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Tuesday's analyst upgrades and downgrades

File photo of Cogeco Inc. president and CEO Louis Audet.

J.P. Moczulski/CP

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

While Desjardins Capital Markets has a positive view Cogeco Communications Inc.'s (CCA-T) acquisition of MetroCast's remaining U.S. cable business for $1.4-billion (U.S.), it has concerns about the valuation of Cogeco's stock.

The "MetroCast acquisition is value-enhancing but recent stock performance diminishes remaining upside potential," Desjardins analyst Maher Yaghi said.

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"We have a positive view of the transaction, which we expect to be accretive to FCF [free cash flow], and estimate that the valuation of the U.S. business by the CDPQ [Caisse de depot et placement du Quebec] should crystallize [at about] $8 (Canadian) per share in the medium term. However, the stock has significantly outperformed its peers in the LTM [last 12 months], leaving modest upside potential to our target."

He downgraded Cogeco to "hold" from "buy."

"We estimate that the acquisition has a dilutive impact on EPS of 34 cents annually but it should be accretive by $43-million from an FCF perspective," the analyst said.

"We are downgrading CCA as the potential upside to our target price is now only 9 per cent on total-return basis. Moreover, we believe the stock's outperformance year-to-date (CCA 25.4 per cent, peers 9.1 per cent) and in the last year (CCA 36.3 per cent, peers 9.8 per cent) has reduced its multiple discount vs peers."

However, he boosted his target price to $87.50 (Canadian) from $79. The consensus is $78.75, according to Thomson Reuters.

"We value CCA using a DCF [discounted cash flow] approach and an NAV-based [net asset value] model, with the average of the two determining our target price of $87.50 (up from $79.00). Our three-stage DCF model utilizes a WACC [weighted average cost of capital] of 7.2 per cent, a medium-term growth rate of 2.5 per cent and a terminal growth rate of 2.0 per cent, which yields a valuation of $83.24. For our NAV-based valuation, we apply a 5.0 times multiple to data services, a 6.5 times multiple to our FY18 EBITDA [earnings before interest, taxes, depreciation and amortization] estimate for the Canadian cable segment and 7.5 times for the U.S. segment, which yields a value of $92.51," the analyst said.

"While the stock still trades at a discount versus peers, we believe this is warranted given the company's lack of a wireless service. In our view, CCA's high indebtedness will make the buy strategy harder to deploy in the upcoming quarters, leaving few catalysts in the short to medium term. We are supportive of the company's US strategy but believe the Canadian market is not getting any easier for a cable-only provider."

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Canaccord Genuity kept its "buy" rating on the stock, and raised its target price to $88 from $80.

"We have revised our target from $80 to $88 as we factor in a higher valuation of 7.5 times for the U.S. cable assets (versus 6.75 times previously) for the reasons discussed above and also because we are rolling forward our valuation to F2019 (from F2018) in order to more fully capture the new acquisition. At the current price, CCA still trades at relatively modest 6.5 times EV [enterprise value]/EBITDA 2018E (and 6.2times 2019E)," said analyst Aravinda Galappatthige.

"We believe the acquisition of the MetroCast cable assets is positive for CCA and its investment thesis on multiple fronts. We have highlighted many of these in this note, but to us the most significant consideration is the fact that it potentially facilitates the U.S. cable assets to be valued more appropriately within CCA. CCA has for a while now traded at a discount to its peers due to the long running skepticism around its M&A [mergers and acquisition] strategy. While this has started to gradually dissipate of late, supported by consistently strong results, we see this transaction accelerating the process quite meaningfully. In addition to the quality of the asset and increased mix of U.S. cable within the business, the acquisition of the 21-per-cent stake in ABB (Atlantic Broadband) by CDPQ at a 8.8 times EV/ EBITDA (Ex tax assets) valuation further underlines the intrinsic value of CCA's U.S. assets."

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Snap Inc. (SNAP-N) shares fell 5.6 per cent on Tuesday, after lead underwriter Morgan Stanley downgraded the stock and raised concerns about the social media company's ability to compete against rival Instagram.

Snap shares were trading at $16.04 (U.S.), after closing below its $17 IPO (initial public offering) price for the first time on Monday. The Snapchat owner's market debut in March was the hottest U.S. technology listing in years.

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The downgrade comes ahead of the expiry of the stock's lock-up period on July 29.

In an unusual move for an IPO's lead underwriter, Morgan Stanley cut its rating on the Snapchat parent to "equal-weight" from "outperform," and also slashed its price target to $16 from $28.

The brokerage's price target now sits below Snap's median price target of $19.50.

Dipping below an IPO price is seen on Wall Street as a setback to be avoided by chief executives and their underwriters, but it is not uncommon for Silicon Valley companies.

Snapchat has gained popularity among people under 30, but many on Wall Street have been critical of Snap's lofty valuation and slowing user growth.

The company faces increasing competition from Facebook, which once made a $3-billion bid for Snapchat.

The social media giant has made the camera a central piece of its apps and offers features similar to Snap on its platforms, including Instagram and WhatsApp.

In June, Instagram said its Stories feature had 250 million users, compared with 166 million users for Snapchat at the end of the first quarter.

Besides rising competition from Instagram, Morgan Stanley analyst Brian Nowak also said user growth trends have been modestly weaker than expected.

"We have been wrong about Snap's ability to innovate and improve its ad product this year and user monetization as it works to move beyond 'experimental' ad budgets into larger branded and direct response ad allocations," Nowak said in the note.

Morgan Stanley cut its estimates for Snap's 2017 revenue by 6.9 per cent to $897-million, and daily active user expectations by 1.6 per cent to 182 million.

Goldman Sachs, another lead underwriter, still has a "buy" and an unchanged $27 price target.

Up to Monday's close, Snap has lost about 42 per cent since its early highs after its IPO.

(Reuters)

***

Raymond James is cutting its price target on Ritchie Bros. Auctioneers (RBA-N;RBA-T) as it has been facing a tough operating environment.

"We expect end market headwinds to continue as the company laps 'tough comps' from recent growth. We also remain mindful of near-term integration risks related to the IronPlanet (IP) acquisition," said analyst Ben Cherniavsky.

He kept his "market perform" rating on the stock but cut his target price to $29.50 (U.S.) from $33.50. The consensus is $31.

"For June 2017 Ritchie generated GAP of $556-million, including $77-million of GAP from IP, versus June, 2016, GAP of $540-million. This brings 2Q17 GAP to $1,258-million, down 2 per cent year over year. Our forecast called for GAP of $1,250-million. However, we were assuming a July 1 close for IP; adjusted for this, the 11 per cent organic contraction in Ritchie's 2Q17 GAP was more than the 8-per-cent drop we expected. Moreover, the company also indicated that 'both Ritchie Bros. and IP GAP faced macro conditions resulting in a reduction in the volume of equipment transacting in 2017 versus 2016 with IP 2Q17 GAP results being 18 per cent lower than 2Q16.' We had previously assumed that IP's recent growth would be sustained in 2017, albeit at a decelerating rate."

He also lowered his 2017 estimated revenue to $628-million (U.S.) from $658-million and his EBITDA estimate to $222-million from $255-million. And he cut his full year EPS estimate to 98 cents from $1.21 and his 2018 EPS estimate to $1.25 from $1.45.

***

CIBC Research says its outlook for ProMetic Life Sciences Inc. (PLI-T) has moderated.

Analyst Prakash Gowd downgraded the stock to "neutral" from "market outperformer" and cut the price target to $2.15 from $4.40. The consensus is $4.54.

" This downgrade reflects our waning confidence in the company to launch its protein products according to our previous forecasts. With our revised forecast, we also expect there to be a need for future financing which could remain as an overhang on the stock. Finally, any negotiations with potential partners for PBI-4050 to hammer out a favourable deal for ProMetic could prove to be more challenging, given the company's suboptimal balance sheet. Our downgrade of the stock does not reflect any change in our view on the quality or potential of the company's plasma protein or small molecule assets," the analyst said.

" We have incorporated ProMetic's most recent $61.7-million equity financing into our model to account for the cash infusion and equity dilution. However, we believe that another financing will need to occur by 2018, especially given the quarterly cash burn of $20-million to $30-million that we expect to take place through to the end of 2018. We assume a $100-million raise in 1Q18 at $2.00 per share."

***

Echelon Wealth Partners has placed Pioneering Technology Corp. (PTE-X) on its Top Picks list.

"Potential catalysts include additional contract/customer wins, improved financial results, and M&A activity. We continue to view PTE as an undervalued, underfollowed play on new safety requirements that should drive strong demand growth for the company's cooking fire prevention products," the firm said.

Pioneering Technology Corp. designs and produces solutions for cooking fire prevention and energy reduction, and markets these products primarily to the multiresidential market and secondarily through retail channels.

The firm kept its "speculative buy" rating on the stock and its price target of $1.60. The consensus is $1.60.

"In March, 2017, the company completed the bulk of a $6.6-million bought deal private placement at $1.10/unit (the overallotment closed in April). The hold period on that financing expires on July 23rd, and we would view any related weakness as a buying opportunity. Echelon Wealth Partners led that the financing. Considering its impressive organic top line performance, strong EBITDA margins and operating cash flow, we do not expect PTE to continue being underfollowed for long," the firm said.

"In late May, the company reported Q217 revenue growth of 80 per cent year over year, beating our sales forecast by 9 per cent. For H117, Pioneering delivered top line growth of 79 per cent year over year, tracking well ahead of management's reiterated guidance of 50 per cent, though we concede the year over year comparisons will be impacted by a strong H216. The company's SmartBurner product has been the primary revenue driver, although the company is working to introduce additional offerings. In June, the company announced a definitive agreement with Innohome OY that contemplates the late summer launch of a Pioneering-branded product using Innohome's heat sensor technology. This product will target the electric smooth top (also called glass/ceramic) market, which will complement the company's rapidly building presence in the electric coil market."

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About the Author
Assistant Editor, Globe Investor

Gillian Livingston started her journalism career at The Gazette at Western University. She's worked for The Financial Post, Dow Jones Newswires and The Canadian Press as a reporter for news, business, markets and Ontario politics. More

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