Friday’s analyst upgrades and downgrades

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

Though he sees "stiff" headwinds ahead for Loblaw Companies Ltd. (L-T), Desjardins Securities analyst Keith Howlett upgraded his rating for the grocery giant following Thursday's release of "solid" fourth-quarter financial results.

"The shares appear to us to be good value, but may be range-bound until early 2019 as Loblaw works its way through a challenging but eventful 2018," said Mr. Howlett, moving Loblaw stock to "buy" from "hold."

Mississauga-based Loblaw reported adjusted earnings per share of $1.13 for the quarter, exceeding Mr. Howlett's estimate by a penny and the consensus projection on the Street by 2 cents. It was a 20-per-cent rise year-over-year on a comparable basis (excluding the divestiture of its gas bars).

The company posted same-store food sales growth for the quarter of 0.5 per cent, which Mr. Howlett said reflected a large average transaction size but few trips. Gross margins were flat.

With the results, management indicated the company faces a $250-million earnings headwind from drug reform in 2018 with a cumulative headwind of $460-$490-million since 2015. Minimum wage increases are expected to cost $190-million in the current fiscal year.

"[Its] retail business finding its groove. IT and supply chain investment begins to pay off," said Mr. Howlett. "Loblaw is maintaining its focus and its discipline despite challenging competitive and regulatory conditions. The company's recent track record gives us a reasonable degree of confidence that it may be able to hold net income flat in 2018 in the face of $440-million of headwinds to EBITDA."

"Shoppers Drug Mart still represents a good platform for health and wellness. Shoppers Drug Mart continues to perform well at the consumer level, despite having had substantial profits eliminated by drug reimbursement reforms over the last three years ($210–240-million cumulatively), with even more of a negative impact in 2018 ($250-million). The impact of these reforms is largely invisible to the consumer, and has little or no impact on brand value as measured by consumer fidelity."

With the results, Mr. Howlett lowered his 2018 EPS projection to $4.63 from $4.68 and introduced a 2019 estimate of $5.08.

He raised his target for Loblaw shares to $77 from $76. The average target on the street is currently $77.64, according to Thomson Reuters data.

"Loblaw is executing on its stated strategic and financial plans under extreme external pressure from the combination of intense competition and regulatory changes," said Mr. Howlett. "While earnings are likely to stall in 2018, the longer-term outlook is positive. Cash generation is strong, permitting ongoing share buybacks. The Weston family, which indirectly controls Loblaw through George Weston Limited, is focused on dependable, growing long-term cash flows as evidenced by the acquisition of Shoppers Drug Mart and the proposed acquisition by Choice Properties of CREIT."

Elsewhere, Raymond James analyst Kenric Tyghe raised his target to $85 from $82 with an "outperform" rating (unchanged).

"We remain constructive on Loblaw given the cost cutting initiatives and traction of both the PC Optimum and ecommerce initiatives," said Mr. Tyghe.

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Raymond James analyst Jeremy McCrea dropped his rating for Raging River Exploration Inc. (RRX-T) to "market perform" from "outperform" in reaction to its 2017 reserves and operational guidance.

"When we first launched on Raging River a year ago with a Market Perform rating, our main concern was valuation in the context of well performance and well results," said Mr. McCrea. "We later upgraded our rating as light oil prices improved; however, with updated reserve figures, our concern once again remains valuation, especially as the company transitions from high decline Viking production to low decline (but higher impact Duvernay). Given the current EV [enterprise value] and updated PDP [proven developed producing] reserve value, investors are paying $930-million for future undrilled upside, which in the context of other light oil operators and their undrilled land value, profitability, and growth, we are moving to a Market Perform on a relative basis. "

On Wednesday after market close, the Calgary-based company announced the expectation of 9-per-cent year-over-year decline PDP net asset value (NAV) per share growth with a 3-year compound annual growth rate of negative 7 per cent, which Mr. McCrea attributed to reserve evaluator pricing declines.

"We compare the change in PDP reserve value (value created) relative to the amount of spending," he said. "We calculated $324-million of PDP value created versus capital spending of $372-million. As such, 2017 results in a loss of $0.13 for every dollar spend. 3-year CAGR now stands at negative 24 cents per share."

Though his 2018 and 2019 cash flow per share projections rose to $1.62 and $1.60, respectively, from $1.57 and $1.59, Mr. McCrea lowered his target to $7 from $8.50 "based on revised Duvernay well economics and a lower risk weighting for the play." The average is $10.68.

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Though National Bank Financial's Maxim Sytchev said downgrading Stantec Inc. (STN-T) after the release of its fourth-quarter financial results "does not feel right," he expressed difficulty in finding upside for the professional services provider.

"We are modeling 11.6-per-cent EBITDA margin this year (i.e., no extrapolation of construction-related issues and slightly above the company's consolidated mid-range guide of 10-12 per cent as some of the $30-million in construction claims could be coming back), assume 3.7-per-cent organic growth in 2018 and expect $176-million/$340-million of M&A (in terms of gross line contribution) this year and next," said Mr. Sytchev in a research report released late Thursday. "With all of these inputs, keeping 10 times/7 times EV/EBITDA on 2019 gets us to $37.00 for a name that will require time to re-establish credibility with the Street after a very challenging 2017. This just does not appear that compelling especially as our new numbers imply 8.9 times EV/EBITDA on 2019E, hardly a bargain when WSP is trading at 8.5 times."

On Thursday, Edmonton-based Stantec reported adjusted EBITDA of $63-million, falling well below the Street's expectation of $94-million. Earnings per share for the quarter of 32 cents also missed the consensus expectation (43 cents).

Despite weaker-than-anticipated 2018 guidance, Mr. Sytchev said he still expects a "reasonable growth environment."

"It will take some time for Water and Construction businesses to find their footing; that being said, we do give some benefit of the doubt that 2018 will normalize to some degree (we are estimating EBITDA margin of 11.6 per cent, just above the midpoint of 10-12-per-cent guide from management)," the analyst said. "Our 3.7-per-cent consulting organic growth for 2018E and 3.5 per cent in 2019E is in line with the company's guide of GDP-type (low to mid-single digits) and reflects a reasonable growth environment in all of Stantec's verticals."

Moving Stantec shares to "sector perform" from "outperform," Mr. Sytchev dropped his target to $37 from $39. The average is $36.94.

"With all the construction commotion this quarter, organic growth in most divisions (excluding Energy & Resources which is now only 9 per cent of gross revenue) was subpar," he said. "Management wants to do M&A (mostly tuck-ins), but objectively the last 10 years brought a very pro-cyclical approach to deals. Now, the company is looking towards Australia. Why? Because that's the market that's been on fire for the last two years. Additionally, at first glance the sale of Innovyze was accretive, but general trends are pointing to 'big data'/analytics as the driver of consulting companies' moat (hence SNC, KBR, Jacobs, Arcadis all committing their resources here); is that a strategic mistake on the part of STN? We would expect STN to be active on NCIB (2.3 million share program) to provide a floor, but we do see the shares range bound. Another negative earnings revision dynamic (100 basis points compression) will also drag all the quant parameters. Waiting for the dust to settle."

Meanwhile, Raymond James analyst Ben Cherniavsky lowered his target to $37 from $41, maintaining an "outperform" rating.

Mr. Cherniavsky said: "Stantec's weak 4Q17 results will surely add fuel to the prevailing investor debate over the interpretation of the company's pattern of increased earnings 'misses' and heightened stock price volatility. There are those who believe that this reflects a broken business model—or at least one that has been fundamentally compromised by, among other things, the addition of a construction platform. There are others, meanwhile, who believe that Stantec has weathered a nasty oil downturn very well, stuck to its disciplined strategy of M&A, and will come out the other end as a larger, and even better version, of its former self. While we have been in the latter camp, we admit that it is getting more difficult to maintain that view with high conviction after yet another frustrating quarter of adjustments and misses. Nevertheless, with our sights still squarely set on 2018 as the real litmus test — and with the stock having corrected 11.0 per cent [Thursday] (versus a 0.1-per-cent decline for the TSX)—we believe that now is not the time to capitulate as Stantec is poised to redeem itself this year."

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Seeing a lack of new catalysts, CIBC World Markets analyst David Haughton downgraded Barrick Gold Corp. (ABX-N, ABX-T) following its Investor Day event in New York on Thursday.

"Barrick unveiled more details for the core development projects, but fell short on providing a fresh strategy to further unlock the potential of the existing asset portfolio that could carry the company forward with a sustainable production profile," he said. "Maintaining investment discipline and profitability is welcomed, but Barrick's valuation looks rich (at 1.8 times NPV [net present value] versus peers at 1.5 times at spot) on the current declining production profile."

Mr. Haughton lowered Barrick shares to "neutral" from "outperformer" with a US$17 target, down from US$20 to reflect "the modest outlook and current spot." The average is US$17.03.

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After "solid" fourth-quarter financial results led by "strong" leasing spreads, Canaccord Genity analyst Mark Rothschild upgraded Crombie Real Estate Investment Trust (CRR.UN-T) to "buy" from "hold."

On Wednesday after market close, Crombie, based in New Glasgow, N.S., reported funds from operations per diluted share of 31 cents, a rise of 1.5 per cent year-over-year and a penny ahead of the expectation on the Street.

Mr. Rothschild attributed the beat to a "healthy" rise in same-property net operating income and contributions from recent acquisitions.

"Same-property NOI, on a cash basis, declined 2.7 per cent in Q4/17 as compared to the year-ago quarter, primarily due to $3.0-million of lease termination income received in Q4/16," he said. "Excluding the same-asset lease termination, Crombie reported an increase in same-property cash NOI of 2.1 per cent. The growth was driven by higher occupancy, strong leasing spreads and revenue from landuse intensifications at several properties.

"Strong leasing activity drives increase in occupancy. Leasing activity was steady in 2017 as Crombie completed 932,000 square feet of lease renewals as compared to 1.2 million sf of expiries and terminations. Occupancy was up 80 bps year-over-year, as the REIT was successful in leasing vacant space. We note that the current occupancy rate of 95.2 per cent is the highest rate in the past six years."

Mr. Rothschild kept a $14.50 target for Crombie units. The average target is currently $15.09.

"Crombie's portfolio is well leased and has been performing well," he said. "While we are relatively cautious towards the retail sector, we expect the REIT's cash flow to grow as development projects are completed and the REIT continues to increase rental rates. We utilize a 6.25-per-cent cap rate to value Crombie's portfolio and our updated NAV [net asset value] per unit estimate is $14.52 (from $14.51). With the recent pullback in Crombie's unit price, the units are trading at a 10-per-cent discount to NAV, and, in our view, present excellent value. We are therefore upgrading our rating."

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CIBC's Scott Fromson raised Winpak Ltd. (WPK-T) to "outperformer" from "neutral" following better-than-anticipated fourth-quarter financial results.

"Since initiation, we have viewed Winpak as a well-run company with a high-quality product suite and good long-term growth prospects," said Mr. Fromson. "With these results we are more confident that Winpak can execute in a challenging environment, both on resin pricing and competitive pressures."

On Thursday, Winnipeg-based Winpak, which manufactures and distributes packaging materials and products, reported revenues for the quarter of $223-million, slight below the analyst's $227-million expectation and the Street's projection of $226-million. However, EBITDA of $52.9-million beat the estimates of both Mr. Fromson ($46.6-million) and the Street ($47.1-million).

In reaction to the results, Mr. Fromson's target for Winpak shares rose to $56.50 from $53. The average is $57.53.

"Winpak trades at a 9.6 times EV/EBITDA multiple on our FY/18 estimate, a discount to peers at around 11 times," he said. "We believe Winpak deserves at least a market multiple. In conjunction with our price target increase, we are upgrading Winpak."

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Canadian Imperial Bank of Commerce (CM-T, CM-N) delivered an "all around solid quarter," according to Canaccord Genuity analyst Scott Chan, raising his target price for its shares.

On Thursday before market open, CIBC reported adjusted cash earnings per share of $3.18, up 10 per cent year over year and exceeding the projections of both Mr. Chan ($2.82) and the Street ($2.83).

Mr. Chan attributed  the 12-per-cent EPS "surprise"  to "solid" results across its business segments, leading him to bump his target to $131 from $129 with a "buy" rating (unchanged). The average on the Street is currently $132.06.

"This mainly reflects: (1) higher NTM [next 12-month] estimates (i.e. lower PCLs, Other income such as trading); and (2) rolling forward our valuation one quarter," he said. "CIBC Bank USA came in much better than expectations. Over time, we believe CM's higher proportion of U.S. earnings, and double-digit NI growth capabilities on this platform will help support better valuation metrics. CM trades at a peer low price-to-earnings (forward) of 10 times, and sports the highest dividend yield at 4.6 per cent (dividend raised 2.3 per cent this quarter)."

Here's a survey of other analyst reaction:

• RBC Dominion Securities' Darko Mihelic raised his target to $141 from $138 with a "sector perform" rating.
  
  "CM now trades at 9.5 times our 2019 estimated core EPS, the lowest amongst the large Canadian banks," he said.
  
  
• Desjardins Securities' Doug Young bumped his target up by a loonie to $134 with a "buy" rating.
  
  "We like CM’s valuation, dividend yield (4.6 per cent) and execution in Canadian banking, and the opportunity within its US banking strategy,” said Mr. Young

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Mackie Research analyst Nikhil Thadani upgraded Espial Group Inc. (ESP-T), an Ottawa-based tech company, to "buy" from "speculative buy."

"With Q4 results ... ESP has shown a path to $5-million Annual Recurring Revenue (ARR), an important milestone we previously highlighted," he said.

"Recall, in December, we suggested ESP's recurring revenue (Software as a Service/SaaS + support) trajectory to be revised upwards following Q4 results in February. We now expect ESP's total recurring revenue in 2019 to be $15-million, up from greater-than $5-million in late 2014, when we began covering ESP.

His target for Espial shares is now $3.25 from $2.75. The average is $2.61.

"We are rolling out our 2019 estimates and expect SaaS revenue growth in the near term to be offset by legacy revenue headwinds as ESP customers switch to a SaaS model," he said.

"This switch by software companies is usually accompanied by some stock price turbulence, which could prove to be an opportunity. We believe ESP's recurring revenue growth profile, should, over time improve ESP's valuation."

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In other analyst actions:

TD Securities analyst Aaron MacNeil raised STEP Energy Services Ltd. (STEP-T) to "buy" from "hold" with a target of $13.50, up a loonie. The average is $18.