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Friday’s analyst upgrades and downgrades

File photo of Canadian Tire Corp. store sign

Jonathan Hayward/The Canadian Press

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

The fourth-quarter results from Canadian Tire Corporation Ltd. (CTC.A-T) drew contrasting reactions from a pair of equity analysts.

In response to Thursday's announcement, Desjardins Securities' Keith Howlett downgraded his rating for the stock to "hold" from "buy," expressing concern about the impact of online retailing on future sales.

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"The risk-reward balance appears less alluring to us," said Mr. Howlett.

Meanwhile, Canaccord Genuity analyst Derek Dley raised his rating to "buy" from "hold" following updates to his sum-of-the-parts valuations, which separates its retail and financial services segments as well as its ownership of CT REIT.

"In our view, the company has done an impressive job of navigating what has been a challenging foreign exchange headwind, and weakness in the Western Canadian economy, and given the strength in the company's balance sheet, we believe there is substantial opportunity to accretively allocate capital," said Mr. Dley.

The retailer reported quarterly earnings per share of $3.46, in line with Mr. Howlett's projection, a penny better than Mr. Dley's estimate and ahead of the consensus expectation of $3.39. It was a rise of 15.6 per cent year over year.

Both analysts emphasized the company's "strong" same-store sales growth. Canadian Tire, Mark's and FGL Sports Ltd. stores rose 8.1 per cent, 10.6 per cent and 5.1 per cent, respectively.

In explaining his downgrade, Mr. Howlett called 2016 "the official end of the square footage era" for the company.

"Canadian Tire has been slowing store count and square footage growth over the last three years, as the transition to digital retailing became the imperative," he said. "The slowdown is also reflective of the high existing penetration of the company's various retail banners across Canada. In our view, 2016 marks the formal end of the era of square footage additions being a prime driver of retail growth. In 2016, Canadian Tire opportunistically converted 12 former Target stores to Canadian Tire, in the process adding two net new stores and enjoying expanded space in the other 10 stores. Canadian Tire now has 500 stores across Canada. FGL Sports also brought its dramatic five-year expansion (and rationalization) of square footage to a close. Management expects very selective store additions or expansion to space going forward. Mark's has no material plans of which we are aware to add to store count.

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"Growth in the digital era will be driven by closer relationships with consumers, differentiated products, in-store and online experience, and higher sales productivity per square foot. Sales productivity will be driven, in part, by growth in e-commerce adding net incremental sales. The challenge faced by successful, established brick-and-mortar retailers is whether, almost by definition, they have too much square footage, now or five years from now. Establishing a successful online business is usually necessary (note, however, that neither Winners nor Dollarama sell online), but is not proving sufficient. By the end of 2015, Nordstrom was generating 21 per cent of revenues online. Its share price performance has, however, been uninspiring. Canadian Tire has continued to prosper despite minimal online sales in categories (clothing, apparel, home goods, sporting goods) which are gravitating to online in the US. Some key categories of products sold at Canadian Tire, such as home improvement, automotive and seasonal, are likely less exposed to online alternatives, in our view."

Citing Thursday's 7-cent-price increase in share price following the earnings announcement, Mr. Howlett lowered his rating. He did increase his target price for the stock to $169 from $164 after slightly raising his 2017 earnings per share estimate ($10.05 from $9.95). The analyst consensus price target is $167.25.

"Canadian Tire has prospered against the strongest U.S. retailers (Walmart, Costco, Home Depot, Lowe's) while many have failed," he said. "It has evolved into a major apparel and footwear retailer, in addition to maintaining leadership in automotive, sporting goods and seasonal products. Square footage growth will no longer be an underpinning of growth in the digital era, with FY16 being the last year of network expansion (albeit modest relative to the growth in prior years). Diversion of sales to online channels may accelerate, and the spectre of that occurring may restrain share valuation."

Mr. Dley said the "wheels keep rolling" for the company.

"In our view, the company has done an impressive job of navigating what has been a challenging foreign exchange headwind, and weakness in the Western Canadian economy," he said. "Over the course of 2016, Canadian Tire was able to deliver same-store sales growth for each banner at or above the targets laid out at the company's 2014 Investor Day. This coupled with gross margin growth, despite the challenging spending environment and foreign exchange headwinds, allowed Canadian Tire to deliver robust earnings growth. Looking ahead, we expect the company to remain focused on productivity initiatives to drive retail ROIC [return on invested capital] towards its 9-per-cent-plus target, although this is likely to come with additional marketing and operating expenses."

Mr. Dley raised his 2017 and 2018 EPS estimates to $10.18 and $10.82, respectively, from $9.93 and $10.55.

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His target rose to $173 from $140.

"Canadian Tire's balance sheet remains flexible, with a slight net cash position at the end of the 2016," he said. "Despite the company's intention to repurchase $550-million worth of stock, a reduced capital expenditure budget will continue to leave Canadian Tire in an advantageous capital position throughout the course of 2017. Therefore, we believe the company may look to acquire smaller brands, licenses or a platform to improve what view as a lagging e-commerce platform. As a result, we are comfortable upgrading our rating to buy …. In anticipation of continued earnings momentum, coupled with the potential for accretive capital deployment, throughout 2017."

Elsewhere, Raymond James analyst Kenric Tyghe raised his target price to $175 with $165 and maintained an "outperform" rating.

Mr. Tyghe said: "As evidenced by the SSS growth, the weather-related anxiety on the quarter was misplaced, in our view, highlighting that the weatherproofing initiatives of the last number of years appear to be over the hump. The data-driven renewed product assortment is clearly resonating with consumers in far more of the store than simply seasonal. While the industrial wear business remains challenging, not only (given both anecdotal recent energy patch hiring activity combined with Mark's results) do we believe the company appears to have cycled the worst, but Mark's merchandising (and pricing strategies) in other categories are resonating."

BMO Nesbitt Burns analyst Peter Sklar bumped his target to $170 from $159, noting: "We continue to find Canadian Tire's valuation compelling compared to other mainline Canadian retailing/consumer stocks, with the implied multiple for the retail business being at 5.4 times our one-year forward retail EBITDA estimate. Given the consistent improvement in results, and the valuation, we continue to rate Canadian Tire shares Outperform."

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It "was a good run" for Sun Life Financial Inc. (SLF-T, SLF-N), according to RBC Dominion Securities analyst Darko Mihelic.

However, based on its valuation and weakness to its MFS Investment Management unit, he downgraded the financial services company to "sector perform" from "outperform."

"Our rating change mainly reflects a challenged outlook for MFS in light of deteriorating outflow trends and ongoing margin pressure," said Mr. Mihelic. "We continue to value SLF using a target price-to-earnings multiple of 12.0 times as we maintain our view of a broadly improving macroeconomic environment and that SLF is well positioned to deliver on higher ROEs and higher earnings growth. We have previously estimated that SLF is the most sensitive to lower U.S. corporate tax rates relative to other companies in our coverage universe (including Canadian banks) – we calculated a 9.6-per-cent upside to earnings following a hypothetical U.S. corporate tax rate cut to 20 per cent (from 35 per cent).

"Over the past 12 months, SLF's stock price has increased by 27 per cent and we see little room for further appreciation at this point in time, absent the U.S. catalysts mentioned above or a material change in the long-term outlook for its asset management business."

On Wednesday, Sun Life reported fourth-quarter underlying earnings per share of 91 cents, which Mr. Mihelic viewed closer to 98 cents after normalizing several items. That result is a penny better than the expectation of both the analyst and the Street. Operating EPS of $1.19 was well ahead of his $1.06 estimate.

SLF Asset Management, which includes MFS Investment Management, reported earnings of $188-million, below his estimate of $197-million. MFS reported "large" net outflows of $9.5-billion (U.S.), which the analyst said was driven by "significantly higher" institutional net outflows of $7.3-billion.

Despite that weakness, Mr. Mihelic said the company's business growth was "solid."

"We view business growth for SLF positively this quarter, as total insurance sales (ex-group) were up 57 per cent year over year in Q4 and wealth sales (excluding SLF Asset Management) were up 47 per cent," said Mr. Mihelic. "AUM [assets under management ] was relatively flat on both a quarter-over-quarter and year-over-year basis, as strong wealth sales ex-SLF Asset Management of $7.8-billion were offset by net outflows of $9.5-billion at MFS. Total new business value was up 13 per cent year over year, which we view positively.

"There was optimism on the outlook for SLF Canada during the conference call, something we were not expecting. SLF noted strong momentum in both sales and retention rates across all Canadian business lines this quarter – particularly in its newer group businesses – which drove SLF Canada EPIF growth of 9 per cent year over year in Q4. The company expects this momentum to continue through 2017-2020, as more of its investments begin to mature and come online. It is targeting SLF Canada growth of 8-10 per cent on a year-over-year basis, with 4-5-per-cent expected from existing core businesses and the balance expected from maturing investments."

Based on the results Mr. Mihelic lowered his core EPS projections for 2017 and 2018 to $3.95 and $4.20, respectively, from $4.05 and $4.35. He said he made the changes to "reflect lower operating margins and higher net outflow assumptions at MFS over our 2017/2018 forecast period."

His target price for the stock fell "modestly" to $51 from $53. Consensus is $54.67.

On Thursday, Scotiabank analyst Sumit Malhotra lowered his rating to "sector perform" from "sector outperform" with a target of $55 from $56.

"SLF has delivered consistently solid operating performance, as evidenced by the fact that its shares have outperformed the TSX Life & Health Insurance Index in each of the past three calendar years," he said. "That said, as we enter fiscal 2017 we are mindful of the fact that (1) MFS is facing structural challenges from a net flows perspective; (2) it is reasonable to expect a more moderate contribution from underlying experience gains; and (3) SLF ranks at the lower end of the group in terms of earnings sensitivity to a higher rate environment. Though we view SLF as a well-managed company, we think the premium valuation accorded to the stock is more likely to narrow than expand from current levels, and as such we are moving to rebalance our lifeco ratings with a move to SP."

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Canaccord Genuity analyst Dalton Baretto feels Capstone Mining Corp. (CS-T) is "fully valued for now."

Mr. Baretto lowered his rating for the stock to "hold" from "buy" based on valuation considerations, however he noted "weakness could create opportunities."

On Wednesday, Vancouver-based Capstone reported fourth-quarter 2016 adjusted earnings per share of 8 cents, topping Mr. Baretto's projection of 5 cents and the 3-cent consensus. He cited lower-than-anticipated depreciation and taxes for the beat.

Earnings before interest, taxes, depreciation and amortization of $72-million was in line with his $73-million estimate.

"Overall C1 cash costs of $1.26 per pound were better than our estimate of $1.35 per pound, due to better cost performance at Cozamin and Minto," he said. "Mine-level All-in Sustaining costs were better than our estimates at all three assets. CS realized losses of $8.5-million on its hedges in 4Q16, versus our forecast of $5.8-million. At an average copper price of $2.70 per pound from February through December, we forecast total losses of $37.1-million in 2017. The company paid down a further $20-million on its credit facility in January, and reduced the overall size to $400-million. Management expects to continue to direct future free cash flow to paying down debt."

Mr. Baretto raised his target for the stock to $1.70 from $1.60. The analyst consensus is $1.67.

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Cenovus Energy Inc. (CVE-TCVE-N) had a "strong" finish to a "tough" 2016, said Alta Corp Capital analyst Nicholas Lupick.

He raised his rating for the stock to "outperform" from "sector perform" based on an increased target price of $25 (up from $24.50) after the release of its fourth-quarter results.

The analyst average price target is $22.60, according to Bloomberg.

On Thursday, Cenovus reported cash flow per share of 64 cents, ahead of Mr. Lupick's 48-cent estimate and the consensus of 49 cents.

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Raymond James analyst Frederic Bastien said he's "losing patience" with Canam Group  Inc. (CAM-T) after "another dismal quarterly earnings release."

Mr. Bastien downgraded his rating for the Quebec-based construction products maker to "market perform" from "outperform," saying its big U.S. pursuits are turning the stock into "roadkill."

On Thursday, Canam reported fourth-quarter 2016 earnings before interest, taxes, depreciation and amortization of $9-million, fell short of both Mr. Bastien's projection of $24-million and the consensus estimate of $26-million. In explaining the miss, the analyst pointed to weaker-than-expected  profitability for its U.S. bridge activities as well as "a worsening operating environment for the Canadian buildings business."

It reported a net loss of 4 cents per share, missing Mr. Bastien's estimate of a 26-per-cent profit and the consensus of a 23-cent gain.

"Canam's 4Q16 results were all the more disappointing considering they materialized even without additional provisions taken on the trophy project that suffered a $32-million after-tax reserve in the first half of 2016," said Mr. Bastien. "Alas, the erection phase is still six weeks away from completion, and management's commentary gave us no good reason to feel particularly optimistic about the project's ultimate outcome. Ditto for the Tappan Zee and Goethel bridges in New York, which are set for completion half way through 2017."

"Canam had previously disclosed following the 2Q16 project cost revisions that it would no longer act as a structural steel contractor for complex, large scale projects. Management is now thoroughly reviewing its bridge activities south of the border, which could lead it to walk away from the sector altogether. We argue the Board should also consider adding to the C-Suite to support Canam's long-term ambitions. While the possible outcomes are many, what investors can be certain of is that lower bridge and heavy structural steel revenues are pretty much guaranteed for this year. This is reflected in a backlog that comprises less than 10 per cent of large-scale jobs, down from 30 per cent a year ago."

His target price for the stock fell to $7.50 from $12.50. The analyst average price target is $8.95.

"Our new target of $7.50 equates to 0.7 times Canam's tangible book value," said Mr. Bastien. "Until we see the bleeding stop, we will value the stock at the low end of its historical trading range."

The stock was raised to "buy" from "market perform" by  Cormark analyst Gavin Fairweather with a target of $9.75, down from $11.75.

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Fairfax Financial Holdings (FFH-T) remains a "show-me story," said BMO Nesbitt Burns analyst Tom MacKinnon.

In reaction to its fourth-quarter results, Mr. MacKinnon lowered his target price for the stock, noting its book value per share of $367 (U.S.) is virtually unchanged since the fourth quarter of 2010.

On Thursday, Toronto-based Fairfax reporting earnings per share of $3 (U.S.), below Mr. MacKinnon's projection of $9. He explained the difference was "due to weaker-than-expected combined ratio of 90.1 per cent (versus our 87 per cent estimate), with the difference worth $2 EPS and $4 EPS loss in the runoff segment, versus our nil estimate. Going forward we see operating EPS of $22 in 2017, for a run rate of $5.50 per quarter."

He added: "Net investment losses of $34 EPS were slightly better than our US$37 loss estimate, and were likely helped by further portfolio repositioning. That said, estimating FFH investment gains and losses is very difficult, especially as the portfolio changes.

"As expected FFH removes the remaining 50-per-cent hedge on its equity portfolio. FFH removed half its $7.6-billion notional hedge Nov. 11 and subsequently removed the remaining portion by the end of Q4/16. While the removal of hedge no longer limits FFH's investment gain in a rising equity market, we prefer to leave our EPS estimates unchanged. Implicit in our 2017 estimated reported EPS of $47 is approximately $23 EPS of investment gains and $13 of interest and dividend income, resulting in a total annual yield on FFH's current bonds and stocks portfolio of roughly 8 per cent, consistent with FFH's 6-per-cent-9-per-cent long-term average."

With a "market perform" rating, he dropped his target to $660 (Canadian) from $730. Consensus is $724.40.

"Deployment of its $10-billion cash position (nearly 40 per cent of its investment portfolio) would obviously improve both interest and dividend income as well as investment gains," the analyst said.

"A 5-per-cent return on the reinvested cash could add $16 (U.S.) EPS to our 2017 estimate and potentially $25 (Canadian) to our share price target. However, given our expectation the move out of cash could be gradual, we prefer to wait."

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Raymond James analyst Steve Hansen raised his target price for Bombardier Inc. (BBD.B-T) stock, citing increased stability and momentum.

Mr. Hansen called the company's fourth-quarter results, released Thursday, "solid" despite a headline earnings per share miss. It reported a loss of 7 cents per share, below his estimate of a 4-cent loss and the consensus of a 3-cent loss.

"Compared to our numbers, the miss was primarily attributable to higher than expected finance expenses," the analyst said. "Despite the headline miss however, we note that EBIT [earnings before interest and taxes] before Special Items ($104-million vs. RJ estimate of $74-million) and Free Cash Flow ($496-million versus $345-million) both came in well ahead of our estimates driven by solid operating margin gains and higher than expected business jet deliveries."

"In conjunction with the 4Q results, management also re-affirmed their 2017 outlook which calls for further operational strides, margin enhancement and a notable $190-million improvement in Free Cash Flow Usage (using the midpoint of BBD's $750-million to $1-billion guidance). CSeries delivery guidance of 30–35 units was also confirmed with BBD notably expressing increased confidence that engine supplier Pratt & Whitney has solved the issues on their geared turbo fan engines and are on track to meet their commitments."

In the release, the company also provided clarity on its $372.5-million interest-free loan from the federal government were also revealed.

"The funds will be disbursed in annual increments of $70–$100-million over four years and thereafter annual repayments will be made based on a percentage of Business Jet revenues and CSeries deliveries. We view this transaction favorably as it provides BBD with another long-term source of capital (approximately 15 years) adding further stability and financial flexibility to the company's operations as it ramps up its two flagship aerospace platforms."

Mr. Hansen raised his target for Bombardier shares to $3 from $2.75 with a "outperform" rating (unchanged). Consensus is $2.70.

"We believe that Bombardier's solid 4Q16 results and re-affirmation of their constructive 2017 outlook serve as another proof point in management's ongoing turnaround strategy," the analyst said. "Despite inherent execution risks in their new aerospace platforms, increased stability in the company's core businesses and continued operating momentum are giving us more confidence in the company's strategy and serve as the basis for our decision to raise our target."

Elsewhere, Desjardins Securities analyst Benoit Poirier increased his target to $2.75 from $2.25 with a "hold" rating.

"While we are positive on BBD's long-term fundamentals (potential value of C$5/share in 2020) and the success of the C Series program, we are maintaining our neutral stance in the short term due to the unfavourable risk/reward profile at current levels," said Mr. Poirier. "The path to FCF recovery is not without risk given the uncertainty around the profitability of the CSeries, softness in the bizjet market and development of the Global 7000."

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In other analyst actions:

Barrick Gold Corp. (ABX-T, ABX-N) was upgraded to "market perform" from "reduce" at Cormark Securities by analyst Richard Gray. He raised his target to $24 from $18. The average is $26.64.

Equity Financial Holdings Inc. (EQI-T) was raised to "buy" from "market perform" by Cormark analyst Jeff Fenwick. He raised his target to $12.25 from $10.50, versus the average of $12.13.

Macy's Inc. (M-N) was upgraded to "overweight" from "neutral" by Atlantic Equities analyst Daniela Nedialkova with a target of $36 (U.S.), up from $31. The average is $34.95.

Reynolds American Inc.
(RAI-N) was downgraded to "hold" from "buy" at Jefferies by analyst Owen Bennett. His target fell to $60 (U.S.) from $62, while the average is $60.16.

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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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