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Friday’s analyst upgrades and downgrades

A Canadian Natural Resources pump jack pumps oil out of the ground near Dorothy, Alta., in this file photo.

© Todd Korol / Reuters

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

Calling Canadian Natural Resources Ltd.'s (CNQ-T, CNQ-N) $12.74-billion acquisition of Athabasca Oil Sands Project holdings from Royal Dutch Shell PLC and Marathon Oil Corp. "very positive" for the company, BMO Nesbitt Burns analyst Randy Ollenberger increased his target price for the stock.

"We estimate that the assets will boost cash flow by roughly $2.4-billion and increase free cash flow by $1.8-billion," said Mr. Ollenberger. "In our view, Canadian Natural provides a unique and compelling investment opportunity that compares very favourably with other oil and gas investments such as shale oil."

"Canadian Natural Resources is nearing a significant inflection point in its ability to generate free cash flow. The completion of expansions to its Horizon oil sands facility should translate to a material increase in cash flow and decline in capital spending that should allow the company to both grow its dividend and generate meaningful organic production growth."

In reaction to the deals, announced Thursday, the analyst raised his 2017 earnings per share estimate to $1.42 from $1.34. His 2018 projection jumped to $2.93 from $2.50.

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"We expect Canadian Natural to deliver significantly more free cash flow over the next several years following the acquisition, as well as the full ramp up of Phases 2B and 3 of Horizon," he said. "We estimate the company can deliver  $2.8-billion of free cash flow in 2017 and more than $5-billion in 2018 while the [debt-to-cash flow] multiple improves to 1.4 times from 2.6 times. On a per share basis, we estimate that the transaction will boost cash flow 14 per cent in 2017 and 17 per cent in 2018, while net asset value increases by roughly $11.60 per share. In 2018 and beyond, we believe that Canadian Natural will shift its focus back to a combination of organic growth and returning cash to shareholders through dividend growth."

With an unchanged "outperform" rating, Mr. Ollenberger's target for the stock rose to $57 from $52. The analyst average target is $52.74, according to Bloomberg.

"At current prices, the shares are trading at a 2017 estimated enterprise value-to-EBITDA multiple of 8.2 times, which is slightly below its peer group average of 8.4 times, despite above-average growth in production and returns on capital," he said. "The shares also imply a 2018 free cash yield (cash flow minus capital spending) of roughly 12 per cent versus a peer group average of only 2 per cent. We believe the shares will outperform with the full recognition of the company's free cash flow generative ability and strong production growth over the next 12 months. Our target price implies a 2018E EV/EBITDA multiple of 7.1x and 3-per-cent discount to our 2018 net asset value estimate of roughly $59."

Elsewhere, Desjardins Securities analyst Justin Bouchard raised his target to $51 from $48 with a "buy" rating (unchanged).

Mr. Bouchard said: "We believe CNQ's acquisition of AOSP is materially positive for the story based on our view that: (1) AOSP is a top-tier project with attractive investment attributes, including a premium mix of upgraded products, effectively no decline and ultra-longlife production; (2) it was acquired at an attractive valuation; (3) it is materially accretive on a per-share basis; and (4) it offers considerable upside through operational synergies and value-add growth opportunities."

RBC Dominion Securities analyst Greg Pardy bumped his target to $60 from $55 with a "top pick" rating.

"We firmly believe that CNQ ought to be a core holding for global energy investors given its compelling combination of visible upstream growth and impressive shareholder returns," said Mr. Pardy. "Overarching all of this is management + directors ownership of some 29.2 million common shares (2.4 per cent following the AOSP deal)."

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IBI Group Inc.'s (IBG-T) growth will stall in 2017, according to Raymond James analyst Frederic Bastien.

In the wake of lower-than-expected fourth-quarter results, Mr. Bastien downgraded the Toronto-based architecture, planning, engineering and technology company to "market perform" from "outperform."

"Management must be commended for saving the business, restoring its profitability and markedly improving its capital structure over the past couple of years," he said. "But with revenue growth slowing and margins shrinking amid mounting UK headwinds, we see the stock trading range bound over the foreseeable future."

On Wednesday, IBI reported quarterly adjusted earnings before interest, taxes, depreciation and amortization of $7-million, below the projection of Mr. Bastien (and the consensus) of $9-million. Earnings per share of 24 cents fell 3 cents below his expectation.

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"Although IBI's top-line of $87-million was $4-milllion stronger than expected, margins disappointed," the analyst said. "EBITDA notably came in at 8.6 per cent of revenue, or 240 basis points off our target, largely on the back of a disappointing operating performance in the UK."

"IBI's UK business continues to suffer from a drop-off in education and health care spending post Brexit vote. Prospects in the U.S. and Canadian transportation sector remains robust, however. IBI is positioned to get a piece of just about every major LRT project slated for development domestically and faces a particularly strong pipeline of work in California. But on balance we believe the former developments, combined with the investment management is earmarking for technology, will net out a slow-growth and lower-margin year for the firm."

Mr. Bastien lowered his 2017 EPS projection to 40 cents from 45 cents, and he introduced his 2018 projection of 50 cents.

His target price for the stock fell to $6.50 from $7. Consensus is $7.25.

"From many perspectives—earnings, DSOs and capitalization—IBI's turnaround has been nothing short of impressive," said the analyst. "But there is still room for more balance sheet improvement. This, at least, is what is implicit in our financial forecasts for the company. Even after considering our more muted growth outlook for 2017, we expect IBI's net debt-to-EBITDA ratio to fall to 2.8 times by the end of the year, versus 3.1 times at the end of 2016 and 4.5 times at the end of 2015. What a difference a couple of years make!"

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Touting the potential of its Taylor Deposit in Arizona, Canaccord Genuity analyst Dalton Baretto initiated coverage of Arizona Mining Inc. (AZ-T) with a "speculative buy" rating.

Mr. Baretto called Taylor, located in its 100-per-cent owned Hermosa Project, a "quality" zinc and lead deposit with strategic options.

"The Taylor deposit, in its current early stage form, contains 114 million tons of Indicated and Inferred resources, grading 11.0 per cent ZnEq [zinc equivalent]," he said. "On that basis, we rank the Taylor deposit as one of the top 25 zinc deposits worldwide, when ranked by tonnage, but just outside the top 10 globally once grades are factored in.

"Given the current size of the resource, as well as the drill results published to date from the large-scale drilling program underway, we believe the Taylor deposit will develop into a producing mine with a 27-year mine life ... Perhaps more importantly, given the dearth of quality zinc projects in the market coupled with the well-publicized deficits forecast in the zinc market over the next few years, we believe Taylor could hold significant strategic value for larger miners hungry for growth and zinc exposure after years of balance sheet re-building. In addition, while our estimates focus only on the conversion and exploitation of the existing resource base, we note the significant land package AZ holds, as well the fact that the deposit remains open for expansion in three directions, step-out holes that have encountered mineralization on patented ground well away from the current resource."

Though Mr. Baretto said his estimates for the company are "subject to significant risk" given the potential for permit and development delays, he said that risk "may not be as high as currently perceived.

"While we acknowledge the significant permitting challenge that lies ahead of AZ, we note several factors that could make this process easier than other mines with well-publicized U.S. permitting issues," he said.

"We note in particular the project's location in a historical mining region with a sparse population, the proposed underground mining method which will limit surface disturbances, the significant effort to initiate production on patented lands only, and the permitting team's track record of success."

Mr. Baretto set a price target of $4 for the stock. The analyst consensus is $3.18.

"At the current share price, AZ trades at just 0.56 times our NAV12%, and 0.41 times our NAV8% versus the base metal producer average of 0.82 times," he said. "We see considerable value in the current share price, given the degree of caution in our NAV estimate, both from an operating as well as a valuation perspective. We note that any relaxation of these restrictive assumptions could further enhance our NAV estimate. We note that AZ has significant catalysts on the horizon, (PEA, March 2017 and Feasibility Study, late 2017), which should go a long way towards crystallizing the value of the Taylor deposit."

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Raymond James analyst Steven Li downgraded Lumenpulse Inc. (LMP-T) following weaker-than-expected third-quarter results.

"While 3Q was seasonally weak, what was disconcerting to us is how much backlog conversion rates slowed down since the beginning of the year (and persists so far in 4Q)," said Mr. Li, moving his rating for the stock to "market perform" from "outperform." "Longer-term growth prospects appear intact, especially with Fluxwerx (office lighting applications) but we expect it is likely going to be volatile nearer term. We are resetting our fiscal 2018 estimates significantly lower as a result. We believe LMP shares will mark time until we start to see conversion rates recover."

On Thursday, the Montreal-based lighting company reported quarterly revenue of $53.1-million, a rise of 49 per cent year over year but below the consensus projection of $56.9-million. Adjusted earnings per share of 10 cents missed estimates by 7 cents.

The company's 2017 guidance was "disappointing" in the eyes' of the analyst.

"Management now expects fiscal 2017 revenue between $205-million to $210-million versus consensus of $230-million and Adjusted EBITDA of 9 per cent to 11 per cent (was 12 per cent to 14 per cent previously)," said Mr. Li. "With three quarters already reported, that implies a substantial shortfall in 4Q despite its seasonal strength. Management highlighted a slowing backlog conversion rate following recent changes in the U.S. political landscape. LMP's realignment of its North American sales force by brand likely led to some disruptions as well. All told, this new dynamic looks short-term in nature. However, given thus far in 4Q we have yet to see an improvement, it may last a few quarters. What is also disconcerting to us is management appears to have been blindsided given, as late as mid-December, there was plenty of confidence in the prior guidance."

He added: "LMP's acquisitions have helped expand its footprint both geographically (UK - AlphaLED, Italy - Exenia) and into new product verticals (500 products, covers 80 per cent of the addressable market). Across the 5 brands, LMP is expecting to launch 17 new products in the next 12 months. Fluxwerx for office lighting applications especially is expected to grow above-market CAGR [compound annual growth rate] of 20 per cent. That said, there is clearly a heightened level of caution given this backlog dynamic. We are resetting our 2018 estimates lower."

Mr. Li's EPS estimate for 2017 fell to 44 cents from 69 cents. His 2018 projection moved to 70 cents from 99 cents with revenue falling to $250-million (from $276-million).

His target price for the stock fell to $14 from $19. Consensus is $19.36.

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Winnebago Industries Inc.'s (WGO-N) turnaround could take longer than expected, said BMO Nesbitt Burns analyst Gerrick Johnson.

In reaction to an almost doubling of its share price in the last year, Mr. Johnson downgraded the stock to "market perform" from "outperform."

"Over the last seven years the RV industry has experienced unprecedented growth, the longest period of uninterrupted expansion over the last 40 years," he said. "In 2016, the industry shipped 430,691 units, 15 per cent year over year growth, and a 160-per-cent increase from the prior trough in 2009. We expect growth to continue in 2017, with industry shipments likely increasing 6.6 per cent. However, we are growing more concerned that Winnebago is missing out on these trends. Changing demographics of the industry are at play here. The two key drivers of the industry are aging Baby Boomers and younger millennial families. However, while these trends have been good for the industry, they have been less so for Winnebago, being that the company over-indexes to high-end motorhomes, especially expensive Class A diesel vehicles. While Core Baby Boomer customers may be retiring and spending their hard-earned wealth, they are also empty-nesters who are downsizing to smaller, easier to handle RVs with fewer 'rooms.' Oftentimes this means a towable RV or a smaller, less expensive motorhome. Meanwhile, younger consumers who are drawn to the camping experience, are generally entry-level customers who tend to buy travel trailers, not motorhomes."

"Winnebago has also been losing share in each of its motorized businesses recently. Its share of the Class A market has declined 240 basis points to 14.6 per cent in calendar 2016 from 17.0 per cent in 2015, according to registration data from Statistical Surveys."

Mr. Johnson lowered his target price to $29 (U.S.) from $40. Consensus is $38.25.

"Previously, our Outperform rating had been predicated on the idea that the company could rapidly grow earnings faster than the RV industry over the next several years as it executes its turnaround centered on enhancing its product offering, expanding distribution, and increasing manufacturing efficiency. However, at this time, we believe it is a good time to take profits as we now believe the next leg of the company's turnaround may take longer to execute than previously expected. Demand for RVs is still very strong, and a tailwind for the industry and the companies like Winnebago who operate within it. However, we are growing more concerned that the company's turnaround could stall owing to a loss of market share, increasing input costs, and labor constraints."

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Element Fleet Management Corp. (EFN-T) was downgraded to "sector perform" from "outperform" at National Bank by analyst Jaeme Gloyn with a target of $14, down from $15. The average is $15.34.

The stock was cut to "hold" from "buy" by TD Securities analyst Mario Mendonca with a $15 target, up from $14.50.

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In other analyst actions:

Chesswood Group Ltd. (CHW-T) was downgraded to "hold" from "buy" at Laurentian Bank by analyst Marc Charbin with a target of $14 (unchanged). The analyst average target price is $14.50, according to Bloomberg.

Sierra Wireless Inc. (SW-T) was downgraded to "underperform" from "neutral" by Macquarie analyst Gus Papageorgiou with a $29 target (unchanged). The average is $29.41.

ZCL Composites Inc. (ZCL-T) was lowered to "hold" from "buy" by analyst Corey J Hammill at Paradigm Capital. His target is $13, versus the average of $13.83.

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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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