Tuesday’s analyst upgrades and downgrades

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

RBC Dominion Securities analyst Paul Quinn likes the current “setup” for the lumber and oriented strand board companies, calling them his preferred names in the paper, packaging and forest products industry in 2020.

“2019 was one of the worst years in memory for lumber and OSB companies, with most reporting significant declines in profitability and seeing their equity value deteriorate,” said Mr. Quinn in a research report released Tuesday. “However, a number of positive developments have us feeling increasingly bullish.”

The analyst pointed to a trio of factors:

• The industry has rationalized capacity, noting: “The large decline in price experienced over the past year has forced lumber and OSB producers to remove production from the market permanently. In British Columbia, we estimate that lumber producers have permanently closed 18 per cent of the province’s capacity, which should help to bring North American supply in-line with demand."
• Growing demand brought on by an increase in U.S. housing starts
• Mass timber will support demand and benefit from its largest producers. He said: “We expect that mass timber building solutions will continue to gain traction in 2020, with a growing number of projects set to begin in North America. Over time, we think larger producers will be able to leverage their expertise and technology to develop higher margin solutions for mass timber construction.”

In the note, he reduced his fourth-quarter 2019 earnings expectations for 14 of the 24 companies in his coverage universe to reflect lower-than-expected commodity prices.

At the same time, he raised his rating for a trio of stocks. They are:

Canfor Corp. (CFP-T) to “outperform” from “sector perform” with a a target of $17, rising from $16 to reflect the cancellation of the take-private transaction. The average on the Street is $16.38, according to Bloomberg data.

“We value Canfor based on a 5.25 times blended valuation multiple using our trend EBITDA estimate of $840-million (85-per-cent weighting) and our 2020 EBITDA estimate of $330-million (15-per-cent weighting)," he said. “We believe the company should trade near the bottom of the range for Canadian Paper and Forest Products companies (range 5.0 times to 7.0 times) reflecting the negative sentiment following the collapse of its recent take-private transaction.”

Conifex Timber Inc. (CFF-T) to “outperform” from “sector perform” with a $1 target, up from 50 cents based on his expectation for reduced leverage following its asset sale to Resolute Forest Products. The average is 80 cents.

“We believe the company should trade below the typical range for Canadian Paper and Forest Products companies (range 5.0 times to 7.0 times), reflecting the company’s smaller size, limited operating footprint, and higher relative exposure to British Columbia,” he said.

Clearwater Paper Corp. (CLW-N) to “sector perform” from “underperform” with a target of US$20, rising from US$15, and exceeding the US$36 consensus.

“When we downgraded the shares last year, we had expected that the company’s negative operating momentum would continue, with a number of downside catalysts on the horizon,” he said. “However, the company has worked past a few and seen some positive surprises, reducing downside risk.”

In the note, Mr. Quinn named Louisiana-Pacific Corp. (LPX-N) his top pick for 2020. He currently has a “top pick” rating and US$38 target for its stock, rising from US$35 and above the average of US$32.05.

“We expect the company to generate attractive returns over the next twelve months,” he said. “Our favourable view of the stock is premised on the company’s strong growth and attractive returns in its siding segment, which we expect will continue to take share in the North American siding market. In addition, the company would benefit from stronger OSB markets.”

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Though Shaw Communications Inc.'s (SJR-B-T) first-quarter 2020 financial results fell largely in line with his expectations, Desjardins Securities analyst Maher Yaghi lowered his financial expectations for the company on Tuesday, despite “strong” growth in its wireless business.

“Wireline continues to be pressured by share loss, wireless substitution and cordcutting,” he said. “We do not expect wireline trends to improve much; however, we see wireless continuing to provide enough growth to more than offset wireline sluggishness. Additional upside could also come if the CRTC provides Shaw with added regulatory support if it pursues additional pricing reductions to consumers through a fourth-player strategy.”

Mr. Yaghi does expect Shaw to make further inroads in wireless, however he cautioned that the market has become increasingly competitive with unlimited offerings and increased subsidies on handsets by incumbents.

“Clearly, gross loading in the Canadian market became irrational in 4Q CY19,” he said. "The incumbents have made initial moves to step back to more rational pricing; however, the market remains aggressive.

"Overall, we expect Shaw to continue to price its wireless products at a discount to incumbents to gain share (a strategy that worked well for Québecor)."

With the results, Mr. Yaghi lowered his 2020 and 2021 earnings per share estimates to $1.22 and $1.31, respectively, from $1.44 and $1.49.

With an unchanged “buy” for its stock, he lowered his target by a loonie to $31. The average on the Street is $29.55.

“We maintain our Buy rating as we expect acceleration in EBITDA growth through FY20, and still see upside potential in the stock on continued wireless market share gains," the analyst said.

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Seeing Copper Mountain Mining Corp. (CMMC-T) as “undervalued,” Industrial Alliance Securities analyst George Topping initiated coverage of the Vancouver-based company with a “buy” rating, advising investors to “buy before industry does.”

“As one of the few remaining independent long-life copper assets, CMMC is vulnerable to a takeover bid,” he said. “A successful expansion to 45,000 tons per day with clear potential for a further increase to 60,000 tpd in a safe jurisdiction is an attractive asset. Transactions during the last bull market were completed at 4 US cents per pound Cu [copper] resource multiple for non-producers and upwards of 10 US cents per pound for producers. Using just 4 US cents per pound alone would value ... the Copper Mountain mine at 98 cents per share alone, while Eva would add another 61 cents per share totalling $1.60 per share, in line with our target price.”

Mr. Topping compared the company's flagship Copper Mountain mine yo the recent US$800-million acquisition of the Chapada mine by Lundin Mining Corp. from Yamana Gold Inc. Both are copper-gold porphyry deposits.

“Porphyries are usually large-scale deposits (e.g., the world’s largest copper mine, Escondida, is a porphyry type deposit) and Chapada’s size offers a look at what the CM mine could be with additional exploration albeit at higher costs as Chapada features a much lower strip ratio, however, grades are similar,” the analyst said. “Currently, Chapada operates at 65,000 tpd but we have modelled it increasing over the next decade to over 100,000 tpd.”

Beyond the takeover potential, Mr. Topping sees Copper Mountain as “highly scalable” and sees the potential for the generation of outsized as copper prices rise.

“2020 is a pivotal year for CMMC with the CM mine expansion that should usher in a new period of higher profitability,” he said. “The current 2.5 billion pound reserve supports a 30-year mine life and further exploration may outline a 60,000 tpd expansion. There are multiple similarities to Chapada, a Brazilian mine recently acquired by Lundin Mining for US$800-million. Investors also receive Eva Copper for free as the market currently assigns no value to the project.”

He set a target price of $1.60 per share. The average on the Street is $1.33.

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Citi analyst Paul Lejuez raised his financial expectations and target price for shares of Gildan Activewear Inc. (GIL-N, GIL-T) on Tuesday.

“While we continue to believe that 2020 will be a challenging year as the company tries to recover from its sales shortfall in its core imprintables business 2H19, we believe GIL still maintains a competitive advantage in the industry and has opportunity to improve sales and margins in the future," he said. "We are raising our estimates in 2021 and beyond to account for a stronger recovery than we had previously forecast.”

After increased his sales and margin assumptions for 2021 and beyond, Mr. Lejuez moved his target to US$29 from US$24. The average on the Street is currently US$28.85.

He maintained a "neutral" rating for the stock.

“Although being a low-cost producer enables the company to pivot and win private label business as mass merchants move away from branded products, this still results in GM pressure,” he said. “In addition, recent sales trends have weakened, reducing visibility."

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Credit Suisse analyst Curt Woodsworth said he’s “cautious” on the demand for commodities in 2020 in the wake of a global deceleration in the second half of 2019 in “major global demand centers,” like China, India and the United States.

“Many commodity verticals such as steel, copper, and iron ore supply growth are set to sharply accelerate in 2020-2022,” he said in a research report on U.S. metals and mining companies.

“We see a Phase I trade deal as having minimal implications for global metals demand and the next phase of China trade negotiations will likely remain volatile dynamic. Global demand is recovering on a seasonal basis as well as an end to destocking but underlying trends remain weak, in our view, this late into the cycle. China demand outlook for 2020 is tepid at best as the property market slows and infrastructure funding is questionable at the state level.”

Mr. Woodsworth lowered his rating for Freeport-McMoRan Inc. (FCX-N) to “underperform” from “neutral," citing its current valuation and a copper surplus view. His target dipped to US$10 from US$11. The average is US$13.56.

“We are bearish on medium-term copper prices owing to less demand-side support from China in 2020-21 and significant supply side growth coming in 2021 and 2022,” he said. “A moderate recession would create significant downside risk to copper, therefore, in our view, given the lack of cost curve support. With the new copper deck and $3.1-billion in smelter capex added, Freeport FCF is significantly reduced ($0.89/share in total 2020-22) and execution risks in the Grasberg block cave are elevated over the next 12 months. We see FCX as lacking valuation support given the PT-FI economic share stepdown to 49 per cent in 2023 which lowers mid-cycle EBITDA to $3.7-billion on an “owned” basis and FCF to $1.10 per share.”

Conversely, he raised Largo Resources Ltd. (LGO-T) to “neutral” from “underperform” based on valuation with a target price of $1.20, down from $1.40. The average on the Street is $1.93.

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In their Canadian Energy Weekly research note, analysts at Canaccord Genuity raised their oil price forecasts for the first half of 2019 to reflect the escalating tensions in the Middle East.

“Prior to year-end, the oil price had begun to firm, with the front end of the curve moving up above US$60 WTI,” said Anthony Petrucci, John Bereznicki and Dennis Fong. " With the U.S. killing of Iranian General Qasem Soleimani early in the new year, the oil price moved even higher for a brief period, reaching over US$63 per barrel on the back of geopolitical tension. A ‘de-escalation’ of events of late has removed the tension from the oil price, in our view, with WTI prices currently in the US$60/bbl range.

"Given the recent strength in WTI, we are moving our oil price assumption in the first half of the year up to US$60/bbl, while leaving the back half of 2020 (and our longterm price) unchanged at US$55/bbl. The result is a modest increase in our overall 2020 assumptions (to $57.50 from $55), which provides a modest bump to our cashflow estimates this year, although our NAV calculations are largely unchanged.

The analysts said their focus for TSX-listed large cap and integrated energy stocks in 2020 is free cash flow, noting: “Notwithstanding the increase in oil price expectations, we believe investors should focus on SU and CNQ given the volatility in price. We note given the volatility in oil price that ECA does show a combination of relative torque to oil price and that it could outperform in a scenario where oil price outperforms our expectations or on the back of incremental Middle Eastern conflict.”

Concurrent with their estimate updates, Mr. Fong made a pair of rating changes.

Despite seeing longer-term value, he downgraded Encana Corp. (ECA-N, ECA-T) to “hold" from “buy,” believing near-term pressures are likely to weigh.

“While we do not have a significant concern around the geological performance of the Montney or Permian, we highlight the early-stage nature of the Anadarko assets which introduces incremental risk to the liquids growth,” he said. “Further to this, developing a track record of execution takes time, and we believe that investors will need time to gain confidence given the myriad of changes seen in the company over the past two years.”

“Given the focus on execution and hitting production targets (which we do not believe is at risk), we view there to be a lack of go-forward catalysts that could drive strong upside performance in the share price.”

He lowered his target to US$4.75 from US$5.50. The average on the Street is US$5.95.

Mr. Fong lowered Husky Energy Inc. (HSE-T) to “sell” from “hold,” pointing to a “double whammy” stemming from Alberta’s mandatory curtailments.

“We view Husky as being a relatively balanced company with respect to its Canadian assets,” he said. “It has physical and financial vertical integration with its upstream production and downstream refining capacity. The mandatory curtailments from the AB government limit Husky’s ability to grow its AB-based production and also squeeze downstream margin. Further to this, the special production allowance benefits producers with crude-by-rail capacity. Husky has little exposure to CBR and therefore is not provided the exemptions versus its peers.”

His target rose to $10 from $9.50. The average is now $11.51.

“Given the inflexibility in the capital program and the already slowed pace of development of its thermal projects and its Indonesian assets, we believe that free cash flow will be relatively muted in 2020 and to a lesser degree in 2021," the analyst said. "We do see free cash flow growing significantly with the completion of the West White Rose project in late 2022, and we will revisit our thesis later as the clarity around FCF improves.”

Elsewhere, Scotiabank analyst Jason Bouvier cut Husky to “sector perform” from “sector outperform" with an $11 target, down from $12.

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In other analyst actions:

TD Securities analyst Michael Van Aelst raised Saputo Inc. (SAP-T) to “buy” from “hold” with a $46 target, up a loonie. The average on the Street is $43.39.

TD 's Brian Morrison raised Aimia Inc. (AIM-T) to “buy” from “hold” with a $4.50 target, rising from $4.25 but below the average of $4.75.

BofA Securities raised Canadian Pacific Railway Ltd. (CP-N, CP-T) to “buy” from “neutral” with a target of US$294, up from US$266. The average is currently US$262.06.