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A Labrador Iron Ore Royalty mine.

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

Though he believes it's a "fundamentally attractive oilfield investment," Raymond James analyst Andrew Bradford downgrading his rating for Canadian Energy Services and Technology Corp. (CEU-T).

Citing recent share price appreciation, Mr. Bradford moved the Calgary-based company to "outperform" from "strong buy."

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"From our perspective, CEU checks the key boxes for attractive oilfield investments today: leverage to the highest growth areas in North America – West Texas in the U.S. and the Deep Basin in Canada; strong operational results highlighted by market share growth across its operating regions; management has repeatedly indicated its current results are sustainable without improved commodity prices or improved product prices, and; the stock is priced at a discount to its historical average trading multiple," he said. "Our view is that CEU should be a core holding for oilfield investors, and that the current price is an attractive entry point."

On May 11, CEU reported first-quarter results that topped the expectations of both Mr. Bradford and the Street by approximately 15 per cent. He attributed the "strong" result to its market share growth, particularly south of the border.

"CEU is highly leveraged to West Texas development," he said. "Since CEU closed its acquisition of Catalyst in early August 2016, 43 per cent of U.S. rig activity growth has accrued in the Permian basin and 55 per cent has been in Texas. CEU estimates that it holds a 20-per-cent market share for specialty chemicals in the Delaware Basin, and it's currently providing drilling fluids to 50 rigs in Texas (representing roughly 11-per-cent drilling fluids market share in the region, and 57-per-cent of CEU's U.S. drilling fluids business). We believe that the capitalization of the Permian (the Delaware basin in particular) is still in the early innings, and CEU still has considerable runway to drive increased penetration of its product lines and chemistries within Catalyst's customer base."

Based on the results, Mr. Bradford raised his 2017 and 2018 earnings before interest, taxes, depreciation and amortization (EBITDA) projections by $18-million and $15-million, respectively, to $151-million and $204-million. He also introduced a 2019 estimate of $213-million, which he said should be "viewed as a placeholder which is representative of a largely flat y/y activity environment across North America in 2019."

His target price for the stock rose to $8.75 from $7.50. The analyst consensus price target is $9.42, according to Thomson Reuters data.


BMO Nesbitt Burns analyst Wayne Hood sees a path to better "relative" sales and transaction growth for Wal-Mart Stores Inc. (WMT-N) over the next 12 months "that is unlikely to cause the stock to underperform."

Accordingly, he upgraded the U.S. retail giant to "market perform" from "underperform."

On Thursday, Wal-Mart reported first-quarter earnings per share of $1 (U.S.), above the projections of both Mr. Hood (97 cents) and the Street (96 cents). The result was at the top end of the company's guidance (90 cents to $1) and represented a 2.2-per-cent rise year over year. Gross margin rate was flat year over year, versus Mr. Hood's expectation of a 22 basis points decline.

"There is little to quibble about in the 2017 outlook or the 1Q17 results other than overall expense deleveraged from e-commerce/IT investments (leveraged U.S. stores), as U.S. WMT SSS [same-store sales] were up 1.4 per cent (traffic  up 1.5 per cent) on; 1) low-single digit (LSD) growth in grocery (strongest growth in food categories in more than three years and no impact from deflation, excluding price investments; 2) LSD growth in health & wellness and what we believe was improving SSS in general merchandise throughout the quarter; 3) a growing contribution from e-comm (up 80 basis points) (Sales up 63 per cent /gross merchandise value (GMV) up 69 per cent) pointing to successful unfolding strategies; 4) well-managed broader sequential strategic price rollbacks that emerged in our 1Q17 pricing data research that could have placed unplanned pressure on gross margin (GM) rate (it's unclear how the pull forward of markdowns into 4Q16 from 1Q17 might have benefited GM rate); and 5) SSS inventory that was down 7 per cent. We could argue that the contribution of growth from e-commerce of 80 bps from 4Q16's 40 bps would imply some sequential deterioration in U.S. store sales, but strategies driving on-line sales are behind that deterioration and transactions rose 1.5 per cent.

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"As we look forward, SSS improved throughout the quarter ending with a strong Easter causing us to believe the 2Q SSS guide up 1.5-2.0 per cent and EPS of $1.00-$1.08 (BMO $1.07) is achievable in a difficult period. We believe the company has control over expense growth that is likely to lead to expense leverage potentially as early as the 3Q17 and see potentially moderating erosion or even expansion in EBIT margin rate. That said, annual EBIT margin rate is likely to remain flattish in the coming years on growth in lower margin e-commerce and price investments."

Mr. Hood raised his 2017 EPS projection by 3 cents to $4.37, while his 2018 estimate increased by a penny to $4.60.

His target price for the stock jumped to $80 from $63. The analyst average is $80.04.

Elsewhere, RBC Dominion Securities analyst Scott Ciccarelli said it was "another solid performance hampered by ongoing investments."

With an "underperform" rating (unchanged), his target rose to $74 from $67.

"Despite the difficult environment and Walmart's already massive size, the company continued to generate low-single digit comps and traffic growth, sustaining a 2.5-plus year pattern," said Mr. Ciccarelli. "However, further investments in price, labor, and technology continue to weigh on margins. We believe the company is making good, smart strategic decisions, but investment spending will likely limit future profit growth and share appreciation."


Shares of Labrador Iron Ore Royalty Corp. (LIF-T) have not yet "adequately" reflected the decline in iron ore prices since early April, according to Credit Suisse analyst Robert Reynolds.

Forecasting prices to continue to fall over the next 12 months, Mr. Reynolds downgraded the stock to "underperform" from "neutral."

"LIF.TO is closely correlated to the iron ore price," he said. "While LIF did not fully participate in the run-up in iron ore prices in late 2016/early 2017, recently it has also not fallen as sharply. Based on its recent correlation this would suggest near-term downside to $15 per share."

Mr. Reynolds lowered his target to $16.50 from $20. The average is $19.10.

"Since 1997 LIF has traded at an average 6.58-per-cent yield on its base dividend and 8.31-per-cent yield on its total dividend payout including special dividends," he said. "We view LIF as a yield play because its investors are primarily income-oriented funds and retail investors. Additionally, the company's strategy is to distribute 100 per cent of cash flows generated from its long life IOC assets rather than pursue diversification or growth. LIF is currently trading at a 5.48-per-cent dividend yield on its C$1/sh basic dividend and 9.21-per-cent yield based on our $1.68per share total dividend estimate for 2017 including 68 cents per share of special dividends (including 25 cents per share already paid in April). Special dividends are dependent on distributions from IOC to its equity owners, including LIF at 15.1 per cent."


RBC Dominion Securities analyst Matthew Hedberg lowered his rating for Symantec Corp. (SYMC-Q) on the heels of a "strong" run, suggesting significant earnings per share upside in fiscal 2018 is "unlikely."

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He moved the California-based cyber security company to "sector perform" from "outperform" after a "significant" re-rating of the stock over the past year. The company's share price has jumped by almost 80 per cent since 2017 lows and is up 24 per cent year to date.

"We feel investors are pricing in best-case FY/18 EPS expectations of $2.00 following recent results where guidance increased to $1.75-1.85," said Mr. Hedberg. "Staying intellectually honest, when we upgraded the stock, our bull case was $30 or 15 times $2.00, which is where we are today. While we think business is largely progressing as planned (although more upside was expected from the prior quarter) and could benefit from a better security spending environment, SEP 14/enterprise endpoint consolidation, the Blue Coat refresh/cross-sell opportunity and additional LifeLock synergies/a consumer business re-rating, we think much of this is captured in buy-side expectations as upside to shares could be more-or-less in-line with the market."

Believing incremental EPS gains could prove "more challenging," Mr. Hedberg said: "1) although Blue Coat is in front of a significant refresh cycle, we wonder if a shift to more ratable revenue could impede additional revenue/EPS upside; 2) if the stock continues to move higher, the company will face additional, albeit smaller, share count dilution from the convert; 3) with $6.9-billion in debt and $4.2-billion in cash, we wonder about the mix of debt repayment to stock repurchase as we imagine deleveraging the balance sheet could be a priority; 4) while we don't necessarily expect a negative outcome from the Google/SSL dispute, it could represent a short-term headwind to sentiment given the potential revenue/EPS impact that is difficult to quantify."

He dropped his target price for the stock to $32 (U.S.) from $34 "on peer-group compression which assumes 16 times calendar 2018 EPS as we could get constructive on a better entry point." Consensus is $32.79.


Based on a "stronger" quarter and "increased conviction in the model transition," RBC Dominion Securities analyst Matthew Hedberg upgraded Autodesk Inc. (ADSK-Q) to "outperform" from "sector perform."

"While the stock has had a strong move year to date, we think the path to $150+ in two years could be reasonable given increased conviction in our estimates as upside to sub adds and quarter-over-quarter ARPS [annualized revenue per subscription] growth starting in the 2H/18 seems reasonable," he said.

On Thursday, the San Rafael, Calif.-based design software and services company reported first-quarter revenue and earnings per share results that exceeded guidance. Margins and billings also topped expectations.

"Full-year guidance was maintained for all metrics which in our mind, de-risks the 2H/18," the analyst said. "CFO [cash from operations] was the only item to pick on at $45.2-million versus consensus of $147.6-million, likely a modeling/linearity issue as it was above internal expectations. Net sub adds of 186K were a record and well above consensus of 134K benefiting from 44K EBA [Flexible Enterprise Business Agreements] subscribers from deals signed in Q4 as well as 26K subs from a 30-per-cent discount on a 3-year subscription versus 28K subs adds from a 70-per-cent discount year over year (provides confidence in sub adds with diminishing discounts). Cloud subscription additions grew by +4-times year over year with particular strength in BIM and Fusion 360."

Mr. Hedberg's target for the stock jumped to $125 (U.S.) from $95. The analyst average price target is $110.06, according to Bloomberg data.

"Starting in June, the 2M maintenance customers upon renewal can move to subscription for a loyalty discount of 60 per cent less than the cost of a new product subscription," he said. "Q2 may be a trough for ARPS and a quarter-over-quarter decline in sub adds but we expect a stronger 2H/18 and improving ARPS driven by 1) improving maintenance ARPS mix due to lower churn on large customers; 2) more enterprise deals; 3) higher mix of collections; and 4) the 5-per-cent price increase as customers move from maintenance. This is somewhat offset by cloud, which is positive for long-term growth and net-new TAM, but is a near-term headwind to ARPS."

Meanwhile, Canaccord Genuity analyst Richard Davis increased his target to $120 from $105 with a "buy" rating.

"Obviously, Autodesk has to execute every quarter, but this calendar year's results will go a long way to proving, or invalidating, our assessment that $6 and perhaps $11 per share in FCF is a reasonable target for calendar 2019 and 2022," he said. "The reason is that the conversion rate to cloud sets the foundation and trajectory of the firm's growth over the next few years. If anything has changed since the CEO departure, it is a more aggressive pricing model, a 'velvet hammer' if you will, to encourage existing customers to transition to Autodesk's cloud versions. The fact is we have no sympathy for end users who have pirated (certainly) or even are still using 5-plus year old software – therefore the forced march to software with greater functionality, ease of use and security is welcomed. Autodesk is progressing along a well-trodden path blazed by Ultimate, Aspen, Adobe and others, so we suppose this is more of a case of when, not if, Autodesk reaches those profitability levels. The fact is that for the 15 years that we have followed this company, we always felt the firm underperformed on margins given its impressive technological and go-to-market competitive moat. A model flip and economic sensitivity makes Autodesk the most aggressive of our four favorite large cap GARP stocks. Even so, the firm is still in the top decile of stocks we track."


In other analyst actions:

Cormark Securities Inc. analyst David Tyerman upgraded ATS Automation Tooling Systems Inc. (ATA-T) to "buy" from "market perform" and bumped his target by a loonie to $14. The analyst average target is $14.30.

Berenberg analyst Fawzi Hanano upgraded Lundin Mining Corp. (LUN-T) to "buy" from "hold" with a target of $9, up from $8. The average is $9.78.

Scotia Capital analyst Ovais Habib raised Richmont Mines Inc. (RIC-T) to "sector outperform" from "sector perform" with a target of $12.50. The average is $14.45.

Stifel analyst Kevin Cassidy downgraded ViXS Systems Inc. (VXS-T) to "hold" from "buy" with a target of 35 cents, down from $2.25. The average is 40 cents.

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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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