Wednesday’s analyst upgrades and downgrades

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

Canaccord Genuity analyst Doug Taylor has changed his recommendation on Patriot One Technologies Inc. to “hold” from “speculative buy” after the company reported disappointing revenue in its fiscal first quarter results. He also lowered the 12-month target price on the stock to $1.35 from $3.25.

The company, founded in 2016 with research partner McMaster University, is commercializing a single threat detection product called PATSCAN RADAR sensor solution, to detect concealed weapons wherever a lot of people gather (think building security).

However, Mr. Taylor noted that initial sales as of October were much lower than expected, at $117,000 versus expectation on $2.2-million, while operating expenses were higher. Now, the analyst has lowered his expectations for fiscal 2020 revenue to $7.7-million, down from $29.8-million previously. He expects that the company will report a loss of 14 cents per share, steeper than his previous estimate of a loss of 2 cents per share.

Mr. Taylor writes: “Our conversations with management, prospective clients and other industry participants have consistently confirmed the demand for a paradigm shift in weapons/threat detection solutions like Patriot One’s. The company’s pipeline of qualified sales leads (9,000+) supports this view, and we see the new pilot with the LA Football Club as further evidence. We continue to see the company achieving the necessary development milestones for commercial production as the gating factor to revenue growth.”

But he has pushed back the start of monetization of the company’s technology, and lowered the sales trajectory until the company shows better visibility for its transition from a research company into one that generates revenue. Even though Patriot One’s cash and cash equivalents fell to $38.2-million from $50.6-million, due to operating losses and an acquisition, he thinks the balance sheet is strong.

“The company continues to invest in its business to drive it towards commercialization; the sizable balance sheet liquidity remains a key asset and enough to fund the company for the near term,” Mr. Taylor said.

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BMO Capital Markets downgraded Halliburton Co. to a “market perform” rating, believing that further gains in what has been the best-performing large-cap U.S. energy stock over the past few months will require a meaningful boost to earnings.

While still down 7 per cent year to date, Halliburton has benefited from a positive rate of change in fundamentals for fracking, macro improvements, and high short interest in the stock which makes it susceptible to short-covering rallies.

“Further outperformance likely requires positive estimate revisions and we expect a tepid recovery in U.S. frac, despite seasonally higher demand,” BMO analyst Daniel J. Boyd said in a note.

BMO lowered its 2020 EBITDA estimates by 2.5 per cent and free cash flow forecasts by 6.5 per cent “after learning that one-half of the company’s planned cost reductions are non-cash.”

Mr. Boyd has a US$23 price target on the stock.

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Canaccord Genuity analyst Scott Chan has raised his target price for Fairfax India Holdings and maintained a “buy” recommendation. He now believes the shares will trade at US$18.75 within 12 months, US$3 higher than his previous target of $15.75.

The price bump follows a deal in which Fairfax India announced a private investment agreement to sell a minority interest in its Anchorage Infrastructure Investments Holdings Limited subsidiary – a flagship vehicle for Indian aviation-related investments -- for about US$134-million. But here’s the key: The deal also implies a significantly higher market value for Fairfax India’s significant ownership stake in Bangalore International Airport (BIAL), and it raises Fairfax India’s book value per share by about $3.30.

“Fairfax India is a unique long-term investing opportunity with a pure-play Indian market exposure that cannot be easily replicated,” Mr. Chan said.

Fairfax’s stake in the Indian airport will decline from 54 per cent to 49 per cent due to the Anchorage deal, but BIAL remains a key investment for the company: In the third quarter, it constituted more than a third of Fairfax’s underlying portfolio and 45 per cent of its private investment book.

The airport shows good growth prospects too, with expansion plans and exposure to the Indian economy.

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Credit Suisse analyst Allison Landry raised her 12-month target price for FedEx Corp. shares to US$170 from $168, but cut the company’s profit forecasts for 2020 and 2021. The reason: The delivery company reported a 40 per cent decline in its fiscal second quarter profit on Tuesday and cut its own forecasts for the fourth time this year amid weak air shipments and costly residential e-commerce deliveries.

The share price has been declining, from about US$250 last year to a close of US$163.23 on Tuesday.

The good news? The Credit Suisse analyst believes (again) that the worst could be over.

“At this risk of sounding like a broken record calling a bottom for FedEx earnings, at this point it is truly a challenge for us to think that things get materially worse from here. With many of the major problematic cost headwinds being largely absorbed in 2020, there is reasonable line of sight toward margin improvement and a reacceleration in earnings growth in 2021,” Ms. Landry said.

That said, she cut her expectations for 2020 profit to US$10.79 from US$12.22.

The second half of the company’s fiscal year will remain challenging, she said, as the company continues to expand into residential deliveries and experiences weak commercial traffic. But the company is adapting, which should lead to profit margin expansion down the road.

“In response to higher than expected costs, the company indicated that it will be limiting hiring, reducing air capacity (including an 8 per cent reduction in flight hours), pursuing tech investments to optimize its networks, and focusing on improving revenue quality. Given that the bulk of the costs will be absorbed in 2020, we believe there is visibility to margin expansion in 2021,” Ms. Landry said.

In other analyst actions on FedEx, Oppenheimer downgraded the shares to “perform” from “outperform," commenting that the company has a lot to prove to investors over the next few quarters.

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Citibank cut its price target on Twitter to US$36 from $45, citing concerns over the company’s near-term revenue outlook.

“We remain largely concerned on the near-term revenue outlook for the stock due to the MAP impacts and therefore are lowering our 4Q and FY20 estimates. As a result, our long-term DCF valuation now results in a new TP of $36," CNBC reported.

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BMO Nesbitt Burns analyst Ben Pham is maintaining an “outperform” recommendation on AltaGas Ltd., along with a 12-month price target of $23 after the company announced its 2020 guidance and strategic plan on Tuesday. But given tremendous upside opportunity and a low valuation, the analyst is identifying the stock as one of the top three picks.

“AltaGas’s 2020 guidance and suspension of the dividend reinvestment program were a positive development relative to expectations. Also, with the company now providing EPS [earnings per share] guidance and with its high-growth Utility business (8-10 per cent rate base growth), we believe this will highlight that the stock is undervalued at 15-times forward price-to-earnings versus Canadian utilities at 18-times and pipelines at 17-times,” Mr. Pham said.

Kirk Wilson, an analyst at Beacon Securities, remains similarly upbeat, with a $24 price target on the stock.

“AltaGas provided guidance for 2020 that outlines a 15 per cent expansion of its base Midstream and Utilities divisions now that the asset disposition program appears to be complete. At the mid-point of each category, the company’s guidance suggests substantial growth compared to our 2019 forecasts,” Mr. Wilson said.

He raised his expectation for earnings next year to $1.22 per share, up from $1.20 previously. In 2021, he expects AltaGas will generate a profit of $1.36 per share, driven in part by growth in the base rate and cost reductions.

His target price is based on a valuation of 11-times estimated 2021 EV/EBITDA (or enterprise value to earnings before interest, taxes, depreciation and amortization) – and a dividend yield of 4 per cent. Right now, the shares have a yield of 4.9 per cent.