Friday's analyst upgrades and downgrades

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

Risks remain for New Gold Inc. (NGD-T), according to Desjardins Securities analyst Michael Parkin.

However, he sees "significant" upside potential for the next 18-24 months, leading him to upgrade his rating for the stock to "buy" from "hold." The move comes in reaction to a 15-per-cent drop since he reduced his rating on Sept. 7, versus a 6-per-cent decline for the S&P/TSX Global Gold Index.

"In our view, the shares now offer compelling value for longer-term investors," said Mr. Parkin.

He said the enterprise value to earnings before interest, taxes, depreciation and amortization multiple (EV/EBITA) is the most appropriate valuation metric for the company in the near-term.

"Since gold reached and exceeded the $1,200 (U.S.) per ounce level in mid-February, we note that New Gold's EV/FY1 EBITDA (consensus basis) has found a support level at 9.0x," said Mr. Parkin. "With the stock currently trading at 9.2x EV/FY1 EBITDA, we believe this is an appropriate time for longer-term investors to step into the name as the stock now offers a potential return of 18 per cent to our target.

"We acknowledge that risks remain pertaining to capital cost increases at Rainy River, but we have included an 11-per-cent capital cost overrun on the remaining $480-million (U.S.) of capex on the company's latest total capex guidance of $1.045-billion. Despite the near-term risks with the remaining Rainy River development, we believe investors could be well compensated for that risk over the next 18–24 months as the Rainy River project ramps up production. We estimate New Gold is trading at an attractive 6.6x EV/EBITDA based on our 2018 estimates assuming $1,320/oz gold. Recall that the mining rate is already at 68,000 tpd as of 2Q16 (72 per cent of design), yet our 2018 estimates assume Rainy will average 80 per cent of design for the year — which could prove conservative and result in an even more attractive valuation."

Mr. Parkin maintained his price target of $7 (Canadian) for the stock. The analyst consensus price target is currently $7.19, according to Thomson Reuters.

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Empire Company Ltd. (EMP.A-T) is "between a rock and a hard place," said Raymond James analyst Kenric Tyghe following the release of weaker-than-expected first-quarter 2017 fiscal results.

The retailer reported adjusted EBITDA of $243.1-million, a 3.9-per-cent margin, compared to the consensus projection of $285-million. The analyst blamed the 1.28 per cent EBITDA margin drop on lower gross margins and "marked" deterioration in expense leverage. Adjusted earnings per share of 27 cents also fell well below estimates (the 36-cent consensus and Mr. Tyghe's estimate of 38 cents).

Mr. Tyghe also emphasized its same-store sales growth decline, excluding fuel, of 1.2 per cent on internal food inflation of 1.5 per cent, which he attributed largely to a weakening performance in Western Canada.

"In Western Canada SSS decreased 3.9 per cent (the slide actually gained momentum over the last 12-months) on the twin storms of the macro backdrop and missed (early) opportunities (training), continuing to haunt the team (traffic is proving stubbornly hard to entice back)," he said. While the price and marketing investments have ratcheted higher, this has not (yet) translated into traffic gains."

He said there is no "quick fix" to its traffic issues, calling them a "stark reminder of how much cheaper it is to keep a customer than to acquire a new one."

"Without meaningful traction of sales initiatives margin pressures will be difficult to manage, as cutting costs, while delivering a compelling experience is no mean feat," the analyst said. "Reducing expenses associated with the store experience is risky, given the traffic imperative, and will require near flawless execution to deliver results."

Mr. Tyghe lowered his target price for the stock by a loonie to $20. The analyst average is $20.45, according to Bloomberg.

"We believe that the while progress is being made the road back will be hard fought, and until such time as they can put a pin in the share losses (or we have conviction that they are getting close), we remain on the sidelines," he said.

Elsewhere, TD Securities analyst Michael Van Aelst downgraded the stock to "reduce" from "hold" and dropped his target to $18 from $20.

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Amazon.com Inc. (AMZN-Q) is stretching its lead in the U.S. online retail landscape, said RBC Dominion Securities analyst Mark Mahaney.

The conclusion came from the results of RBC's fourth U.S. online shopper survey, taken from an audience of 2,024 consumers, including 1,682 shoppers that had used Amazon in the past 12 months.

"We asked our survey respondents which Online Retail sites they most commonly use. Not surprisingly, Amazon ranked No. 1 with an 89-per-cent response rate, which is consistent with last year's results (2015: 90 per cent)," he said. "While Amazon continues to rank very highly, it actually widened the gap between itself and the No. 2 site (eBay) and largely maintained its lead over the #3 site (Wal-Mart). Who gained and lost 'share' in our survey? eBay, lost 3 pts year over year while Wal-Mart and Jet (now part of Wal-Mart) both improved. Wal-Mart gained 3 pts year-over-year in our survey (to 33 per cent) and Jet improved by 3 pts Y/Y (off a 0-per-cent base).

"Our broader online retail survey work continues to indicate three of the most important criteria consumers use when deciding where to shop are - price, selection and convenience. And when we asked respondents how they ranked the online retail sites on these factors, Amazon remained overwhelmingly the leader across all three factors."

Mr. Mahaney's findings also included: a rise in transaction frequency and spending; satisfaction "remains high;" increased adoption of Amazon Prime; Prime members become "more loyal" with veterans more dedicated than rookies and a ramp-up in same day delivery (SDD) interest and usage.

"Overall, we believe these results not only show Amazon's dominant position in U.S. Online Retail and highlight the 'Prime Flywheels' momentum but also illustrate how these flywheels are spinning faster today than they were last year," he said. "And we believe these results offer growing evidence – a large, growing and increasingly loyal Prime subscriber base that gets more loyal with time and SDD roll out – that Amazon's flywheels will spin even faster next year than this year."

Maintaining his "outperform" rating for the stock, Mr. Mahaney raised his target price to $1,000 (U.S.) from $840. Consensus is $870.33.

"Even though AMZN has consistently traded at a premium valuation level (average forward P/E multiple of 35–40x since 2007), its sector-leading forward EPS growth outlook and its high EPS quality (very high FCF conversion) warrant, in our opinion, a considerable market multiple premium," the analyst said.

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BMO Nesbitt Burns analyst Tim Long raised his target price for Apple Inc. (AAPL-Q) following the first week for the iPhone 7/7 Plus and Watch Series 2.

"Commentary from the U.S. operators has been encouraging, particularly T-Mobile and Sprint. We believe customer reception to the device itself has been strong, but the U.S. operators have been promoting the device more aggressively than we expected," he said. "The U.S. carriers are basically offering a new phone by allowing for a trade in of an iPhone 6 or later for $650 in credits, well more than those phones are worth today. Operators in Canada, Europe, and Asia are taking a traditional approach. We expect unit upside in September and December to be driven by the U.S. carriers."

Despite initial concerns about the loss of the headset jack, Mr. Long said consumers are being drawn to an improved camera, increased storage, waterproofing and "refreshed" case colours.

"After another solid quarter, we believe the total iPhone installed base exceeds 650 million, including second-hand devices," he said. "We expect Apple to continue to gain share of smartphone subscribers, and now model 12-per-cent [compound annual growth rate] iPhone installed base growth through 2019.

"In addition to a rapidly growing subscriber base, we believe the age of the installed base bodes well for sales. We believe the installed based entering the iPhone 7 cycle is older than it has been for the prior cycles, which bodes well for upgrade."

Mr. Long also expects the Watch Series 2 to "perform well" over the next several quarters.

"We are still modeling less than a 10-per-cent attach rate, which we think will prove conservative over time," he said.

After raising his unit estimates for both the phone and watch for the next two quarters, he raised his 2017 and 2017 earnings per share projections to $8.31 (U.S.) and $9.24, respectively, from $8.25 and $9.13.

With an "outperform" rating, he increased his target to $140 from $116. The analyst average is $125.84.

"We believe long-term revenue growth will be driven by iPhone upgrades off a growing installed base and a larger used iPhone base, as well as from switchers from mass-market Android phones," said Mr. Long. "Additionally, we expect 9-10-per-cent services revenue growth, supported by both new and used devices."

Elsewhere, Canaccord Genuity analyst T. Michael Walkley raised his target to $140 from $120 with a "buy" rating.

He said: "We believe the iPhone 6 and iPhone 6s products enabled Apple to materially increase its market share and installed base of the premium tier smartphone market. We believe these trends resulted in the iPhone installed base growing to over 500M exiting C2015 with overall connected Apple devices exceeding 1 billion users. This impressive installed base should drive strong future iPhone replacement sales and earnings, as well as cash flow generation to fund strong longterm capital returns programs of $250-billion through fiscal 2018. With the iPhone 7 off to a strong start, we anticipate improving replacement sales versus the 6S and a return to iPhone unit growth in fiscal 2017. However, we anticipate a stronger upgrade cycle in F2018 versus our modest expectations for the iPhone 7, resulting in us introducing our 2018 estimates."

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In other analyst actions:

Canadian Energy Services & Technology Corp. (CEU-T) was downgraded to "sell" from "hold" at Industrial Alliance Securities by analyst Elias Foscolos. His target rose to $4 from $3.75. The average is $5.19.

Badger Daylighting Ltd. (BAD-T) was cut to "hold" from "buy" at Industrial Alliance by Elias Foscolos. He has a price target of $28, while the analyst average is $29.36.

Penn West Petroleum Ltd. (PWT-T) was raised to "hold" from "reduce" by TD Securities analyst Juan Jarrah. His target rose to $2.25 from 80 cents. The average is $2.18.

Credit Suisse analyst Edward Kelly assumed coverage of Wal-Mart Stores Inc. (WMT-N) with an "outperform" rating. It had previously been rated "neutral." He raised the firm's target for the stock to $80 (U.S.) from $62, versus the average of $74.73.

Mr. Kelly assumed coverage of Target Corp. (TGT-N) with a "neutral" rating and $65 target, down from $72. The consensus is $74.71.

Goldman Sachs analyst Richard Ramsden downgraded Citigroup Inc. (C-N) to "neutral" from "buy" with a target of $50 (U.S.). The average is $53.73.

Goldman Sachs analyst Ryan Nash upgraded Comerica Inc. (CMA-N) to "buy" from "neutral" with a target of $52 (U.S.). The average is $46.70.