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

In the wake of stronger-than-anticipated third-quarter financial results, Raymond James analyst Jeremy McCrea upgraded his rating for Baytex Energy Corp. (BTE-T, BTE-N), citing both its current valuation as well as “expectations for a much-improved differential (and overall netback and return on capital environment still going forward).”

On Nov. 2, the Calgary-based company reported quarterly production of 82,400 barrels of oil equivalent per day, exceeding the projections of both Mr. McCrea (81,500 boe/d) and the Street (81,300 boe/d). Adjusted funds flow per share of 46 cents also topped expectations (38 cents and 41 cents, respectively) due largely to both the strong production results and lower operating expenses.

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“Although a noisy quarter with the Raging River closing, Baytex still reported better-than-expected production and funds flow, demonstrating the value add of geographically diversified asset base,” said Mr. McCrea. “Although the share price has suffered over the last few months, we believe with 37 per cent and 45 per cent of production and cash flow coming from Eagle Ford, the current concerns on CDN Differentials has been overblown with BTE. Add in increased rail shipment capacity (40 per cent of 2019 heavy oil production) and BTE likely will be able to weather the current turmoil better than other operators. Elsewhere, the successful production results (IP30: 750 boe/d; 73% oil/condensate) from 2 recent Duvernay wells are also encouraging – among some of the best wells throughout the region.

“We believe many investors had begun to ‘write off the Duvernay’; however, these initial results do appear rather encouraging. More data will be required in terms of decline rates and EURs, but we believe this is a promising sign nevertheless.”

Moving the stock to “outperform” from “market perform,” Mr. McCrea maintained a target of $4.75 per share. The average target on the Street is currently $5.66, according to Bloomberg data.


Believing lumber markets “have found a floor,” CIBC World Markets analyst Hamir Patel upgraded his rating for Interfor Corp. (IFP-T) and West Fraser Timber Co. Ltd. (WFT-T) to “outperformer” from “neutral.”

“When we downgraded the lumber names on Sept. 18, Western SPF [Spruce-Pine-Fir] lumber prices were trading at US$442 per thousand board feet mfbm,” said Mr. Patel. “Since troughing 35 per cent lower on Tuesday (as low as US$285/mfbm), lumber market sentiment has shifted in the past day or so as low prices (and capacity curtailments) appear to finally be enough to shore up pricing (despite housing demand being subdued over the near term). Mills reportedly ended Thursday quoting as high as US$325.”

He added: “While lumber prices are likely to remain under US$375/mfbm through the end of the year, we see potential for supply to tighten heading into the spring selling season as depleted log decks in B.C. (running below plan following the summer wildfires) may limit output from Western Canada at a time of strong seasonal demand. Much like B.C. forest fires/U.S. softwood duties were the key pricing catalysts in 2017 (and Canadian rail issues this year), log shortages could be the next market shock next year. We think SPF lumber prices have seen their lows for the year as most of the B.C. industry is currently underwater.”

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His target price for Interfor shares remains $23, which falls short of the average of $25.60.

“While we are getting more constructive on Interfor given its significant U.S. South exposure (45 per cent of capacity), we remain on the sidelines on lumber names with the majority of their production in log-cost inflicted British Columbia. With a strong balance sheet, Interfor is also well positioned to accelerate its expansion in the South through potential greenfield(s) (not yet in our estimates) and/or become more active on its buyback program.”

Mr. Patel’s target for West Fraser is $82.50, versus the average of $84.50.

“While we are getting more constructive on West Fraser given its significant U.S. South exposure (45 per cent of capacity), we remain on the sidelines on lumber names with the majority of their production in log-cost inflicted British Columbia,” he said.


BMO Nesbitt Burns analyst Randy Ollenberger thinks Encana Corp.'s (ECA-N, ECA-T) US$5.5-billion acquisition of Newfield Exploration Co. (NFX-N) has brought both uncertainty and investor angst, leading him to downgrade its stock to “market perform” from “outperform.”

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“While we believe that the sell-off is overdone and see solid value in Encana’s shares, we expect the shares to remain range bound until there is better visibility regarding the benefits of the transaction,” he said.

“Accordingly, we are taking a pause and are downgrading our investment opinion.”

His target fell to US$12 from US$18, which sits below the average of US$15.87.


Though he said he remains “positive” on Sleep Country Canada Holdings Inc.'s (ZZZ-T) positioning and execution, CIBC World Markets analyst Matt Bank downgraded his rating for its stock after lowering his store traffic and earnings expectations as well as its valuation based on “a softening big-ticket consumer.”

“Same-store sales (SSS) have softened through the year, and Q3′s 0.2 per cent is the worst result in over five years,” he said. "Sleep Country is performing well versus peers, but can only do so much against weaker industry traffic trends (down mid-single digits in quarter) as housing-related consumer spending is slowing.

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“The company’s strategy is sound, and it is gaining market share and growing average unit selling price, while GTA trends suggest ecommerce competitors are not the issue. New stores are performing well and management continues to express confidence in long-term 3-6-per-cent SSS growth. Over our forecast period, however, we have a hard time seeing all of this outweigh the increasingly difficult market while lapping four straight years of 10-per-cent SSS growth.”

Moving Sleep Country to “neutral” from “outperformer,” Mr. Bank dropped his target to $25 from $34. The average is $29.75.

“We’ve lowered our SSS forecast for Q4 and 2019 from 4 to 2-3 per cent,” he said. "New stores bring total sales growth to 6 per cent, while flat margins keep EBITDA growth at the same rate. This is not an overly bearish scenario, as our assumption at this point is that the environment flattens out sequentially (uncertain) and that Sleep Country does better than its mattress peers (more certain).

“While forecasting SSS is a careful matter of weighing probabilities, the stock immediately re-rated on the specter of slowing comps. We view the lower multiple as justified given cyclicality in this business, and we are lowering our target P/E to 14 times (from 18 times) and using 8.5 times EV/EBITDA on 2019 forecasts.”

Meanwhile, Raymond James' Kenric Tyghe dropped his target to $32 from $35 with an “outperform” rating (unchanged).

Mr. Tyghe said: “Despite our positive bias to the name (and the All for Sleep positioning) we are making material revisions to our outlook, to better align with current market dynamics (and risks). Despite the near term challenges, we continue to believe that Sleep Country is well positioned to execute on its growth strategy, even if the new normal growth vector is more modest than expected given the state of the consumer.”

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Cameco Corp.’s (CCO-T, CCJ-N) “strong” balance sheets provide it flexibility in dealing with current market weakness, said RBC Dominion Securities analyst Andrew Wong, pointing to its recent moves to curtail production and spot market purchases.

“We believe Cameco’s decision to indefinitely curtail production at Mcarthur and meet delivery commitments through inventory and purchases is having the intended effects - strengthen financial position, reduce company and market inventories, stimulate market activity, and help push prices above unsustainably low levels,” said the analyst.

“By end-2018, we estimate $318-million net debt and 0.5-times net debt/LTM [last 12-month] EBITDA. With inventories effectively drawn down, we expect a significant increase in market purchases which may further tighten the uranium market in 2019. We estimate 15 million pounds purchases over next 12-months, equivalent to 10 per cent of annual mine production. We expect Cameco to continue purchases until market prices rise to a level that provides economic incentives to re-start McArthur - we view this level broadly as $40-45 per pound.”

Also believing the company’s ongoing dispute with the Canadian Revenue Agency has been “significantly de-risked” following a Tax Court decision in September that he deems “very favourable” for the company, Mr. Wong raised his target price for its stock by a loonie to $16. The average is $16.91.

He currently has a “sector perform” rating for Cameco.

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“We are turning more constructive on the shares, especially with a potential positive TEPCO ruling in early-2019, but remain on the sidelines until we see signs of sustained strength in uranium price,” the analyst said.


Believing it will be difficult for Apple Inc. (AAPL-Q) to offset lower iPhone volume with higher selling prices through the second half of 2019, Rosenblatt Securities analyst Jun Zhang downgraded the U.S. tech giant to “neutral” from “buy.”

“Calendar fourth-quarter guidance reflects our cautious view on weaker than expected sell-through and production reductions for iPhone XS/XR," he said.

Mr. Zhang maintained a price target of US$200, which falls below the current average of US$233.58.


Calling its risk-adjusted return “not compelling,” CIBC World Markets analyst Robert Bek lowered TVA Group Inc. (TVA.B-T) to “underperformer” from “neutral” following the release of “soft” third-quarter results.

“Although shares rallied Friday and remain cheap, operating momentum remains poor (as evidenced by quarter upon quarter of missed expectations - often with results that also imply year-over-year declines) and visibility remains poor, as structural pressures continue to weigh on TVA’s broadcasting and publishing assets,” said Mr. Bek. “We struggle to see any major upside catalysts that will help TVA’s valuation recover. This view, combined with the lack of dividend yield at TVA and a complicated share structure, makes the risk-adjusted return to our target at TVA less compelling when compared to the rest of our coverage universe. Although an end-game thesis is a risk to our Underperformer rating, we do not see a takeout on the horizon in the near-to-medium term.”

Mr. Bek’s target fell to $2.50 from $3. The average is currently $3.75.

“We remain cautious on the outlook for broadcasting and publishing assets not only at TVA, but across the industry, given structural risks that are now firmly entrenched and likely growing in their effect,” he said.


Believing Starbucks Corp. (SBUX-Q) current sits at a “critical pivot point in its transformation into a leaner, focused operator,” Mizuho analyst Jeremy Scott raised his rating for its stock to “buy” from “neutral.”

“Additionally, while the company is still in the early days of its renewed digital initiatives in the Americas, momentum appears to be forming sooner than we expected," said Mr. Scott.

Following last week’s release of better-than-expected same-store sales growth in North America, the analyst raised his target for Starbucks shares to US$75 from US$56. The average target is currently US$65.13.

Conversely, DZ Bank AG analyst Michael Pohn downgraded his rating to “sell” from “hold” with a target of US$55, rising from US$51.


Canaccord Genuity analyst David Galison hiked his financial expectations and target price for shares of Pembina Pipeline Corp. (PPL-T) in reaction to its $1.3-billion announcement of new integrated infrastructure development programs.

“The agreements consist of an integrated deal utilizing the company’s full value chain including natural gas gathering, processing and transmission; propane-plus and condensate transportation; and propane-plus fractionation,” he said. “The additional development projects bring the total secured capital program to $3.1-billion. Once up and running, the combined capital program is expected to generate run-rate EBITDA (adjusted) of $300-to $450-million annually extending the company’s earnings growth post-2021. During the Q3/18 conference call, management indicated that the lower end represents the take-or-pay portion.”

The Nov. 1 announcement coincided with the release of stronger-than-projected third-quarter financial results, driven largely from strength on its pipelines segment.

With increases his earnings and funds from operations expectations, Mr. Galison moved his target to $58 from $52, keeping a “buy” rating. The average is $53.88.

Elsewhere, Desjardins Securities’ Justin Bouchard maintained a $53 target and “buy” rating.

Mr. Bouchard said: “The ability to leverage the Peace pipeline system and the value of integration to offer an end-to-end solution was on display again. We believe PPL will be able to continue to win a disproportionate amount of business in NW AB and NE BC as a result of its asset base.”


Though he thinks Stella-Jones Inc.’s (SJ-T) third-quarter results “showed good execution in a tough pricing environment,” Acumen Capital analyst Brian Pow lowered his financial projections for the Saint-Laurent, Que.-based manufacturer of pressure treated wood products, pointing out EBITDA margins are “taking longer to transition back to historical levels from higher lumber costs.”

On Nov. 2, Stella-Jones reported sales of $630-million for the quarter, up from $517.6-million during the same period a year ago and above the projections of both Mr. Pow and the Street ($535.7-million and $577.3-million, respectively). EBITDA and earnings per share of $76.7-million and 66 cents, respectively, also exceeded expecations.

“Management expects pricing conditions in the railway tie product category to continue improving and continues to expect increasing market reach for utility poles and residential lumber,” said Mr. Pow. “As a result, sales growth is expected to be driven by price and volume for the balance of 2018 and 2019. Operating margins in Q4/FY18 will continue to be impacted by untreated railway tie costs until price adjustments can be pushed through. Management is more hesitant to commit to the timing of when EBITDA margins will return to historical levels.”

With a “buy” rating (unchanged), Mr. Pow lowered his target for Stella-Jones shares to $48.50 from $51. The average is $52.31.

“The main takeaway is that lumber costs will continue to put pressure on margins, and Management will do its best to increase prices as contracts allow,” he said. “As a result, the more likely scenario – and key risk to the outlook/our estimates – is that margins are on a longer road to recovery.”

Elsewhere, Desjardins Securities’ Benoit Poirier lowered his target by a loonie to $50, keeping a “buy” rating.

“We continue to like the name and the improved fundamentals across all segments,” he said. “We view the recent volatility as temporary and see recent weakness as a buying opportunity. We believe the stock could be worth $55 two years from now and see further M&A opportunities that could provide additional EPS accretion.”


In other analyst actions:

TD Securities analyst Derek Lessard upgraded Dorel Industries Inc. (DII-B-T, DII-A-T) to “hold” from “reduce” and raised his target to $23 from $22. The average on the Street is $24.

Bank of America Merrill Lynch upgraded Norbord Inc. (OSB-N, OSB-T) to “buy” from “underperform” with a target of US$35, rising from US$33. The average is US$34.23.

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