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

After the release of “mixed” second-quarter financial results on Tuesday, the spotlight remains on EXFO Inc.’s (EXFO-Q, EXF-T) integration of its acquisition of a 97-per-cent stake in Astellia, said RBC Dominion Securities analyst Steve Arthur.

The Quebec City-based tech company reported revenue for the quarter of US$64.7-million, exceeding both Mr. Arthur’s projection of US$61.5-million and the consensus on the Street of US$62.2-million. Gross margins of 60.9 per cent missed the analyst’s 62-per-cent forecast.

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“The quarter was impacted by transaction-related expenses of $1.4-million, as well as an unexpected $1.3-million EBITDA loss from Astellia operations (apparently a seasonal pattern),” said Mr. Arthur. “Net of these items, the company delivered adjusted EBITDA of $5.2-million, shy of our/consensus forecasts of $6.4-million/$5.6-million. Adjusted EPS of 1-cent loss, or $0.02 after adjusting for the Astellia losses, was shy of our and consensus forecast of 6 cents/4 cents.”

Though management reiterated the synergies stemming from the acquisition of Astellia, Mr. Arthur emphasized a short-term impact lingers, noting the company expects to see “soft” contributions over the next two quarters given the seasonality of its business.

In order to incorporate the impact from Astellia, a France-based firm, Mr. Arthur lowered his 2018 EBITDA projection to US$21.2-million from US$25.2-million. His EPS forecast fell to 18 US cents from 26 US cents.

Keeping a “sector perform” rating for EXFO shares, his target declined to US$5 from US$5.25. The average on the Street is currently US$5.07, according to Bloomberg data.

“EXFO shares have weakened in recent months and now trade at 12.2 times calendar 2019 estimated EPS, versus peers averaging 20.5 times,” he said. “Despite this discount, at this stage we maintain our Sector Perform rating, and will watch for integration of the acquisitions, as well as progress with organic growth initiatives.”

Elsewhere, Canaccord Genuity analyst Robert Young lowered his target to US$4.50 from US$4.75 with a “hold” rating (unchanged).

Mr. Young said: “Management indicated that the consolidated entity expects $10-20-million in revenue synergies as a result of the transaction in the next two to three years. With minimal duplication of customers, the two businesses are poised to offer their complementary solutions to one another’s customer bases. That said, we note that much of the 2019 EBITDA target is dependent on execution against this target given a lack of available cost synergy. As we model out the synergistic benefits of the transaction, we highlight significant forecast risk in the near term.”

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The frigid winter conditions experienced across North America should drive Superior Plus Corp.’s (SPB-T) first-quarter fiscal results, said Desjardins Securities analyst David Newman, who expects to see a “healthy” propane demand, particularly in its retail business.

“In 1Q18, average heating degree days increased by 4–6 per cent in Canada and 4 per cent in the U.S. Northeast,” said Mr. Newman in a research note released Wednesday. “SPB should also benefit from a recovery in the western Canadian energy markets, especially on the back of its Canwest acquisition last year. U.S. results should be bolstered by recent M&A.”

“2Q weather has kicked off with another blast of cold weather as ‘Old Man Winter’ refuses to give up his icy grip, although milder temperatures are expected to take hold as we enter late April and early May.”

Ahead of the May 8 release of its earnings report, Mr. Newman raised his adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) forecast for the quarter to $130-million (from $129-million), citing the colder conditions, margin improvements in its Canadian propane and U.S. refined fuel segments, strength in the chlor-alkali markets and the contributions from acquisitions, particularly Canwest.

Mr. Newman also hiked his full-year 2018 and 2019 EBITDA estimates to $320-million and $339-million, respectively, from $317-million and $335-million.

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He kept a “buy” rating and $15 target for Superior Plus shares. The average is $14.07.

“We believe SPB is gaining momentum in its effort to fundamentally improve its operations, invest in the business and various organic growth initiatives, step up its acquisition program and prune noncore assets,” he said. “It could also leverage its leadership position across end market segments, backstopped by strength in the Energy Distribution and Specialty Chemicals segments. Hence, despite recent share price appreciation, we believe the stock has strong upside supportive of our Buy rating.”

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The underperformance of Caterpillar Inc. (CAT-N) stock since the release of its fourth-quarter financial report on Jan. 25 presents investors with an enticing buying opportunity, according to Buckingham analyst Neil Frohnapple.

Believing the U.S. machinery giant remains in the early stages of earnings expansion and sits poised for 30-per-cent earnings per share growth this year, he initiated coverage with a “buy” rating, seeing upward revenue momentum that could push earnings to the top end of 2018 guidance.

Mr. Frohnapple set a price target of US$170, which sits below the average on the Street of US$181.46.

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Canadian airlines continue to face a “volatile” environment featuring swings in both forex and fuel prices, according to CIBC World Markets analyst Kevin Chiang.

“While this creates a near-term earnings headwind, it does not change our underlying positive view on the airline space,” said Mr. Chiang in a research note previewing first-quarter earnings season.

“We see the sector as well positioned heading into the busy spring/summer season. The industry is poised to generate significant amounts of free cash flow, benefitting from a healthy revenue environment, while valuations remain compelling.”

He pointed to three key themes that he believes reaffirms his positive outlook for the sector.

  • Another “test” for the airlines with higher oil prices expecting and a weaker outlook for the loonie. He said: “One of the biggest pushbacks we hear from investors against our positive airline thesis is that the sector has not gone through a full economic cycle. While the outlook for economic growth remains healthy, given the increased volatility in FX and fuel price, the view that it has been easy sailing the last few years for the Canadian airlines is far from true. We continue to see the sector benefitting from increased rational behaviour, good cost control, and increasing revenue opportunities. We see increased resiliency in the airline business model.”
  • A “healthy” revenue environment. He believes the sector is “looking to offset the rise in input costs.”
  • “Compelling” valuations. Mr. Chiang said: “[D]espite the Canadian airlines having gone through a significant transformation over the past five years, their relative valuation over this period has not dramatically changed compared to their transportation peers. We argue that the market continues to underappreciate the transformation within the airline business model. As airlines continue to prove the resiliency of their business models while benefiting from a strong revenue environment, this should support multiple expansion.”

In reaction to changing fuel and forex assumptions, Mr. Chiang lowered his 2018 and 2019 EBITDA estimate for WestJet Airlines Ltd. (WJA-T) to $893-million and $1.022-billion, respectively, from $940-million and $1.072-billion.

Ahead of the release of its earnings on May 8, he lowered his target for WestJet shares to $26 from $28, maintaining a “neutral” rating. The average is $26.84.

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Raymond James analyst Brenna Phelan lowered her financial projections for Intact Financial Corp. (IFC-T) in reaction to its announcement Tuesday that severe winter weather will have a higher-than-anticipated impact on first-quarter results.

The Toronto-based company projects catastrophe and non-catastrophe weather-related losses that exceeded expectations by approximately $130-million pre-tax, or 70 cents per share after tax. That’s a significant jump from the $40-million losses sustained in the first quarter of 2017.

“We view Intact as a best-in-class operator with meaningful scale, a sustainable competitive advantage and the ability to generate a normalized mid-teens ROE [return on equity],” said Mr. Phelan. “While we are positive on its entry into the U.S. market via OneBeacon, pressured performance in its Personal Auto segment over the last several quarters has tempered our earnings growth forecasts, and the pace of meaningful improvement remains uncertain. After a couple of quarters with some respite from catastrophes, winter weather was problematic in 1Q18 making ‘elevated’ catastrophes and weather-related claims once again the norm and clouding the outlook for run-rate charges in this area. As we have noted before, while investors generally look through elevated catastrophes, the prevalence of elevated charges over the past two years makes that increasingly harder to do. All that said, the shares are trading a full standard deviation below their five-year P/B [price-to-book] multiple.”

Based on the announcement, Ms. Phelan lowered her adjusted earnings per share projection for fiscal 2018 to $6.05 from $6.53. Her 2019 estimate remains $7.42.

She kept an “outperform” rating and $110 target for Intact shares, which is slightly ahead of the consensus target of $109.81.

“Given our base case forecast for improvement in personal auto through 2018 and more normal weather-related losses through the balance of the year, we are maintaining our price target at this time,” the analyst said. “With 16-per-cent upside (including a 2.5-per-cent dividend yield) to our unchanged $110.00 target price, we maintain our Outperform rating.”

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BMO Nesbitt Burns analyst Stephen MacLeod raised his target for Premium Brands Holdings Corp. (PBH-T) upon resuming coverage following the completion of its $172.5-million financing of 4.65-per-cent convertible unsecured subordinated debentures.

The funds are expected to be used to finance the previously announced $122-million acquisition of Concord Premium Meats Ltd. as well as other future potential strategic acquisitions and capital projects.

After increasing his 2018 and 2019 EBITA estimates to $265-million and $313-million, respectively, from $258-million and $293-million, Mr. MacLeod hiked his target for Premium Brands shares to $134 from $118, exceeding the average on the Street of $125.78.

He kept an “outperform” rating.

“We believe the company is well positioned to benefit from long-term and emerging consumer trends, which we expect to provide support for organic growth across Premium Brands’ businesses over the next several years,” said Mr. MacLeod. We also see a long runway for acquisition growth.”

CIBC World Markets analyst John Zamparo raised his target to $128 from $116 with an “outperformer” rating (unchanged) after resuming coverage.

Mr. Zamparo said: “The Q4 release perfectly illustrates why we view PBH so favourably. Even in a quarter in which severe labour shortages caused supply disruptions and margin deterioration (GM% down 117 basis points year over year; EBITDA margin down 69 bps), there are enough other levers - material M&A and organic volume increases - to continue the company’s growth path. ... Premium Brands remains one of our favourite consumer staples names,”

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In other analyst actions:

TD Securities analyst Timothy James upgraded Transat AT Inc. (TRZ-T) to “buy” from “hold” and raised his target to $14.50 from $12. The average target on the Street is $13.38.

GMP analyst Ben Jekic upgraded Exco Technologies Ltd. (XTC-T) to “buy” from “hold” with a $12.50 target, rising from $11. The average is $11.42.

HSBC analyst Alevizos Alevizakos upgraded Citigroup Inc. (C-N) to “buy” from “hold” with a US$85 target, rising from US$82. The average is US$84.03.

KeyBanc Capital Markets analyst Edward Yruma upgraded eBay Inc. (EBAY-Q) to “overweight” from “sector weight” with a US$50 target, which exceeds the consensus of US$48.52.

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