Friday's analyst upgrades and downgrades

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

Toronto-Dominion Bank (TD-T) is "well set up" to reap the rewards of stronger growth in the United States, said RBC Dominion Securities analyst Darko Mihelic.

On Thursday, TD reported U.S. personal and commercial banking (P&C) earnings, excluding TD Ameritrade, of $689-million, exceeding Mr. Mihelic's projection of $667-million.

"Earnings growth was good but below BMO and BNS's U.S./International earnings growth this quarter," the analyst said. "Overall loan growth was solid (although BMO's was slightly stronger when excluding their indirect auto portfolio which had a sale in the quarter), efficiency improvement was also good, although provisions for credit losses were significantly higher year over year and net interest margins (NIM) declined this quarter. TD indicated that the decline in NIM was driven by the accounting impact of hedging on net interest income but excluding this impact, NIMs were up 1 basis point quarter over quarter. TD reiterated that it expects NIM improvement in 2017, and additional U.S. rate hikes would improve NIMs further. We continue to forecast good growth in this business of 8 per cent on average in 2017 and 2018."

Overall, TD reported quarterly core cash earnings per share of $1.33, four cents higher than the projection of both Mr. Mihelic and the Street.

"Better core EPS this quarter was driven by higher trading and other fee income and slightly better efficiency, despite slightly higher provisions for credit losses (PCL) relative to our estimates," he said. "On a segmented basis, wholesale earnings were the largest driver of the better earnings relative to our estimate. TD increased its quarterly dividend to 60 cents (was 55 cents), in line with our forecast. TD also announced a normal course issuer bid (NCIB) for up to 15 million shares or approximately 1 per cent of total shares outstanding."

Based on the results, Mr. Mihelic raised his 2017 EPS estimate by 7 cents to $5.20. His 2018 projection remains $5.50.

"Our net interest income forecasts move lower but are largely offset by higher forecast trading, market sensitive, and other fee income," he said. "We now incorporate a modest share repurchase assumption of 1.5 million shares per quarter over the next year."

With an unchanged "outperform" rating, he raised his target price for the stock by a loonie to $73. The analyst consensus price target is $69.57, according to Thomson Reuters.

"In our view, valuations for TD remain fair – at this time, we are not overly bothered by weaker Canada P&C results this quarter – TD tends to deliver on its promises and is strongly suggesting positive operating leverage in the second half of 2017," said Mr. Miheloc. "TD trades at 13.3 times our 2017 estimated core EPS or a 12-per-cent premium relative to the other large Canadian banks that we cover versus a historical premium of 6 per cent.

"TD has a relatively smaller wholesale business than peers and thus if the outlook for this business remains strong, TD will likely benefit less than peers in our view. Wholesale earnings was surprisingly the largest driver of better EPS relative to our estimates on a segmented basis and TD reported the best wholesale earnings growth (66 per cent year over year) versus peers (33 per cent) this quarter. We are forecasting more modest earnings growth of 3 per cent on average in 2017/2018."

Elsewhere, Desjardins Securities analyst Doug Young raised his target price to $72 from $68 with a "hold" rating.

"Cash EPS beat our estimate and consensus, but we believe the market was expecting all banks to beat, and the variance for TD was the second lowest of the group," he said. "There was a mix of positives and concerns, as discussed in our note, but nothing to change our views."

"TD's U.S. retail operations stand to benefit from improved U.S. economic conditions and higher interest rates. Expenses related to investments in its retail operations (mostly in Canada) should tail off in 2H FY17. However, near-term we expect expenses to remain elevated. And we still lack clarity on TD's interest rate sensitivity."

BMO Nesbitt Burns analyst Sohrab Movahedi raised his target to $72 from $66 with an "outperform" rating.

"Contributing to TD's positive growth momentum has been better fee income growth (card fees; services charges) and, more recently, improving NIMs, helped by product mix notwithstanding continued competitive dynamics," he said.

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RBC Dominion Securities analyst Greg Pardy raised his target price and reiterated his "top pick" rating for Canadian Natural Resources Ltd. (CNQ-T) in reaction to its fourth-quarter financial results.

"Canadian Natural Resources is walking the talk when it comes to balancing upstream growth and shareholder returns," said Mr. Pardy. "Indeed, commensurate with its broadly in-line fourth quarter operating results, CNQ rang the bell on two fronts—raising its dividend by 10 per cent and announcing a normal course issuer bid. On its conference call, the company also pointed towards Horizon oil sands operating costs which should drop to sub-$20/barrel at the end of 2017 (previously a 2020 target). This is a big deal in our books—and has boosted our 2018 cash flow outlook by circa $300-million (27 cents per share)."

On Thursday, the Calgary-based company reported operating earnings per share of 40 cents, far exceeding Mr. Pardy's projection of 11 cents and the consensus of 14 cents. Cash flow per share of $1.50 topped his expectation of $1.26 and the Street's estimate of $1.29.

Mr. Pardy said CNQ's "most important potential catalyst" is the performance of its Horizon Oil Sands project.

"The crown jewel of CNQ's portfolio remains Horizon— which produces a 34° API light sweet SCO barrel at a 2017 operating cost range of $24-$27 per barrel," he said. "In the wake of its 2B (45,000 bbl per day) expansion phase last year, Horizon has been performing above current design capacity of 182,000 bbl/d. Indeed, Horizon supported 195,000 bbl/d of SCO production in January, and 202,600 bbl/d in February—with operating costs that have averaged $22.50/bbl over the same period. Horizon Phase 3 (80,000 bbl/d) was 89-per-cent physically complete as of Dec. 31, will absorb about $1.05 billion of growth capital this year, and remains on track to come on-line in the fourth quarter."

Based on the results, Mr. Pardy raised his 2017 operating EPS and CFPS estimates to $1.60 and $6.97, respectively, from $1.44 and $6.88. For 2018, his projections rose to $2.68 and $8.65 from $2.29 and $8.26.

His target for the stock rose to $55 from $52. Consensus is $48.50.

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Better execution and lower expenses will drive SNC-Lavalin Group Inc. (SNC-T) in 2017, according to Canaccord Genuity analyst Yuri Lynk.

"A sharp focus improving project bid discipline and execution, combined with aggressive SG&A expensive reductions continue to drive more consistent, predictable bottom-line results," he said. "In fact, SNC is in the minority of E&C companies that have achieved their initial guidance in each of the last two years despite volatile commodity prices. We believe this will eventually lead to a multiple re-rating."

On Thursday, SNC reported revenue and adjusted earnings before interest, taxes, depreciation and amortization for its engineering and construction business of $2.146-billion and $108-million, respectively, which are declines of 17 per cent and 25 per cent year over year. Mr. Lynk's projections were $2.155-billion and $112-million. A gross profit margin of 14.4 per cent topped his estimate by 1.4 pent, representing a 0.9-per-cent improvement from the previous year.

"SNC initiated 2017 E&C adjusted-EPS [earnings per share] guidance in a range of $1.70 to $2.00," the analyst said. "At the mid-point, this represents 22-per-cent year-over-year growth from the $1.51 in E&C adjusted-EPS achieved in 2016. However, to be fair, if the aforementioned O&G cost reforecast had not occurred, full year E&C adjusted-EPS would have been $1.86. When looking at revenue compared to 2016, we note $400-million was associated with the French and Real Estate Facility Management businesses that were sold late last year. So we're now modeling approximately flat year-over-year pro forma E&C revenue with profit growth coming from $100 million in G&A savings that were implemented in Q4/16 and better execution.

"The Q4/16 book-to-bill was 0.9-to-1.0 and backlog stood at $10.7-billion versus $10.9-billion last year (after adjusting for the sale of non-core assets). The O&G segment had a book-to-bill of 1.3-to-1.0 after it booked numerous contracts in the Middle East. Looking ahead, management was upbeat on the prospects for 2017 I&C bookings given SNC is shortlisted on the Massey Bridge, the Gordie Howe Bridge, the Finch West LRT, and REM."

Based on the new guidance, Mr. Lynk dropped his 2017 and 2018 E&C EPS estimates to $1.85 and $2.25, respectively, from $2.10 and $2.50.

"Our model assumes a 6.3-per-cent E&C EBITDA margin in 2017 and 6.9 per cent in 2018," he said. "We believe 2017 will feature material backlog build that should lead to strong organic EPS growth in 2018."

With a "buy" rating, his target price for the stock fell to $64, which is the current consensus target, from $67.

"SNC currently trades at 14.5 times 2017 estimated E&C adjusted-EPS compared to Fluor (FLR-N, 'hold' rating) and Jacobs Engineering (JEC-N, not rated), two other E&C's that are executing relatively well, at 18.8 times," the analyst said. "Our target is based on 16 times 2018 estimated E&C EPS plus $25.00 (aftertax) for 16.8 per cent of Highway 407 and $3.00 for the remaining Capital portfolio."

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CIBC World Markets analyst Robert Sedran upgraded his rating for Canadian Western Bank (CWB-T) in response to its first-quarter earnings.

"Our rating on this bank has been driven almost entirely by concerns over the top line," said Mr. Sedran. "To be sure, we figured on some pressure on the loan loss front, but based on a strong underwriting history and its business mix, we always figured loan losses would be fairly well controlled. Loan growth and margin pressure, however, were expected to be more challenging. That has generally been the case as without the acquisition assist, loan growth performance has been decidedly un-CWB like of late. In fact, this quarter it was actually negative sequentially as paydowns accelerated and demand for new loans remains weak. The offset this quarter was the margin, where the paydowns actually helped and the deposit mix was more favorable.

"As a result, net interest income came in ahead of our forecast (albeit for an undesirable reason). Management expects loan growth to begin to reaccelerate in H2/F17 and also seems comfortable that the margin pressure that may return in coming quarters will be modest. Our numbers come up slightly to reflect some of that improving asset growth picture, though there is no question that the next couple of quarters may still be challenging from a revenue perspective. In other words, while our view is no longer negative, we do not see an imminent turn in financial performance and so it may yet prove too early to be positive."

His rating moved to "neutral" from "underperformer" and his target price for the stock increased by a loonie to $32. Consensus is $30.90.

Desjardins Securities analyst Doug Young said he likes the long-term growth potential for CWB, based on a greater focus on commercial lending.

However, in reacting to its first-quarter financial results, Mr. Young said the bank's exposure to "more challenged regions like Alberta" is likely to remain a significant near-term overhang for the stock.

On Thursday, the bank reported cash earnings per share of 61 cents for the quarter, exceeding the estimates of both Mr. Young and the Street by 2 cents. Net interest margins of 2.47 per cent exceeded Mr. Young's 2.36-per-cent estimate, which was also the fourth-quarter result and represented a 1 basis-point decline year over year.

"A favourable change in deposit mix (more branch-based) positively impacted NIMs (up 6 basis points year over year) and pre-payment penalties (up 5 basis points year over year)," he said. "Management expects FY17 NIMs to be in line with FY16, implying average NIMs in the 2.40-per-cent range over the remainder of FY17.

"With a CET1 ratio of 9.5 per cent, it is comfortably capitalized, and evaluating acquisitions remains an option (likely in asset management. Excluding acquisition-related charges, the NIX ratio was 46.0 per cent versus vs our 47.0-per-cent estimate. However, management expects the NIX ratio to fluctuate at levels moderately higher than 46.0 per cent going forward."

Mr. Young pointed to a pair of concerns coming from the results, noting: "On a period-end basis, loan growth was 7 per cent year over year or 10 per cent year over year on an average basis. Last quarter, management expressed confidence that loan growth would remain in the double digits, but now expects growth in FY17 to fall below this threshold. The biggest driver was contraction in Alberta, British Columbia and Saskatchewan, and in the commercial mortgage and equipment financing and leasing segments. It would appear loan paybacks are a bigger drag than what management anticipated last quarter.

"The PCL rate of 0.27 per cent was above our 0.25-per-cent estimate, although it was in line with management's guidance of 0.25–0.35 per cent. Of this, 0.12 per cent related to a single fully resolved loan and 0.08 per cent to an increase in collective allowances."

Mr. Young kept his "hold" rating for the stock and raised his target by a loonie to $32.

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Citing greater comfort in the growth dynamics of its hotel business, Citi analyst Mark May upgraded Expedia Inc. (EXPE-Q) to "neutral" from "sell."

"Since we initiated coverage with a pair trade idea (Buy-rated Priceline Group Inc. and Sell-rated EXPE) on Jan. 10 PCLN shares are up 13 per cent versus 1 per cent for EXPE," said Mr. May. "In addition, our EXPE thesis was also overly conservative in four main areas: 1) we underestimated how much of the earnings downside risk that we highlighted at the time of the initiation was already known and priced in (note that consensus CY17 adjusted EPS forecasts have declined by 14 per cent since our initiation, while the stock has increased 1 per cent); 2) we underestimated how much and how quickly core room nights growth would improve (e.g., up 16 per cent year over year in 4Q16 versus 11 per cent in 3Q16); 3) recently disclosed room night and bookings growth at HomeAway provides a more bullish backdrop to this business' long-term growth outlook; and 4) we overestimated the near-term losses at Trivago. For these reasons, we no longer see sufficient downside to warrant a Sell rating or a pair recommendation (PCLN/EXPE) and, thus, are changing our rating for EXPE."

Mr. May raised his target price for Expedia stock to $130 (U.S.) from $116. Consensus is $140.97.

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