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Monday’s analyst upgrades and downgrades

A man poses with a magnifier in front of a Facebook logo on display in this illustration taken in Sarajevo, Bosnia and Herzegovina, in this December 16, 2015, file photo.

DADO RUVIC/REUTERS

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

In reaction to a recent pullback in the price, investors should accumulate units of Canadian Apartment Properties Real Estate Investment Trust (CAR.UN-T), according to Raymond James analyst Ken Avalos.

He upgraded his rating for CAP REIT to "outperform" from "market perform."

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Mr. Avalos called it "one of the best performers" of 2015, after a 10-per-cent rise in price and outperforming the TSX Capped REIT Index by 11 per cent, due largely to "strong" same-property net operating income growth. That momentum continued in the first half of 2016 with a 26-per-cent rise (versus a 21-per-cent jump for the index). However, it has fallen 12 per cent in the third quarter, compared to the index's 5-per-cent drop.

It is now the second-worst performer in his coverage universe, and currently trades at a 3-per-cent discount to net asset value.

"We downgraded CAP REIT in May 2014 and, quite frankly, have been on the wrong side of the trade," said Mr. Avalos. "The company's strong portfolio performance, aggressive acquisition pace and the collapse in oil pushed investors into the name, given its high concentration in Ontario. The stock has been outperforming for two years, and we've been waiting for a chance to upgrade the name but valuation had been a roadblock."

Calling its current price a "solid entry point," he added: "This pullback provides a more attractive valuation/entry point than we have seen in several quarters. We expect generally steady performance from the Ontario apartment market, and believe the current valuation offers investors a good chance to capture Ontario (45 per cent of apartment suites) exposure with a strong operator. The REIT has decent growth prospects (we expect SPNOI of 2-3 per cent annually), a flexible balance sheet and a well-diversified portfolio."

Mr. Avalos set a new target price of $32 for units of the REIT. The analyst consensus price target is $33.30, according to Thomson Reuters.

"We view CAP REIT as a strong operator in a property type that is anything but easy to manage," he said. "Acquisition pricing is aggressive, and capital costs can pose surprises while rent control (in certain markets) makes revenue growth more challenging. CAP REIT has as strong track record of smart capital investment, rental rate growth and expense control."

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A decline in price has created a favourable risk-reward profile for Stella-Jones Inc. (SJ-T), said Desjardins Securities analyst Benoit Poirier.

He upgraded his rating for the Quebec-based producer and marketer of pressure treated wood products to "buy" from "hold."

"In our view, the Street is underestimating SJ's FCF [free cash flow] generation prospects and the strong fundamentals in its industries, which should support a higher valuation for the foreseeable future," said Mr. Poirier. "Our scenario analysis demonstrates SJ's ability to create sizeable shareholder value by accelerating cash deployment once it has successfully consolidated its markets."

Mr. Poirier said the stock, which closed Friday at $43.89, has the potential to reach $70 by 2020 if the company deploys its cash appropriately.

"On its 2Q16 conference call, SJ management made cautious comments on its second-half 2016 outlook — it expects to end the year with flattish revenue growth in railway ties despite a strong 1H16 (organic revenue increased 7.7 per cent year over year in 1H16)," the analyst said. "However, SJ is confident it can maintain stable year-over-year revenue growth in the division in 2017, despite expectations of capex cuts by Class I railroads until 2018 (2015–18 compound annual growth rate down 7.5 per cent) in light of ongoing softness in freight volumes. This is due to the fact that 90 per cent of SJ's tie demand is related to maintenance/replacement, which secures a sizeable portion of revenue. Meanwhile, our recent meeting with CN (SJ's largest customer) confirmed that the railroad will maintain spending levels on its network next year. As a result, we believe our forecast of a 3-per-cent year-over-year revenue decline for 2017 is conservative and that potential revenue softness is already reflected in SJ's current share price."

Though he said industry tie production points to a short-term decline in sales growth, Mr. Poirier said the long-term outlook is not at risk due to a "health" ratio between tie inventory and sales, which he believes supports a thesis of a short-term slowdown. He expects production to accelerate in 2017.

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"We currently expect 2017 consolidated revenue to grow by 4.6 per cent year over year, despite our assumption of a 2.8-per-cent organic revenue contraction for railway ties next year," he said. "We also assume a slight year-over-year margin expansion for 2017 (EBITDA margin of 15.8 per cent. Combined with FCF and lower debt, this should translate into adjusted EPS of $2.67, up from $2.49 a year ago. In the long run, growth in railway ties should be correlated with GDP (including pricing and volume), although the downside is protected as ~90% of tie demand is driven by maintenance. Meanwhile, long-term utility pole revenue growth should outpace GDP as the industry's fundamentals remain robust."

Mr. Poirier said the stock's underperformance since June 23, an 11-per-cent drop in price, brings a buying opportunity for investors. He maintained a $51 target price, versus the consensus of $54.75.

"Investors should consider SJ for (1) its leading market position in markets supported by strong industry fundamentals, (2) its solid management team which has a consistent track record, and (3) its sizeable FCF generation prospects, which should eventually translate into accelerated cash deployment," he said.

"We expect valuation to remain elevated―SJ now trading closer to Class I railroads. We do not consider it reasonable that SJ traded in line with CCPPs in late 2015, given its lower dividend yield (0.9 per cent versus average of 4.9 per cent for CCPPs) and FCF yield (negative 1.3 per cent versus average of 3.4 per cent for CCPPs). However, with the recent correction, the shares are now trading in a range closer to that of Class I railroads, which is justified in our view given SJ's stable business model, decent growth prospects and leading market share position across its different segments. As a result, we expect the company to maintain its rich valuation for the foreseeable future."

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Cascades Inc. (CAS-T) is "continually rushing forward," according to Desjardins Securities analyst Keith Howlett.

He initiated coverage of the stock with a "hold" rating.

"Cascades is a Québec-based entrepreneurial and innovation success story that has evolved into a significant player in the containerboard and tissue product segments in North America," said Mr. Howlett. "Both of these segments are shielded from the impact of the shift to the digital economy. Beyond using recycled inputs, Cascades has remained at the forefront of industry change—for example, by deploying ATMOS tissue production technology and constructing a lightweight linerboard plant. Management has made significant progress in improving financial returns in recent years, and our view is that this will continue."

Mr. Howlett said "innovation is at the core of the company's culture" as it transitions beyond its original focus on the utilization of recycled materials.

"Cascades has an impressive history as a pioneer and innovator in manufacturing and marketing products made from recycled materials," he said. "The company's creativity and cooperative nature led it into a diverse array of businesses, often in partnership with others. In recent years, Cascades has been streamlining operations to focus on those businesses with the highest long-term potential. It is also in the process of centralizing administrative functions, thereby liberating operating units and managers from those activities. We believe the recent concentration of effort and capital will continue to pay off for shareholders. However, with the recent sharp run-up in the share price, the present risk/reward outlook is not compelling."

He set a price target of $13.50. Consensus is $12.13.

"Cascades has positioned itself well in the relatively stable, moderately growing businesses of tissue, containerboard and specialty packaging. Cascades' results remain subject to volatile input prices, fluctuations in the value of the Canadian dollar, capacity additions by competitors and highly competitive markets for end products," the analyst said. "Pricing power is restrained by the number and quality of competitors. Overall industry volume growth is modest and varies by segment, and we believe it is likely to fall between population growth and GDP growth. Higher growth may be generated through higher-risk activities, such as deploying new technologies, similar to what Cascades has successfully done with its ATMOS machine and at the Greenpac lightweight liner mill."

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After a recent rebound in price, stock of PayPal Holdings Inc. (PYPL-Q) now properly reflects its total payment volume (TPV) strength, according to Canaccord Genuity analyst Michael Graham.

He downgraded his rating to "hold" from "buy."

"After a sharp decline following news of the Visa deal in July, PayPal's stock is up 9 per cent off of lows," he said. "We are optimistic regarding TPV growth in the near term, but we believe the factors driving this (One Touch, Venmo) are well understood and largely reflected in estimates. Meanwhile, higher funding mix-driven transaction expenses stemming from the [Visa Inc.] and [MasterCard Inc.] deals are likely to pressure margins and temper EPS growth modestly. Longer term, we see a balance of factors (offline volume potential, competition from Apple & Android Pay) that should keep TPV growth on a path of gentle deceleration. With the multiple now at a less attractive level and the possibility of pressure on EPS estimates from 2017-2020, we believe shares are fully valued at current levels."

Mr. Graham maintained his 2016 earnings per share projection of $1.48 (U.S.), while he lowered his 2017 estimate to $1.69 from $1.80.

His target price for the stock fell to $40 from $45. Consensus is $44.06.

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Accountability Research analyst Harriet Li upgraded Goldcorp Inc. (G-T) to "buy" from "hold" in the wake of a recent pullback in share price.

"We expect to see operational improvements in H2/16, as challenges encountered during the first half of the year have been resolved," said Ms. Li. "The approval of the Penasquito and Musselwhite expansion projects and ramp-up of Eleonore will improve the company's medium-term production and cost profile."

She also raised her target price to $26 from $22, citing improved gold prices as well as the projects' approvals. The analyst average target price is $27.51, according to Bloomberg.

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As Facebook Inc. (FB-Q) investors become less concerned with growth drivers, like ad load and engagement, the stock's multiple can expand, according to Citi analyst Mark May.

"Facebook's impact on people's lives around the world and on the advertising industry is tough to overstate," he said. "And, it feels like it is still early days for the company. Nonetheless, in recent months investors have grown concerned about the possible slowdown in ad load growth and the potential threat posed by Snapchat on Facebook's user and user engagement growth. We analyzed these concerns by stress testing key underlying FB model assumptions and concluded that Street forecasts not only appear reasonable but also potentially conservative."

He called investor concerns about the impact of the deceleration in ad load growth on ad revenue us "overblown."

"While ad load will contribute 30 per cent of the 46-per-cent growth in core Facebook ad revenue this year (i.e., increasing 14 per cent from 7 per cent to 8 per cent), it only needs to expand 4 per cent in calendar year 2017 (to 8.3 per cent) and 3 per cent in CY18 (to 8.5 per cent) in order to meet current forecasts," he said.

Mr. Li also shot down user and engagement concerns, saying: "Investor concerns about the impact from Snapchat's growth on core Facebook's user and user engagement growth appear unfounded. Our review and analysis of third-party and company-reported data suggest that user engagement (i.e., time spent) for the average core Facebook user (as well as Instagram) is still growing and not being materially impacted by Snapchat."

Maintaining his "buy" rating for the stock, he increased his target to $158 from $148. Consensus is $154.98.

"We believe the bias to our and consensus forecasts is to the upside for two main reasons: 1) forecasts assume what appear to be conservative expectations for growth in key underlying drivers such as ad load and CPM growth for core Facebook); and 2) current forecasts do not appear to include contributions from scaled platforms like WhatsApp and Messenger or from potential new opportunities (e.g., longer form video, e-commerce/payments, etc.)," the analyst said.

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In other analyst actions:

Bombardier Inc. (BBD.B-T) was raised to "outperform" from "underperform" by Konark Gupta at Macquarie with a target of $2.50, up from 75 cents. The analyst average is $2.15, according to Bloomberg.

Alacer Gold Corp. (ASR-T) was raised to "neutral" from "underperform" at Macquarie Research by analyst Michael Gray. His target increased to $3.63 per share from $3.24, versus the average of $3.95.

CIBC World Markets analyst Kevin Chiang initiated coverage of Cargojet Inc. (CJT-T) with a "sector outperform" rating and target of $48. The average is $46.70.

Concordia International Corp. (CXRX-Q, CXR-T) was downgraded to "sector perform" from "sector outperform" by Scotia Capital analyst Alan Ridgeway. His 12-month target price fell to $8 (U.S.) from $20. The average is $10.83.

Morgan Stanley analyst Adam Jonas upgraded General Motors Co. (GM-N) to "overweight" from "equal-weight." His target is $37 (U.S.), while the average is $37.50.

Performance Sports Group Ltd. (PSG-N, PSG-T) was rated new "hold" at Craig Hallum by analyst Steven Dyer. His target price is $4 (U.S.) per share, compared to the average of $3.13.

Monness, Crespi, Hardt & Co analyst Jim Chartier upgraded Mattel Inc. (MAT-Q) to "buy" from "neutral" with a target of $37 (U.S.). The average is $35.44.

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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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