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Friday’s analyst upgrades and downgrades

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

Methanol prices look "stronger-for-longer," said Raymond James analyst Steve Hansen.

Citing recent industry developments and the commensurate surge in prices, Mr. Hansen upgraded Methanex Corp. (MEOH-Q, MX-T) to "outperform" from "market perform."

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"While we continue to expect methanol prices will ultimately retreat from their 'fly-up' highs, unexpected plant outages, surging olefin prices (rising MTO affordability), and shifting greenfield timelines collectively suggest that: 1) windfall current prices will hold longer-than-expected; and, 2) upon their eventual fade, prices are likely to settle much higher than previously expected," he said.

Mr. Hansen admitted his previous downgrade of the stock on Jan. 3 was "too early, plain and simple." Since that time, he said several notable events have occurred that point to higher-than-anticipated prices.That includes significant, unexpected outages across the supply chain, namely in Iran and Oman, that have added upside pressure on regional markets.

"While none of these outages are 'structural' in nature, they clearly reflect a common pattern of vulnerability, and, in Iran's case, raise legitimate questions about the ability of future greenfield capacity to operate," the analyst said.

"We also point to the strong upturn in downstream olefin values that continue to push MTO affordability higher, arguably pointing to a higher 'floor' value once methanol prices eventually retreat."

Mr. Hansen also pointed to reports indicating the start-up of new U.S. greenfield capacity will be pushed back.

"Finally, Methanex posted its Asian contract price for March late yesterday at $500 per metric ton, a stunning $70/mt (16.3 per cent) month-over-month increase," he said. "In addition to trouncing our prior estimate, we believe this posting sets the stage for large increases to follow in both the North American (March) and European (2Q17) contracts in the coming days."

Mr. Hansen raised his 2017 and 2018 earnings per share projections for the company to $6.44 (U.S.) and $3.79, respectively, from $3.28 and $2.80.

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His target price for the stock rose to $60 (U.S.) from $53. The analyst consensus price target is $53.09, according to Thomson Reuters.


Momentum is building for Exchange Income Corp. (EIF-T), according to Raymond James analyst Steve Hansen.

Expecting the Winnipeg-based company to "enjoy increasingly solid EBITDA growth/momentum throughout our forecast horizon," Mr. Hansen raised his rating for the stock to "strong buy" from "outperform."

"While not specifically factored into our model, we believe the company's recently de-levered balance sheet increases the prospects of accretive M&A," he said. "As previously opined, we continue to believe that EIF's distinguished track record, attractive growth opportunities, and enhanced scale make the firm increasingly hard to ignore."

On Wednesday, the company reported fourth-quarter earnings before interest, taxes, depreciation and amortization of $51.3-million, an increase of 11 per cent from the previous year. The result was below both Mr. Hansen's projection of $54.5-million and the consensus projection of $52.7-million. In explaining the miss, Mr. Hansen pointed to one-time weather-related expenses at Perimeter Airlines, one of its regional airlines, of $4-million.

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"Ex-these items, EBITDA would have come in well ahead of our estimate, with upside growth supported predominantly by sustained outperformance at the firm's Regional One and Provincial Aerospace units," he said.

Mr. Hansen called 2016 "impressive" for the company, notably in earnings growth, share-price gains and "strategic milestones." He sees "plenty more ahead" in both 2017 and 2018.

"We believe EIF's outlook looks increasingly solid, underpinned by momentum building at both the company's Aerospace and Manufacturing divisions," he said. "Key factors supporting this view include: 1) definitive signs of growth returning to its beleaguered Manufacturing segment—most notably at Stainless where backlogs have moved sharply higher; 2) sustained growth at Regional One, including the pre-determined acquisition of an additional 5 CRJs in 1H17 (8 already acquired); 3) emerging growth associated with the recent Canadian Fixed Wing Search and Rescue Contract with Airbus; 4) contribution from recently acquired CarteNav and Team J.A.S.; 5) the ongoing expansion of its airlines business into new, Northwestern Ontario markets; and, 6) the recent upsizing ($250-million to $700 mln) of the corporate credit facility and $98-million equity deal which means EIF now has a hefty $415-million in undrawn credit facilities to fund future opportunities."

Mr. Hansen maintained a target price of $48 for the stock. Consensus is $45.92.

Elsewhere, RBC Dominion Securities analyst Derek Spronck downgraded the stock to "sector perform" from "outperform" with a target of $42.00 per share.

Canaccord Genuity analyst Raveel Afzaal lowered his target for the stock to $49 from $49.50 with a "buy" rating (unchanged).

He said: "We believe the company should be valued using enterprise value/next 12 months (NTM) EBITDA multiple, which is above its historical average of 7.0x given (1) impressive long-term track record, (2) significant growth in higher multiple aerospace business, and (3) good visibility on additional growth capital investments that can drive upside to our estimates."


Though he called Canadian Imperial Bank of Commerce's (CM-T, CM-N) first-quarter results "good," Desjardins Securities analyst Doug Young is seeking further clarity on it $3.8-billion offer to acquire Chicago-based PrivateBancorp Inc. (PVTB-Q).

"There was nothing new on CIBC's proposed acquisition of PrivateBancorp (PVTB)," he said. "That said, there were a few interesting discussion points brought up on the conference call. First, the date at which all parties can walk away is June 29. Second, management clearly wants to pursue a US strategy, and it believes PVTB is a good bank but would be a better bank under CIBC. So it is committed to the deal. Third, CIBC's CEO said a few times that it will be disciplined, patient and do what's in the best interest of shareholders. Fourth, if the deal does not go through, it believes there are plenty of organic growth opportunities (1Q FY17 provides some evidence of this point). Fifth, the NCIB that management has applied for gives added flexibility if the PVTB deal does not pan out as management anticipates. That said, the NCIB [normal-course issuer bid] is for only 2 per cent of shares outstanding so it is not an overly material amount, in our opinion."

On Thursday, CIBC reported cash earnings per share of $2.89, ahead of both Mr. Young's expectation ($2.50) and the consensus ($2.59).

"Perhaps more importantly, management believes it can grow adjusted EPS in excess of its 5-per-cent medium-term target in 2017 on an organic basis," said the analyst. "In 1Q FY17, all of CIBC's operating divisions beat our estimates on a segmented basis. Capital markets was the biggest contributor though, with the delta versus our estimate contributing 30 cents to EPS. Cash EPS excludes a 62-cent gain on the sale (and leaseback) of 89 retail properties. Looking forward over 2017, the EPS growth in excess of 5 per cent mentioned by management would exclude the acquisition of PVTB, which could by our math be 1–2-per-cent dilutive over the first full year post close.

He added: "While all operating divisions beat vs our expectations, the biggest driver was capital markets (added 30 cents versus our estimate). In terms of positives: (1) Canadian P&C banking earnings topped expectations for the seventh consecutive quarter; (2) credit was a nonissue; (3) the quarterly dividend was increased 2 per cent (we did not expect an increase); and (4) with an 11.9-per-cent CET1 ratio, it has a lot of capital flexibility (could be used for stock buybacks if the PrivateBancorp (PVTB) acquisition falls apart). However, while we appreciate management's comments about the PVTB deal, the uncertainty around whether the acquisition will go through and whether CIBC will raise its offer remains."

Based on the results, Mr. Young raised his cash EPS projections for 2017 and 2018 to $10.65 and $11, respectively, from $10.08 and $10.69.

He kept a " buy" rating for the stock and increased his target to $126 from $119. Consensus is $118.20.

"We acknowledge there are risks with PVTB; however, we believe these are baked into expectations and the current valuation," said Mr. Young. "Otherwise, the main reasons for our Buy rating are unchanged. First, CM's strategy is clear and easy to understand. Second, management has executed on its domestic banking strategy and we see room for further improvement near-term. Third, we like CM's strategy of having a dividend payout at the top of its 40–50-per-cent target (current dividend yield is 4.2 per cent)."

RBC Dominion Securities analyst Darko Mihelic called it a "great" quarter, however he said his investment thesis hasn't changed.

He kept his "sector perform" rating, raising his target by a loonie to $119.

"Q1/17 results were excellent in almost every regard with low PCLs [provisions for credit losses], strong credit, cost control and decent revenue growth," he said.

"We would revisit the earnings model and valuation with more clarity on PVTB."

Elsewhere, BMO Nesbitt Burns analyst Sohrab Movahedi raised his target to $118 from $108 with a "market perform" rating (unchanged).

"CM is trying to diversify its earnings by growing the contribution from U.S. to [approximately] 25 per cent of total bank in the medium term," he said. "It has announced a transformative U.S. acquisition (terms/closing look to be in flux). Notwithstanding the relative valuation discount, the uncertainty around the acquisition and the above-market residential mortgage growth (housing-related tail risk) keep us guarded on CM."


The management of Loblaw Companies Ltd. (L-T) is executing "well" on its plan, according to Desjardins Securities analyst Keith Howlett.

Calling its fourth-quarter financial results, released Thursday, "solid," he raised his target price for the grocer.

"Loblaw is progressing well on its agenda of tighter management of capital and operating spending, with the objective of returning any excess capital to shareholders," said Mr. Howlett. "We expect modest annual increases to the dividend combined with increasing share buybacks. The operating business is on track to deliver consistent EPS growth, in our view."

Loblaw reported adjusted earnings before interest, taxes, depreciation and amortization of $956-million, topping the analyst's expectation of $953-million. Adjusted earnings per share of 97 cents fell slightly below Mr. Howlett's $1 estimate, which he attributed to effective tax rate and accounting related to the company's consolidation of franchisees.

"Management generated samestore sales growth of 1.1 per cent in grocery, despite internally measured food price deflation slightly in excess of the 2.3 per cent reported by Statistics Canada," the analyst said. "Management is becoming increasingly nimble in operating the levers, perhaps a reflection of improved systems."

Mr. Howlett expressed continue concern about the impact of potential drug reforms, both provincially and federally, on the company going forward. He said those issues are "not fading away."

"Loblaw wrote off $88-millon of Shoppers Drug Mart assets in 4Q16 as a result of changes to prescription drug policies pertaining to long-term care homes in Ontario," he said. "In Quebec, regulatory officials are inquiring into certain aspects of Shoppers' contractual arrangements with pharmacists and drug manufacturers. The Council of the Federation has reduced the reimbursement price of six generic molecules to 15 per cent of branded (from 18 per cent), effective April 1, 2017. The federal health minister is evaluating ways to reduce branded drug costs. This could have a follow-on impact on generic drugs."

Mr. Howlett lowered his 2017 EPS forecast to $4.52 from $4.55 and introduced a 2018 forecast of $4.97.

With a "buy" rating for the stock, he increased his target price to $84 from $82. Consensus is $79.67.

"Loblaw is executing well on its operational and financial objectives. Risks remain elevated, in relation to food price deflation and ongoing drug reform. We expect clarity by late 2017 as to whether governments intend to take dramatic, as opposed to gradual, measures on further reducing generic drug costs. Loblaw is working on new health and wellness initiatives within its pharmacy business; details are not yet known."


BMO Nesbitt Burns analyst Tim Long raised his target price for stock of Apple Inc. (AAPL-Q) ahead of expected changes to its iPhone portfolio this year.

"We believe Apple, which already commands the highest selling prices in the industry, will introduce a higher-priced model (or potentially two) in September alongside the standard iterative refresh to iPhone 7," he said. "We are raising our ASP [average selling price] estimates in conjunction with the higher mix and are now above the Street for FY2018.

"We expect some cannibalization of both regular and large-screen models but still model 11 million of net incremental unit growth in the first 12 months, which would make the upcoming cycle the most successful refresh cycle since iPhone 6 was launched in 2014."

Mr. Long increased his earnings per share projection for the second quarter of fiscal 2017 to $2.06 (U.S.) from $2.03. His full-year 2017 and 2018 estimates rose to $9.13 and $10.40, respectively, from $8.99 and $10.15.

He kept his "outperform" rating for the stock and bumped his target to $160 from $142. Consensus is $139.53.

"As the largest publicly traded company, Apple is continuing the decade-long trend of the biggest player trading at a discount to the market," he said. "However, AAPL shares have been particularly discounted lately, and we base our price target on a reversion to the 10-year mean."


Altus Group Ltd.'s (AIF-T) valuation is "stretched," according to CIBC World Markets analyst Stephanie Price.

On the heels of the release of its fourth-quarter results, Ms. Price downgraded the stock to "underperformer" from "neutral."

"While we continue to like Altus' competitive positioning, we believe that the current valuation has gotten ahead of itself, with the stock trading at 15 times NTM [next 12-month] EBITDA, in line with (or above) pure software peers, despite deriving less than 50 per cent of revenue/EBITDA from software," she said.

On Thursday, Altus reported quarterly revenue of $115-million, in line with the consensus projection ($117-million). Adjusted earnings per share of 38 cents fell 4 cents below the Street's expectation, while EBITDA margins of 19 per cent also missed estimates (21 per cent).

"Altus' premium valuation has been supported by growth in its Analytics division," the analyst said. "However, we note that growth in this division has been slowing over the past several quarters. With Altus Enterprise rolled out to most major clients and maintenance price increases taken, we expect that the next phase of growth may be tougher. We see opportunities and AE expanding into Europe and Asia, but given the primarily greenfield nature of these sales processes, we expect a longer sales cycle and view this as a mid-longer term opportunity.

"While we see Argus on Demand as an opportunity for management to increase recurring revenue, we expect that Altus may experience a cloud transition as upfront license revenue is replaced with lower upfront subscription revenue. Depending on the pace of uptake, we expect that this may also slow growth in Analytics in the near term."

Ms. Price maintained a price target of $28 for the stock. Consensus is $34.38.

Meanwhile, BMO Nesbitt Burns analyst Stephen MacLeod raised his target to $37 from $34 with an "outperform" rating, citing a "positive" outlook for 2017.

"We believe that management continues to execute well, building out its global platform," said Mr. MacLeod. "Momentum at ARGUS continues to be strong, with the higher-value ARGUS Enterprise offering recently surpassing 1,900 customers globally, as the company leverages its technology products to offer a robust data platform along with independence to global commercial real estate owners."


BMO Nesbitt Burns analyst Tim Long downgraded Hewlett Packard Enterprise Co. (HPE-N) to "market perform" from "outperform" under the view there are "no catalysts on the horizon."

"The factors behind HPE's weak results and guidance could persist for several quarters and as the focus shifts to the RemainCo, we expect the shares to stay range-bound," said Mr. Long. "Outside of the divestitures, there are no meaningful catalysts on the horizon, and while that and low valuation could provide support for the shares, there is also not much upside."

He lowered his target to $24 (U.S.) from $27. Consensus is $24.74.


In other analyst actions:

Stantec Inc. (STN-T) was upgraded to "sector outperform" from "sector perform" at Scotia by analyst Anthony Zicha with a target of $40. Consensus is $37.45.

Tree Island Steel Ltd. (TSL-T) was raised to "buy" from "market perform" by Cormark Securities analyst Gavin Fairweather. His target price is $5.25, while the consensus is $5.69.

BMO Nesbitt Burns analyst Andrew Kaip raised Hecla Mining Co. (HL-N) to "market perform" from "underperform" and increased his target to $6.50 from $5. Consensus is $6.65. Mr. Kaip said: "HL reported Q4/16 adjusted EPS slightly below consensus. Taking into consideration the company's improved outlook, reasonable valuation, and free cash flow profile for 2017, we are upgrading the shares."

Credit Suisse analyst Michael Nemeroff upgraded Intuit Inc. (INTU-Q) to "outperform" from "neutral" and bumped his target to $140 (U.S.) from $109. Consensus is $116.88. He said: "[We are] Upgrading shares of INTU ... given our expectations for a normal close to the 2016 tax season, in which we expect the company to at least maintain its share of the tax prep market, and continued strong growth in the company's small business segment, particularly given new and expanded partnerships with financial institutions such as JPMorgan Chase, Wells Fargo, and others."

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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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