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

Desjardins Securities analyst Benoit Poirier thinks both Canadian National Railway Co. (CNR-T, CNI-N) and Canadian Pacific Railway Ltd. (CP-T, CP-N) remain capable of meeting 2019 guidance, despite enduring a “harsh” winter.

However, Mr. Poirier lowered his rating for both to "hold" from "buy" on Friday, seeing both stocks as "fairly valued with less room to manoeuvre."

"While we continue to like both railroads in the long term, the strong rebound in their share prices (CN and CP are up 19 per cent and 17 per cent year-to-date, respectively, vs up 14 per cent for the S&P/TSX Composite) and signs of global softening justify a more prudent stance," he said in a research note.

Mr. Poirier sees signs of an economic slowdown are appearing, pointing to several indicators flashing "softness" warnings.

"The U.S. inventory-to-sales ratio (lagging indicator) continued to increase in January to 1.39 times, up from a low of 1.33 times in June 2018," he said." While this increase has been attributed to the seasonal rush related to the Lunar New Year holiday, inventories are above historical levels (average of 1.33 times since 1995). Combined with bullish expectations for industrial production in 2019, elevated inventories are creating uncertainties for the transportation industry, which in our view are not currently being reflected in the market (the Dow Jones Transportation Index has recovered nicely since the beginning of the year). In fact, while harsh winter conditions and the seasonality of the shipping industry may be responsible for recent disruptions in the transportation industry, we believe signs of an economic slowdown are starting to appear. Finally, we believe the market is not taking into account global factors such as Brexit and the potential fallout from trade negotiations between the U.S. and China, both of which could also negatively impact economic conditions in the near term. We note that the World Trade Organization recently revised its 2019 growth forecast for global trade to 2.6 per cent, down from its previous expectation of 3.7 per cent (was 3.0 per cent in 2018), mainly due to weaker economic conditions and trade tensions."

Warning of the potential negative impacts of heightened trade tensions, housing market "uncertainties" on both sides of the border, slowing North Amercian auto sales in 2019 and a weaker-than-expected first-quarter volumes stemming from a difficult winter, Mr. Poirier lowered his earnings projections for both companies.

For CN, he's now expecting adjusted earnings per share for the first quarter of $1.18, down from $1.30 and below the $1.20 consensus on the Street. His full-year estimate for 2019 fell to $6.14 from $6.23, while his 2020 forecast rose to $6.83 from $6.76.

His target for CN shares rose by a loonie to $128. The average target on the Street is $120.40, according to Thomson Reuters Eikon data.

"Bottom line, we continue to like CN and believe it remains a core holding, although we have reduced our rating to Hold from Buy given the limited upside vs our current target (6-per-cent potential return), driven by solid performance so far this year (CN shares are up 19 per cent vs 12 per cent for the S&P/TSX Composite) and a softer macro environment with increased trade uncertainties," said Mr. Poirier. "However, we continue to like CN over the longer term and still believe it deserves a premium vs peers given its stronger balance sheet (net debt to EBITDA of 1.8 times vs 2.5 times for CP and 2.2 times for U.S. peers), unmatched network and numerous growth opportunities."

Mr. Poirier lowered his first-quarter EPS forecast for CP to $2.90, dropping from $3.53 and below the $3.05 consensus. His full-year projection is now $16.13, down from $16.46, while his 2020 estimate remains $18.32.

He also lowered his target for CP shares to $313 from $314, which exceeds the consensus of $307.53.


Pointing to a 32-per-cent jump in share price thus far in 2019 that has led it to become “fully valued,” Industrial Alliance Securities analyst Elias Foscolos downgraded his rating for Badger Daylighting Ltd. (BAD-T) to “sell” from hold" on Friday.

“Although Badger reported a very solid Q4/18, accompanied by a 6-per-cent increase to the monthly dividend, we are inclined to move to the sidelines given the stock’s run-up in price. Slowing economic growth and decreased U.S. oil & gas activity, as well as more normalized contribution from disaster relief work are likely to lead to a sequential decline in Q1/19. We are still forecasting steady growth over the next couple of years, but we question whether the company’s prospects have been fully priced in.”

Mr. Foscolos also pointed to a recent slowdown in share buybacks, noting: "Since Dec. 4, 2018, Badger has repurchased 1.3 million shares through its NCIB at prices ranging from $30.50-35.00/share. It is clear to us that the buying commenced after disengagement of an unsolicited offer for BAD, which the Board rejected. However, since breaking out over $35.00/share in mid-February, the company has not purchased any shares. Although not the sole reason for our downgrade, it is clear that the internal valuation has placed a cap on Badger’s value, and the stock is now trading 19 per cent above the last repurchase price."

Mr. Foscolos raised his target for Badger shares by a loonie to $41 to reflect the share price increase. The average target on the Street is $44.17.

"At this point, we believe that Badger’s growth prospects are monetized," he said. "As such, we are downgrading BAD to a Sell (previously Hold) on a negative 3-per-cent projected total return."


Desjardins Securities analyst Josh Wolfson called the first quarter in the precious metals sector "eventful," however he is not expected surprises when earnings season begins in earnest during the week of April 22.

“A few items came up in 1Q, including the creation of the world’s (new) largest gold company, the creation of the world’s largest gold complex and some modest drama in between,” he said. "While 1Q was eventful for the gold mining sector, we expect lower potential for surprises with 1Q reporting. At the margin, we expect slightly positive results for Kinross (Tasiast ramp-up, Paracatu outperformance) and Detour (1Q higher grade), while we see slight risks for IAMGOLD (Westwood results/retrenchment), Torex (significantly higher costs) and Wheaton Precious Metals (tough quarter-over-quarter comparable, seasonal inventory factor). We expect key updates will be issued by Agnico Eagle (Meliadine ramp-up), Eldorado (Lamaque ramp-up) and Kinross (Lobo Marte initial economics).

"We forecast that gold producers under coverage will report a 14-per-cent decline in earnings quarter-over-quarter. Despite materially higher gold prices (up 6 per cent), we forecast that this will be more than offset by weaker operating results, consisting of 13-per-cent lower production and 10-per-cent higher total cash costs. On a fully loaded cost basis (ie FCF breakeven, before debt, dividends and true growth spending), we calculate costs will increase by a more modest 5 per cent to US$1,180/oz. Constructively, we forecast that producers will return in 1Q to positive net FCF generation, which was last reported in 1Q18. In our view, costs will remain a focal point—although average oil prices in 1Q declined by 8 per cent quarter-over-quarter, spot oil today has increased by 17 per cent vs the 1Q average, while labour inflation has been noted by various operators. Currency effects are less of a notable factor in 1Q, with subdued changes overall."

Mr. Wolfson sees a "supportive" backdrop for gold producers despite lingering uncertainties, adding: "Year-to-date, gold prices have increased by 2 pe cent, in part reflecting a dovish shift in global central bank monetary policy and a substantial decline in real interest rate expectations. While this is supportive, we acknowledge that interim heightened outstanding uncertainties remain, as reviewed in our original 2019 outlook."

After updating his valuation for companies in his coverage universe, he lowered his rating for a trio of companies to "hold" from "buy." They are:

Agnico Eagle Mines Ltd. (AEM-T, AEM-N) with a $61 target. The average on the Street is $68.29.

Analyst: "In 2019, AEM is scheduled to deliver meaningful growth, supported by the ramp-up of its Meliadine mine in 1H19 and Amaruq in 2H19. Combined, these milestones should position the company to once again generate net positive FCF. In our view, AEM maintains a balanced and clearly communicated strategy that we forecast enables the company to generate modest incremental production growth in upcoming years, while maintaining the ability to generate net positive FCF after accounting for ongoing capital spending. AEM shares trade at 2.2-times P/NAV at spot gold, above the senior producer average of 1.7 times, reflecting both the company’s favourable historical track record of execution and its long-term outlook. While AEM’s premium has been established over time, the company’s relative valuation has expanded following changes among the senior producer group. In our view, AEM’s favourable outlook is appropriately reflected in its valuation."

Osisko Gold Royalties Ltd. (OR-T, OR-N) with a $16 target. The average is $16.85.

Analyst: “In 2021 and beyond, OR offers royalty investors exceptional FCF growth, supported by the company’s portfolio of development projects (Amulsar, Back Forty, Cariboo, Eagle, Horne 5, Windfall) and producing asset base upside (Malartic, Mantos). Short-term, our forecasts outline net neutral FCF generation as a result of existing funding commitments (Horne 5, Back Forty, Eagle) and slightly higher underlying operator uncertainties (Renard and Amulsar a combined 10 per cent of NAV, Renard 14 per cent of 2019 revenue). Following positive share price performance in 2019, OR shares now trade at a P/NAV at spot gold of 1.6 times, a substantial discount to the royalty group average of 2.2 times. When adjusting for the company’s US$400-million equity portfolio, OR’s P/NAV valuation increases to 1.8 times, still discounted but narrower in size. Long-term, we view OR’s valuation as providing investors with good revaluation upside to the peer group average and more balanced risk/reward in the short term in 2019–20 following positive share price performance.”

Royal Gold Inc. (RGLD-N) with a US$99 target. The average is US$96.89.

Analyst: "Following positive share price performance for the senior royalty group, royalty companies have re-established a premium valuation vs producers, now trading at a P/NAV at spot gold of 2.2 times vs the senior producer group average of 1.7 times and 2019/20 FCF/EV of 3.2 per cent/3.3 per cent vs the senior producer group average of 3.3 per cent/4.3 per cent. Within the larger-capitalization royalty group, a narrow valuation range has been established between companies (2.2–2.4 times), thereby providing lower differentiation than in the past. Historically, RGLD has offered more favourable valuation and FCF than its peers while today its valuation represents a slight premium (P/NAV 2.4 times and FCF/EV in 2019/20 of 3.8 per cent/3.0 per cent), while the potential for higher underlying asset risk exposure exists in the short term (Rainy River and Golden Star a combined 11 per cent of NAV). Long-term, we continue to view RGLD and the royalty group as well-positioned."


The recent decline in share price for Parkland Fuel Corp. (PKI-T) makes for an “attractive” entry point for investors, according to Industrial Alliance Securites analyst Elias Foscolos.

Calling its 2018 operating results "exceptional" and expecting 2019 to be stronger, Mr. Foscolos initiated coverage of the Calgary-based company with a "buy" rating.

"In 2018, PKI reported adjusted EBITDA of $887-million which represented a 112-per-cent year-over-year increase over 2017, as a result of the acquisitions of Chevron

Canada Limited ('CCL') and CST Brands ('CST')," he said. "The profit from CCL’s Burnaby Refinery exceeded expectations due to high refining margins in 2018. For 2019, we are projecting Adj. EBITDA of $969-million, which is above the Company’s current guidance of $960-million (conensus: $989-million)."

"We anticipate that PKI will continue to post EBITDA growth from (1) potential tuck-in acquisitions, (2) operational synergies from CCL, CST, and Simpsons Oil Limited ('SOL'), and (3) organic growth capital to be invested in Convenience Stores ('C-Store'). These factors combine to shape our expectations for 7-per-cent CAGR in EBITDA to $1.103-billion by 2021. Despite the flurry of acquisitions, we expect that PKI’s debt will stabilize in 2019, with Debt/EBITDA falling into its 3.0-3.4-times target range by Q4/19."

Ms. Foscolos said Parkland's "exceptionally low" payout ratio provides "ample" room for dividend growth, noting: "PKI pays a monthly dividend which is currently yielding 3 per cent on an annual basis. However, we project PKI’s payout ratios for 2019 and 2020 to be 39 per cent and 35 per cent, respectively, leaving ample room for dividend growth."

He set a target price of $47 for Parkland stock, which equates to a potential 21-per-cent one-year total return. The average is $47.11.

"PKI’s stock price peaked in October at $47.45 per share and since that time has declined by 16 per cent on no change in the company’s 2019 outlook," he said.


After its first-quarter results showed “strong” margin performance, Acumen Capital analyst Nick Corcoran raised his rating for Firan Technology Group Corp. (FTG-T) to “buy” from “speculative buy,” believing its business is “back on track” with a positive outlook.

Mr. Corcoran increased his target to $4.60 from $4.50. The average is $4.98.


In other analyst actions:

National Bank Financial analyst Cameron Doerksen raised his rating for WestJet Airlines Ltd. (WJA-T) to “sector perform” from “underperform” with a target of $22.50 from $19.50. The average on the Street is $20.81.

Calling it his preferred name in the airline space, Mr. Doerkesen raised his target for Air Canada (AC-T) to $44 from $39, keeping an “outperform” rating. The average target is $42.27.

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