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

Heroux-Devtek Inc. (HRX-T) boasts "above-average" growth visibility despite "elevated" macro uncertainties for the global economy, according to Raymond James analyst Ben Cherniavsky.

Citing the Boeing 777 landing gear contract that began production in June, Mr. Cherniavsky upgraded his rating for the Quebec-based company to "outperform" from "market perform."

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"We have previously noted the long gestation period that is inherent in Heroux's business," he said. "The large 777 contract is a case-in-point. It was announced in December 2013 but is only ramping into production today. A recently secured contract for landing gear on the KF-X fighter jet provides another such example."

Mr. Cherniavsky said the company has a "proven" track record for executing well for shareholders.

"The biggest catalyst in recent years was clearly the 2012 decision to divest of the aerostructures business, pay investors a $5.00 a share in cash, and focus on landing gear systems," he said. "A large contract with Boeing on the 777 platform and the accretive acquisition of APPH followed shortly thereafter. We believe there is more momentum to this story over the next few years."

Heroux is scheduled to report second-quarter 2017 results on Nov. 7. Mr. Cherniavsky is projecting earnings per share of 17 cents, flat year over year. He expects earnings to "reaccelerate" in the second half of fiscal 2017 and 2018 with the 777 program.

"Notably, Heroux has reported EPS 'beats' in the last six quarters," he said. "While this raises the expectations bar a little, it also speaks to the strong record of execution noted above."

He maintained a target price of $15.50 for the stock. The analyst consensus target is $17.40.

"When we downgraded Heroux's stock on May. 25, valuation was our primary concern," he said. "The stock had hit our target and generated outsized returns over the prior two years. We were, however, still positive on the company's fundamentals and advised investors to wait for an opportunity to buy the stock with a more favourable risk-return profile. We believe that opportunity is now at hand. The shares have retreated 12 per cent from the time of said downgrade (versus 5 per cent for the TSX and 5 per cent for the PPA aerospace index) and now offer a 15-per-cent return to our $15.50 target price."

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In a research report on oil and gas energy services companies, Raymond James analyst Andrew Bradford said it's time for investors to re-examine their positions.

"At the time of writing, WTI crude is at $50.43 (U.S.) and giving all the appearance of wanting to breakout above its recent $43 to $50 trading range. This is its third test of the S$50 level since June and it presents a dilemma for energy investors – oilfield services investors in particular: to the extent that crude has established a technical range between $43 and $50, the fact that we are at the top of that range today implies a tactical risk and consequently lightening positions is prudent investing. Accordingly, we are lowering our ratings across a third of our coverage group in this report.

"At the same time, most would agree that the service sector is undeniably in recovery mode; so maintaining weightings in key core positions is equally important. We suggest Trinidad Drilling Ltd. (TDG), Canyon Services Group Inc. (FRC), Secure Energy Services Inc. (SES), Mullen Group Ltd. (MTL), and Canadian Energy Services and Technology Corp. (CEU) as candidates for these core positions. As a group, the companies cover the full life-cycle of a well or well-pad from well construction through its productive life. Of these, MTL and CEU have each generated strong returns over recent weeks, and so their ratings have been lowered. Nonetheless both offer unique and attractive business models that qualify them as core holdings through a recovery. We also suggest complementing these core positions with some more tactically attractive stocks."

Mr. Bradford downgraded the following stocks:

- Enerflex Ltd. (EFX-T) to "market perform" from "outperform" with a target of $14.75 from $15. Consensus is $16.28.

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- Secure Energy Services Inc. (SES-T) to "outperform" from "strong buy" with a target of $12 from $10.75. Consensus is $11.31.

- Trican Well Service Ltd. (TCW-T) to "market perform" from "strong buy" with a target of $3.60 from $3.30. Consensus is $3.29.

He said: "We place a 15% time discount on a 7.5x multiple of 2018E EBITDA to arrive at our $3.60 target. We could see as much as 75 cents to $1.00 above and beyond this given a timely liquidity event for its 10-per-cent equity position in Keane Group plus its 558,000 shares in National Oilwell Varco. However, based on our numbers, which are admittedly below consensus (we think pricing increases won't hit until 1Q17 and 3Q17), and Trican could be challenged by covenant issues again in 1Q17."

- Canadian Energy Services and Technology Corp. (CEU-T) to "market perform" from "outperform" with a target of $6.20 from $5. Consensus is $5.33.

He said: "We admit to being wholly uncertain about the degree of impact of CEU's jump on specialty chemicals in the Permian Basin via its Catalyst acquisition earlier in the summer, except to say that all the qualitative factors sound positive. We are upping our target to 13.0x 2018E EBITDA, less a time discount. This multiple is consistent with its historical multiple post its Jacam Chemical Company Inc. acquisition."

- Mullen Group Ltd. (MTL-T) to "market perform" from "outperform" with a target of $16.50 from $16.25. Consensus is $17.80.

Mr. Bradford also made a series of target changes to stocks, including:

- Ensign Energy Services Inc. (ESI-T, market perform) to $8 from $7.50. Consensus: $8.40.

- Savanna Energy Services Corp. (SVY-T, strong buy) to $3.50 from $3.75. Consensus: $2.52.

- Trinidad Drilling Ltd. (TDG-T, outperform) to $3.75 from $3.40. Consensus: $3.31.

- Calfrac Well Services Ltd.(CFW-T, outperform) to $5.50 from $5.70. Consensus: $4.11.

Mr. Bradford said: "Willie Keeler famously advised to 'Hit 'em where they ain't.' 'Wee Willie', as he was called, stood 5'4'' and weighed-in at only 140-lbs, but nonetheless had 13 straight seasons batting over 0.300 and a career 0.341 for the Baltimore Orioles, the New York Giants and Highlanders. In the oilpatch, where 'they ain't' is where the investors haven't ploughed capital and consequentially pushed-up share prices to the point of diminishing remaining upside potential. Like Willie himself, we primarily find these names at the small-cap end of the spectrum. Within our coverage group we see the greatest return potential today in SVY, WRG [Western Energy Services Corp.], BDI [Black Diamond Group Ltd;], and SDY [Strad Energy Services Ltd.]. Of the more liquid stocks, we'd highlight TDG, FRC [Canyon Services Group Inc.], SES, and to a lesser degree given recent share price performance, CEU."

He added: "Canadian drillers have underperformed their U.S. counterparts by about 18 per cent over the last 90-days. We attribute this to the prevailing view that U.S. drilling and the underlying plays are more economical so they will recover faster and more durably than in Canada. This isn't a new thesis; it's gained varying degrees of traction in the market during the early stages of just about every cycle we can remember. Indeed, it would make for a very sensible argument, were it not for the bulk of evidence to the contrary. Confining ourselves to the current cycle, the Canadian rig count today is down less from its 2014 peak, up more from its late-May bottom, and down less year-over-year than the US onshore rig count – and by convincing margins. This, coupled with the more than 60 per cent U.S. and international concentrations in each of ESI, PD, and TDG, simply doesn't square with the stock performances. As such, Wee Willie might have suggested looking for returns in the Cdn driller space too. We highlight SVY, TDG, and WRG as having he most upside potential within their existing asset bases, and ESI and SVY showing the best balance between upside potential and downside risk. Of course, PD with its US listing is a favorite go-to for U.S. investors seeking a proxy for the Canadian drillers as well."


Long-term investors should take a look at Sandvine Corp. (SVC-T), said Desjardins Securities analyst Maher Yaghi.

"For investors who can tolerate short-term volatility but are looking for a long-term growth company with strong cash flows and a solid balance sheet, we believe SVC fits the bill," he said. "In our view, SVC is well-positioned to be a key player and grow its business during the next network upgrade cycles in both wireless and wireline. It could also become a prime takeover target for established hardware firms looking for a strong software IP platform."

Accordingly, he upgraded the Waterloo, Ont.-based tech company to "buy" from "hold."

On Thursday, Sandvine reported a third-quarter 2016 drop in revenue of 4.3 per cent year over year, in line with consensus projections as well as a company warning issued three weeks ago.

Mr. Yaghi said that warning caused a "sharp" drop in share price, which now presents an opportunity for investors.

"Moreover, we believe SVC has significant revenue growth opportunities given its strong focus on software development," he said. "We believe the telecom industry's hardware-focused network topology is becoming more software dependent, with network function virtualization taking centre stage, providing SVC with both better product positioning and access to a bigger end market. In the meantime, the company has a strong cash position with about $1.15 per share in excess cash and a 8-per-cent free cash flow (FCF) yield after deducting excess cash. This should allow SVC to aggressively buy back stock. We forecast repurchases of $24-million (U.S.) in FY17."

He added: "Revenue growth was negative for the first time in four quarters, and we note that revenue volatility has pressured the share price in the past. We believe the revenue decline this quarter could put pressure on the name in the short term. However, we note SVC signed nine new customers, up from eight new clients signed a year ago in a seasonally low-activity quarter. The customer base remains well-diversified, with no customer or reseller accounting for more than 10% of revenue for the second consecutive quarter. This low level of client concentration has rarely happened in the past despite continuous improvement in recent quarters, and should lead to lower revenue volatility in the future, in our view."

Though Mr. Yaghi lowered his revenue projections for both 2016 and 2017, he did raised his full-year 2016 adjusted earnings per share estimate by 1 cent (U.S.) to 12 cents.

"We see SVC's sustained strong cash generation as very attractive, providing management with the opportunity to pay dividends and maintain a strong buyback program," he said. "We also view the product suite as industry leading in a field with solid growth potential. Finally, the recent stock price decline provides a good entry point and leaves little downside in the name, in our view."

Mr. Yaghi maintained a target price of $3.50 (Canadian) for the stock. The analyst average is $3.60, according to Bloomberg.

Elsewhere, Canaccord Genuity analyst Robert Young said the company looks "ripe for a rebound" in the fourth quarter, raising his target to $4 from $3.75 with a "buy" rating (unchanged).

"While product revenue (down 20 per cent year over year) bore the brunt of Sandvine lumpiness and summer seasonal weakness, service revenue (up 21 per cent year over year) was relatively strong," said Mr. Young. "SVC does not quantify the size of its opportunity funnel, but stated they were enthusiastic about its size and quality and noted the presence of large opportunities despite a lack of large customers in the quarter. Investments in sales force, share gains and new products have supported the funnel (60 per cent more opportunities since the beginning of the year) and a surge of new customers (51 year to date versus 38 in 2015). We remain positive on Sandvine shares heading into Q4 due to seasonality and our view that expectations are reasonable. Our confidence is supported by the current product offering, the large number of new customer additions YTD, robust balance sheet with cash representing 41 per cent of the current share price, attractive valuation and a sustainable dividend with 2.3-per-cent yield."


BMO Nesbitt Burns analyst Michael Mazar raised his target price for PHX Energy Services Corp. (PHX-T) following a recent tour of its facilities.

Mr. Mazar said the tour provided insight into PHX's recently announced electronic drilling recorder (EDR).

"While initial impressions of the EDR are promising, the commercialization and roll-out of the product suite is still in early stages," he said. "A combination of intuitive software, modular design and agile engineering (modifying software and adding features due to customer feedback) all bode well; however, these features in themselves are unlikely to be enough to dethrone Pason, the dominant player in Canada, which possesses more than 90-per-cent market share."

"We would be more bullish on the EDR aspect of the PHX story if we felt there was some sort of game-changing element to the Stream offering, which is really what we would like to see in a situation where a company is challenging a competitor with such a solid hold on the Canadian market."

Calling PHX his preferred directional driller, Mr. Mazar did not change his "outperform" rating for the stock. He bumped his target to $5 from $3. Consensus is $4.88.

"A combination of a stronger balance sheet and growing market share position it well, should a sustained recovery in commodity prices and activity level take hold," he said. "While its new EDR product offering is intriguing, we don't see it as a core reason to own PHX at this juncture."


In other analyst actions:

Martinrea International Inc. (MRE-T) was raised to "top pick" from "buy" by Cormark Securities analyst David Tyerman. His target fell by a loonie to $11, versus the average of $11.83.

Encana Corp. (ECA-N, ECA-T) was downgraded to "sell" from "hold" at Société Générale by analyst John Herrlin. His target rose to $9.35 (U.S.) from $8.52. The average is $12.

Tyson Foods Inc. (TSN-N) was downgraded to "sell" from "buy" at Pivotal Research Group LLC by analyst Timothy Ramey. His 12-month target price dropped to $40 (U.S.) from $100 per share. The average is $77.10.

CIT Group Inc (CIT-N) was downgraded to "hold" from "buy" by Stifel analyst Christopher Brendler with a target of $41 (U.S.), up from $40. The average is $40.29.

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About the Author
Globe Investor Content Editor

David Leeder is a content editor in the Report on Business. He was previously Deputy Sports Editor and Weekend Digital Editor at The Globe.  He holds an undergraduate degree from McMaster University and a graduate degree from Ryerson University. More


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