1.90, down from $3.40. The average is $5.68.

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In other analyst actions:

Seeing further downside to consensus estimates, Goldman analyst Jerren Holder downgraded Sunoco LP (SUN-N) to "sell" from "neutral," believing it warrants a valuation discount. Mr. Holder set a Street-low target of US$28 (from US$33). The average is US$32.13.

CIBC World Markets analyst Scott Reid initiated coverage of Yangarra Resources Ltd. (YGR-T) with a "sector outperform" and $7 target, which is 7 cents below the average on the Street.

Mr. Reid also initiated coverage of Petrus Resources Ltd. (PRQ-T) with a "neutral" rating and target price of $1.50. The average is $2.45.

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