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Friday’s analyst upgrades and downgrades

Customers arrive at the Canadian Tire store in North Vancouver, B.C. on February 10, 2011.

Andy Clark/REUTERS

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

Believing the timing of improvements for Element Fleet Management Corp. (EFN-T) is "uncertain," Credit Suisse analyst Nick Stodgill downgraded his rating for its stock to "neutral" from "outperform."

"With EFN shares down 32 per cent year to date  and management significantly reducing 2017 EPS guidance we acknowledge that the set-up into H2/17 could be favourable," he said. "However, we believe overcoming execution-related challenges and a re-rating will take several quarters."

On Thursday, the Toronto-based company reported adjusted basic earnings per share of 23 cents, 2 cents less than Mr. Stodgill's expectation and a penny less than the Street consensus.

The company's full-year EPS guidance now sits at 71-73 cents, which implies flat earnings for the second half of the fiscal year.

To reflect the guidance, the analyst's EPS projections fell to 90 cents and 91 cents, respectively, from $1 and $1.09.

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His target price for the stock fell to $10.50 from $13. Consensus is $13.46.

"We remain positive on EFN's core Fleet business which has scale, a diversified client base and an attractive recurring revenue stream," said Mr. Stodgill. "Currently trading at 1 times price-to-book we see upside if execution improves and issues noted above are addressed."

Elsewhere, Raymond James analyst Brenna Phelan downgraded the stock to "outperform" from "strong buy" with a $13 target, falling from $16.

"We believe that EFN's core fleet management offering represents a compelling value proposition of cost savings and profitability improvement, and that its target market of in-house managed fleets is large, underpenetrated and becoming increasingly likely to outsource," said Ms. Phelan. "Strong customer retention throughout a very challenging integration of the GE Fleet business serves to reinforce how sticky this business is. While our long-term favorable view of this business is unchanged, we underestimated the pressure it has been facing since the GE acquisition across all key earnings drivers and our expectations for improvement are now both delayed and less optimistic. We utilize EFN's new disclosure for core and non-core earnings to forecast 2018E Adjusted EPS, and calculate our target price using a blended multiple on these earnings streams. Our target comes down to $13, from $16 previously. Although there is 54-per-cent upside to our target price, our less constructive outlook leads us to lower our rating to Outperform."

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Though its profit results fell below expectations, Canaccord Genuity analyst Doug Taylor called Computer Modelling Group Ltd.'s (CMG-T) first-quarter 2018 financial results "somewhat encouraging."

On the heels of Thursday's 0.5-per-cent share price rise in reaction to the quarterly report, Mr. Taylor raised his rating for the Calgary-based company's stock to "hold" from "sell" as it's "moving through the trough."

"There is increasing evidence that the company has found some stabilization in its recurring revenue base and may soon return to more consistent positive year-over-year comps even with oil in the $45-50-million range," he said. "Taking into account the recent share price weakness, we now see the risk/reward potential for the stock as more balanced for a very high-quality and well-managed company that still carries a very high valuation."

On Thursday, CMG reported quarterly revenue of $19-million, ahead of the $18.5-million projection of both Mr. Taylor and the Street, due largely to improved software license revenue. However, earnings before interest, taxes, depreciation and amortization (EBITDA) of $7.4-million missed the consensus expectation of $8.6-million, mainly as a result of one-time costs stemming from its new headquarters.

Mr. Taylor pointed to "positive" data points that suggest momentum in deferred revenue for the company noting: "The recurring annuity/maintenance revenue delivered its first year-over-year increase on a normalized basis (adjusted for FX and catch up revenue) since Q4/F15. We had modeled 5-per-cent year-over-year growth considering easy comps and strong perpetual licenses revenue witnessed last quarter translating to recurring revenue. The improvements were driven by upselling activities in the U.S. and continued strength in the Eastern Hemisphere, partially offset by still weak Canada and South America. Looking past the mixed Q1/18, we remain cautious on the end market demand but do see some fundamental improvements."

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The analyst raised his full-year fiscal 2018 revenue projection based on improved deferred revenue and "improving" fundamentals. However, his EBITDA estimate fell slightly to $34.5-million, also the consensus, from $35.3-million due to higher operating expenses. His EPS expectation remains 30 cents.

He also kept a price target of $9 for the stock. The analyst consensus target is $9.81.

"Taking into account the recent share price weakness, we now see the risk/reward potential for the stock as more balanced for a very high quality and well-managed company that still carries a very high valuation," said Mr. Taylor. "As such, we are increasing our rating to HOLD (from SELL) given the close proximity to our unchanged $9.00 target."

Elsewhere, Acumen Capital analyst Brian Pow lowered his target for the stock to $9.75 from $10 with an unchanged "hold" rating.

"We believe CMG's business has stabilized, and the risk for further licensing erosion has diminished," he said.

"An investment in CMG provides exposure to a recovering oil industry; we believe that selling in response to the underlying results ignores the fact that CMG is favorably positioned from a long-term perspective."

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Citing its current valuation and an increased bid slate, Canaccord Genuity analyst Yuri Lynk upgraded his rating for Bird Construction Inc. (BDT-T) despite mixed second-quarter results.

Noting the Mississauga-based company's stock is down 8 per cent year to date, underperforming the S&P/TSX Index (down 1 per cent), he moved it "buy" from "hold."

"What was most apparent in Bird's otherwise in-line Q2/2017 results was that booking opportunities in the institutional market have markedly increased and management's tone was incrementally more positive," the analyst said. "Therefore, we are buyers of recent share price weakness noting that backlog and earnings will likely put in a bottom this year. At 15 times 2018 estimated earnings per share (EPS), we don't find the stock overly expensive in the context of 49-per-cent EPS growth, a 4.7-per-cent dividend yield, and a balance sheet sporting $63-million in net cash."

On Wednesday, Bird reported quarterly revenue of $346-million, below Mr. Lynk's projection of $390-million and a decline of 16 per cent year over year. Earnings before interest, taxes, depreciation and amortization of $5.2-million also missed his estimate ($390-million), while earnings per share of 6 cents fell in line with his expectation.

"Revenue declined in industrial due to the reduction in capital spending by oil and mining clients. Institutional revenue also fell as projects booked in 2015 were completed in the quarter and new projects did not offset the decline," said Mr. Lynk. "Gross margin for the quarter was 5.4 per cent, down from last year's adjusted level of 6.6 per cent reflecting less higher margin industrial work.

"Looking ahead, management noted it expects H2/2017 earnings to compare favorably to H2/2016. We found this reassuring after the dramatic drop witnessed in H1/2017. The book-to-bill ratio in the quarter was 0.99:1.00. Bird booked $341-million in new awards in Q2/2017 leaving backlog at $1.24-billion (down 0.4 per cent quarter over quarter; down 19.5 per cent year over year). Recall, the Niagara Falls Entertainment Centre award, which we estimate is $125-million, will be booked this quarter adding a nice boost to current quarter bookings. Importantly, a number of public private partnership (P3) opportunities have emerged for Bird, reflecting the commitment to address the infrastructure deficit made by various levels of government. Bird has either responded to a request for proposals (RFP) or has been pre-qualified to submit an RFP on a number of projects including the $350-million Stouffville Corridor Project, the $75-million Kipling Bus Terminal, the $125 million OPP Modernization Phase II, the $800-million Residuals Waste Treatment Facility, the $1.4 billion Hurontario LRT, the $3.3-billion Confederation Line Phase II, and the Trillium Line. This bid slate should allow Bird to increase its backlog next year."

Based on that bid slate, Mr. Lynk increased his 2017 and 2018 EPS projections to 37 cents and 55 cents, respectively, from 21 cents and 46 cents.

His target price for the stock rose to $10 from $9.50. Consensus is currently $10.40.

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Following a recent steep drop in share price stemming from the uncertainty surrounding its leadership, Medical Facilities Corp. (DR-T) currently presents investors with an attractive proposition, according to Canaccord Genuity analyst Neil Maruoka.

The Toronto-based company's stock is down almost 24 per cent since the unexpected departure of chief executive officer Britt Reynolds on June.

"Given the steadying outlook, projected 18.4-per-cent annualized return, and support from its 8.5-per-cent yield, we believe that shares look far more attractive at these levels and we are therefore upgrading Medical Facilities to BUY (from HOLD)," said Mr. Maruoka, who called the company's second-quarter results "solid" and confirm his expectations for stabilizing operating margins.

On Thursday, Medical Facilities reported adjusted EBITDA for the quarter was $23.1-million with a 24.1-per-cent EBITDA margin, exceeding both Mr. Maruoka's projection of $22.1-million and 24.3 per cent and the consensus of $21.7-million and 23.8 per cent.

"Revenue grew 25.2 per cent year over year, driven predominantly by the recently acquired Unity facility, as well as organic growth at existing operations; we note that the top-line beat was not attributable to one facility, but reflected a solid performance across MFC's entire hospital portfolio," the analyst said.

"The recent weakness in the U.S. dollar provides significant headwinds for MFC as the company generates cash in USD but trades and pays a dividend in Canada. Following a solid payout ratio of 72.4 per cent in Q2 (compared to our estimate of 73.7 per cent), we now forecast a full-year 2017 payout ratio of 73.1 per cent, still well below the company's target of 80 per cent."

With the results, Mr. Maruoka increased his full-year revenue projection slightly (to $383.5-million from $378.5-million), but his EPS expectation fell to 68 cents from 84 cents due to a $9.8-million non-cash adjustment and an increase in outstanding shares.

His target price for the stock remains $14.50. Consensus is $17.13.

"The stock should find support from its 8.5-per-cent yield," said Mr. Maruoka. "With a forecast payout ratio of 73.1 per cent in 2017; we believe the company still has significant breathing room on its dividend and, with access to almost $100-million of liquidity, can still pursue M&A. Nonetheless, we believe near-term acquisitions are now likely on the back burner until the vacant CEO role can be filled."

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Laurentian Bank Securities analyst Mona Nazir upgraded her rating for NAPEC Inc. (NPC-T), citing "solid" second-quarter results and a "strong" outlook for the second half of 2017.

"Following a challenging 2016 period hindered by delays and project issues, NPC posted strong Q2/17 results marking the second consecutive quarter of organic growth expansion," said Ms. Nazir. "Results were ahead of our forecast which we view positively. We are upgrading the shares to a Buy on the strong result momentum since the beginning of 2017 and continuing strength in the U.S. utility market. We believe that upside to our forecast could exist via a multiple expansion towards the peers' average multiple. However, given the last three years of lackluster results and miss on the strategic plan, we believe time is required for the shares to regain investors' confidence."

Moving the Drummondville, Que.-based company's stock to "buy" from "hold," her target rose to $1.35 from $1.10. Consensus is $1.44.

Meanwhile, Desjardins Securities analyst Benoit Poirier lowered his target to $1.80 with $1.90 with a "buy" rating (unchanged).

"We continue to like NPC and believe the stock is undervalued (trades at 5.3 times our 2018 enterprise value-to-EBITDA estimate versus 7.0 times for peers on average) based on its strong industry fundamentals and cross-selling opportunities with the PCT acquisition," said Mr. Poirier. "We remain confident in management's ability to deleverage the balance sheet, and successfully identify and integrate further M&A opportunities in the longer term."

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Following a steep drop in share price, the near-term impact of Air Canada's decision to terminate its contract with Aimia Inc. (AIM-T) is now priced into its stock, said CIBC World Markets analyst Stephanie Price.

"We continue to see significant risk to Aimia's business model post the expiry of the Air Canada contract in 2020," said Ms. Price. "However, prior to the expiry, we believe the company has a window of opportunity to attract new travel partners, reduce debt and right-size the organization."

She upgraded the Montreal-based company to "neutral" from "underperformer."

"We see significant uncertainty in Aimia's business model post 2020, with cost increasing significantly (up to $200-million if Aimia pays "market fare" on all flights), redemption patterns uncertain (with $2.2-billion in future redemption liability) and $250-million in bonds due in 2019," Ms. Price said. "However, management is working to mitigate these issues by looking for new travel partners (while noting that Air Canada could still be part of the program post 2020), cutting cost ($70-million in cost savings by 2019) and working with existing partners (with the Amex contract expiring in 2018, Nectar in 2019 and TD/CIBC in 2024)."

Her target for the stock fell to $2.50 from $3.25. Consensus is $3.56.

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Low commodity prices and new supply are likely to pressure the operating performance of Boardwalk Real Estate Investment Trust (BEI.UN-T), according to BMO Nesbitt Burns analyst Heather Kirk.

After "another weak quarter," she downgraded the Calgary-based REIT to "underperform" from "market perform"

On Thursday, Boardwalk reported a second-quarter same-property net operating income of 19 per cent year over year. Revenues dropped 6.5 per cent, while expenses rose 13.7 per cent.

"In the majority of markets, the Q2 decline in SPNOI was greater than the previous 4Q average," she said.

The REIT reduced its 2017 FFO guidance by 13 per cent to $2.15 (from a range of $2.10 to $2.20), while SPNOI is expected to decline 19 per cent (versus a previous expectation of a 17-per-cent drop).

Ms. Kirk lowered her target price for units of Boardwalk to $37.75 from $44.50. Consensus is $45.77.

"We see continuing headwinds for the REIT stemming from exposure to resource-based regions and expect this to weigh on operating performance," she said. "Although the suite renovation program is expected to improve NOI in the long term, capital upgrades will require significant capex spending and increased leverage."

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Desjardins Securities analyst Keith Howlett raised his target price for shares of Canadian Tire Corporation Ltd. (CTC.A-T) in reaction to "a strong quarter of financial results under challenging circumstances in 2Q17."

"Canadian Tire's financial results are beginning to reflect the benefits of the technology platform the company has put in place over the last five years," he said. "The Canadian Tire division successfully managed sales, mix and margin through one of the most challenging periods of spring weather in many years, delivering strong financial results. The company is relatively well-developed in many aspects of the digital economy (loyalty, credit, online media, social media, personalization), but still lags with respect to online sales and delivery of orders to home. By the end of 2018, we expect this worrisome weakness will have been remedied."

On Thursday, the retailer reported quarterly diluted earnings per share of $2.81, exceeding Mr. Howlett's estimate of $2.55 as well as the consensus of $2.54. It was an increase of 14.1 per cent year over year.

"The positive variance to forecast ($20.9-million of EBITDA) was driven by the retail segment," the analyst said. "Retail revenue was in line with forecast but gross margin rate improved more than forecast. The improvement in gross margin rate was driven by the Canadian Tire division. Financial services also posted modestly higher-than-forecast EBITDA, driven by reignited growth in accounts receivables. After two years of arduous effort, Canadian Tire appears to have gotten traction with its in-store offers of deferred and installment financing. These offers are also stimulating the opening of new credit card accounts."

With the results, Mr. Howlett increased his 2017 EPS estimate to $10.72 from $10.20 and 2018 to $11.52 (from $11.05) in 2018.

Keeping a "buy" rating for the stock, his target rose to $184 from $169. Consensus is $177.50.

Meanwhile, Canaccord Genuity's Derek Dley also bumped his target to $184 (from $174) with a "buy" rating (unchanged).

Mr. Dley said: "Canadian Tire's Q2/17 results were modestly ahead of our expectations, but demonstrated better-than-expected growth in key verticals, such as FGL Sports sales, retail gross margin increases, and RoR [return on receivables] growth at CTFS. Looking ahead, we believe Canadian Tire is well positioned for earnings momentum over the course of our forecast period, particularly as the company increases its owned-brands penetration, benefits from the appreciation of the Canadian dollar, and continues to actively monitor write-off rates at CTFS. The company's balance sheet remains healthy with minimal net debt (only $77-million), leaving Canadian Tire well positioned to return cash to shareholders. Canadian Tire has roughly $213-million of capacity remaining on its $550-million NCIB, and we expect the company to fully utilize its NCIB by the end of November, further supporting our earnings growth expectations."

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BMO Nesbitt Burns analyst Heather Kirk upgraded Northview Apartment REIT (NVU.UN-T) after a "solid' second-quarter beat.

Citing "solid" operating performance across its portfolio and a "material" revaluation in its Ontario holdings, Ms. Kirk moved Calgary-based REIT to "outperform" from "market perform."

On Wednesday, Northview reported quarterly funds from operations per unit of 54 cents, excluding one-time charges. It was a drop of 4 per cent from the previous year but beat Ms. Kirk's estimate by 3 cents and the consensus by 2 cents.

Driven by "material" improvements in its apartment portfolio, same property net operating income was up 3.9 per cent year over year.

"SPNOI was positive for the first time since Q2/15 with strength across the majority of geographies and property types," said Ms. Kirk.

Ms. Kirk raised her target to $24.25 from $21.75. Consensus is $21.59.

"Operating performance is firming providing a clear line of sight to higher NOI, FFO, and NAV," she said. "NVU continues deliver on strategic initiatives, including internalization of property management, suite renovations, NOI growth, and the disposition of non-core assets. We expect leverage to trend down on asset sales and growth in portfolio value."

Elsewhere, Canaccord Genuity analyst Jenny Ma increased her target by a loonie to $20.

Ms. Ma said: "While we are pleased that Northview posted a strong quarter and fundamentals in Western Canada have shown early signs of stabilization, we believe Northview is fairly valued at current levels, as the REIT's unit price is currently 7.5 per cent above our target price. We are maintaining a SELL rating on Northview Apartment REIT."

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It's "time to double down" on Great Canadian Gaming Corp. (GC-T), according to Canaccord Genuity analyst Derek Dley, calling its acquisition of the rights to Toronto-area casinos "transformational."

On Tuesday, the Coquitlam, B.C.-based company and Brookfield Business Partners LP (BBU.UN-T) won the right to run three Ontario Lottery and Gaming Corp. facilities in the province. The pair acquired OLG Slots at Woodbine, OLG Slots at Ajax Downs and the Great Blue Heron Casino located in the Mississaugas of Scugog Island First Nation, gaining exclusive rights to right to operate the facilities for at least 22 years.

"In our view, the awarding of the GTA bundle is a transformational event for Great Canadian, allowing the company to meaningfully increase its earnings potential, capitalize on future growth opportunities within Ontario, and reduce its dependence on the highly profitable River Rock casino," said Mr. Dley. "Great Canadian did disclose that the partnership's up front cost of acquisition for the GTA bundle is $150-million (including working capital), with an overall capital expenditure budget of over $1.0-billion (including the upfront cost). We estimate the GTA bundle currently represents $150-million in EBITDA, of which $74-million is attributable to Great Canadian.

"We are assuming that Great Canadian's total capital commitment to acquire the bundle is $407-million (or 5.5 times our estimated current GTA bundle EBITDA of $74-million). However, we believe there are substantial expansion and redevelopment opportunities that could lead to incremental EBITDA within the bundle, albeit with a higher capital commitment than we are assuming."

On Thursday, the company reported "strong" second-quarter financial results after market close. EBITDA of $63-million exceeded Mr. Dley's $59-million estimate, which was also consensus. It was an increase of 14 per cent year over year. EBITDA at its Red Rocks casino also jumped 14 per cent from the previous year following nine consecutive quarters of declines.

Though Mr. Dley's full-year EPS projection fell by a penny to $1.49, he increased his fiscal 2018 estimate to $2.11 from $1.64.

"Given the limited disclosure relating to this [GTA] bundle we admit our forecasts are subject to volatility in the near term," he said. "Meanwhile, the company boasts a collection of well-positioned, highly profitable casino properties, which are likely to demonstrate stable revenue and EBITDA growth that can be accelerated through renovation and expansion initiatives over the course of our forecast period."

With an unchanged "buy" rating for the stock, his target rose to $39 from $31, which is the current consensus.

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Alio Gold Inc.'s (ALO-T) "new direction is positive," according to BMO Nesbitt Burns analyst Brian Quast.

On Thursday, the Vancouver-based company reported second-quarter adjusted earnings per share of 10 cents, topping the analyst's projection due largely to lower depreciation.

"Following a successful equity raise in Q2/17, and more definitive plans for a $90-million credit facility to fund Ana Paula, we have altered our financing assumptions, which results in less equity dilution for the company," said Mr. Quast. "We also note the new tone and direction taken by current management, which gives more valuation certainty to the assets. Therefore, we are upgrading the stock."

Moving it to "market perform" from "underperform," his target stayed $6. Consensus is $9.39.

"There is still some funding required for the Ana Paula development project, which will likely be some combination of debt and equity," said Mr. Quast. "The limited mine life at San Francisco also acts to depress valuation."

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In other analyst actions:


Credit Suisse analyst Christian Buss upgraded Kohl's Corp. (KSS-N) to "neutral" from "underperform" and increased his target to $44 (U.S.) from $39. Consensus is $41.

"KSS is working to drive traffic into stores, reduce fixed costs and improve inventory turns," the analyst said. "Even modest execution to these targets is reducing near-term concerns about an inflexible real estate portfolio that adds risk of significant deleveraging with weakening demand across the apparel retail landscape. As a result, we raise estimates modestly, assign an 11 times price-to-earnings multiple on FY18 earnings estimates for $3.88 that look to have less downside risk than previously anticipated."

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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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