Monday’s analyst upgrades and downgrades

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

Shares of Stella-Jones Inc. (SJ-T) are now fairly valued, according to Desjardins Securities analyst Benoit Poirier.

Citing a "more cautious" outlook following the release of its fourth-quarter financial results, Mr. Poirier downgraded the Quebec-based producer and marketer of pressure treated wood products to "hold" from "buy."

"Stella-Jones reported 4Q results in line with the preliminary release in January," he said. "That said, management's outlook is more cautious as inflated tie industry inventories are expected to pressure pricing more than initially expected in 2017. As SJ expects the situation to take at least nine months to resolve and given the limited upside to our target, we are taking a neutral stance and would wait for a better entry point or increased visibility on the outlook before changing our view."

Mr. Poirier saw no surprises in the company's results, released Friday.

Revenue of $342-million met the $341-million projection of both Mr. Poirier and the Street, representing a decline of 4 per cent year over year. Railway tie sales of $113-million topped his forecast ($84-million), while utility pole sales ($145-million versus $154-million) and residential lumber sales ($45-million versus $58-million) fell below his expectations.

"SJ expects rail tie revenues to decline by 10–12 per cent year over year in 2017, with weakness skewed more heavily to the first half of 2017," said Mr. Poirier. "Most of the softness should come from pricing pressure, as volumes are expected to drop 2–3 per cent year over year. Given this pricing pressure and shift in mix for utility poles, SJ now expects to achieve a consolidated EBITDA margin of [approximately] 13 per cent in 2017 versus 14.5 per cent previously. As inventory levels normalize and average inventory costs fall, SJ expects EBITDA margin to improve closer to 15 per cent in 2018."

He added: "SJ plans to focus on reducing its rail tie inventory throughout 2017, we expect net working capital to end the year in positive territory. This combined with our $150-million FCF [free cash flow] estimate for 2017 should result in stronger financial ratios by the end of 2017 (we expect net debt to EBITDA of 2.4 times in 4Q17 versus 2.5 times in 4Q16). However, given the seasonal investment required to build inventories in the consumer lumber market in 1H17, management expects financial ratios to deteriorate slightly during the first two quarters of the year. In our view, this reduces the likelihood of a share buyback in the short term to support the share price."

Based on the company's revised outlook for 2017, Mr. Poirier lowered his adjusted earnings per share projection for the fiscal year to $1.92 from $2.21.

His target price for the stock fell to $43 from $45. The analyst consensus price target is $45.88.

"We expect the shares to trade sideways until the latter part of 2017, pending more visibility on railway tie industry inventory levels or a pick-up in tie demand," the analyst said. "Meanwhile, we expect the challenging short-term environment to put additional pressure on financial ratios in 1H17, thus reducing the potential for short-term cash deployment opportunities other than M&A (share buybacks). In light of these reasons and the limited upside to our target price, we are downgrading our rating."

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BMO Nesbitt Burns analyst Alexander Pearce continues to see the uranium market "tipping into undersupply" in 2018.

In a research note in which he updated his outlook, Mr. Pearce said he expects it will take until 2020 for a "meaningful" deficit to emerge. His 2017 uranium price forecast rose to $26.88 (U.S.) per pound, from $22.50, in order to reflect "the improved sentiment in the sector."

"We continue to project undersupply emerging in 2018," he said. "In combination with structural production changes from Kazakhstan, the world's biggest producer of uranium, we are now more optimistic on the uranium price outlook than we have been for quite some time . . . cautiously so. The Kazakhs have cut output by 10 per cent, which sends the message that they are prepared to take action to defend the uranium price below $20-25 (U.S.) per pound U3O8 [triuranium octoxide] , and at the same time have reduced supply to the spot market, which appears to have tightened.

"Annual term contracting volumes have declined by 70 per cent since 2012 and now stand at only 30 per cent of annual utility requirements. Utilities have been making up for any shortfalls in uncovered requirements through spot purchases and the carry trade. We see the potential for a tighter spot market and decreased security of supply to be catalysts for rebooting term contracting, which could result in higher term and spot market prices, especially given that utilities should now be appraising requirements for the early 2020's, well into the forecast supply deficit. The risk to this outlook is that excess inventories generated by oversupply since 2009 could allow utilities to continue to be price selective for longer than anticipated. However, inventory classification is subjective and we certainly see the potential for 'excess' inventories to be reclassified as 'strategic' if utilities do begin to get nervous about future supply."

Mr. Pearce upgraded his rating for NexGen Energy Ltd. (NXE-T) to "outperform" from "market perform."

"NexGen's share price has sold off recently and it is now trading on more attractive P/NPV [price to net present value] and EV/lb [enterprise value to pounds] multiples," he said. "Given continued resource upside potential, near-term catalysts, and improving sentiment in the sector we believe this could be an attractive entry point to the stock."

He did not specify a target for the stock. Consensus is $4.66.

"Given the intensive drilling programme that NexGen is undertaking and the success to date, we note that there is strong potential for this resource to grow further, in our view," said Mr. Pearce."

On the sector, as a whole, Mr. Pearce said: "Our thesis is that higher uranium prices are needed but that excess inventories make the timing of this uncertain. The uranium price could move meaningfully tomorrow . . . or it could move in three years' time. What we can say with reasonable certainty is that when it does move, it will likely move quickly. Considering this, we believe now could be an attractive entry point for our preferred stocks: Cameco, Fission, and NexGen. However, we note that uncertainty around the timing of the projected uranium price increase may mean that patience is needed."

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Based on its current valuation, Accountability Research analyst Harriet Li upgraded Kinross Gold Corp. (K-T, KG-N) to "buy" from "hold."

"Kinross has a robust pipeline of organic projects under development, including projects at Tasiast and Bald Mountain, which supports production growth along with a reduction in overall cost of production," she said. "The company continues to advance the 2-phased Tasiast expansion, with Phase 1 expected to enter commercial production in 2018. Meanwhile, the recent doubling of gold reserves at Bald Mountain, along with expectations of a significant rise in production and lower costs this year, support this asset's strong growth potential."

She maintained a target of $6. Consensus is $5.24.

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There's a "bumpy road ahead" for AutoCanada Inc. (ACQ-T), predicted Canaccord Genuity analyst Derek Dley.

On Thursday, the Edmonton-based multi-location automobile dealership company reported a 6.4-per-cent year-over-year decline in revenue to $629-million. Earnings before interest, taxes, depreciation and amortization of $19-million fell below Mr. Dley's projection of $25-million and the consensus of $26-million. Adjusted earnings per share of 28 cents fell a penny below the analyst's projection and 7 cents below the Street.

"Same-store new vehicle volumes declined 8.8 per cent during the quarter, with overall same-store sales declining 10.0 per cent," said Mr. Dley. "Given the continued weakness in Western Canada, we expect new vehicle sales to remain challenged over the course of 2017. We note that management outlined expectations for national new vehicle sales declines of 1-2 per cent in 2017. Additionally, used vehicle sales declined 5.6 per cent year-over-year, parts, service and collision repair sales declined 9.7% YoY, and finance and insurance sales declined 10.4 per cent year over year.

"In contrast to the declining top line, AutoCanada's gross profit margin increased by 20 basis points, to 18.6 per cent. The expansion was strongest in the parts, service and collision segment, where the company gained 260 bps of margin, driven by a higher average spend per order."

The company also announced president Thomas Orysiuk had unexpectedly resigned.

"In our view, AutoCanada is likely to experience continued headwinds with both new and used retail vehicle sales channels throughout 2017," said Mr. Dley." While we believe management's decision to spend $31-million in 2017 on dealership relocations to mitigate deteriorating business conditions in core markets is appropriate, the company's Alberta exposure will continue to weigh down the top line. We are forecasting same-store new vehicle sales to decline 2.0 per cent. We believe the company will be able to reduce SG&A through its cost savings initiatives, however earnings growth is likely to remain relatively muted given the challenging top line. AutoCanada commented it is currently in discussions with G.M. as it relates to the pending transition of current Chairman Pat Priestner's voting rights and economic rights in the dealership to AutoCanada. We expect further colour on this transition during Q1/17."

Mr. Dley did increase his EPS projections for 2017 and 2018 to $1.64 and $1.85, respectively, from $1.49 and $1.70.

With a "hold" rating, his target for the stock rose to $21 from $20. Consensus is $26.73.

"While we like the long-term prospects of the company, we believe the near-term outlook and macro-economic headwinds remain challenging, and are comfortable remaining on the sidelines for the time being," he said.

Elsewhere, CIBC World Markets analyst Matt Bank lowered his target for the stock to $20 from $22 with an "underperformer" rating.

Mr. Bank said: "To get back to normalized EBITDA margins, dealer-level volumes need to take a material step up, which is probably at least a year out and potentially much longer. With deal pace slowing, it is difficult to get excited about the near-to-medium term financial prospects for ACQ. We wouldn't be surprised to see a buy-in of GM dealership minority interest this year, which would add $1 to our NAV [net asset value], but we still see the stock as somewhat pricey."

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Credit Suisse analyst Robert Reynolds initiated coverage of Pretium Resources Inc. (PVG-N, PVG-T) with an "outperform" rating, saying its Brucejack facility in British Columbia "has potential to be one of Canada's highest FCF gold mines" and calling its valuation "attractive."

"In our view, the market perception is that Brucejack's success or failure is a binary event due to the controversial resource estimate," said Mr. Reynolds. "This has kept some investors on the sidelines. As a result, we estimate PVG shares are currently pricing in negative 20-per-cent grade reconciliation (12.90 g/t) vs. the reserve to trade at 1 times NAV [net asset value] at spot gold ($1,230 per ounce). Near-term catalysts including plant commissioning in April and commercial production before 2017YE could drive a re-rating toward 1x our NAV estimate, as (1) the proven reserve (14.5g/t) has been de-risked through infill drilling, (2) a 144kt surface stockpile should help smooth the underground ramp-up, and (3) PVG will graduate to producer status.

"We will track how expectations and valuation evolve in advance of this catalyst, with initial data likely to be received by the market during Q3. Medium-term risks to monitor are the probable reserve grade due to wide drill spacing, elevated consensus expectations for 2018 and 2019 vs. our estimates in-light of the typical underground ramp-up profile, and operational risks due to the remote location and climate."

Mr. Reynolds set a price target of $13.50 (U.S.) for the stock. Consensus is $12.20.

"Based on the March 16th closing price, investment in Pretium stock currently offers a 31-per-cent potential upside return to our target price versus a 28-per-cent average for our coverage universe and 42-per-cent average return for other Outperform-rated stocks," he said. "In our outperform view, we have also considered that PVG offers a positively skewed Blue-Sky upside of 99 per cent to $20.50 (U.S.) per share versus a 47-per-cent Grey Sky downside to $5.50 per share. PVG's gold price sensitivity benefits from the low cost structure of Brucejack, which protects downside, and the upside potential of its large-scale, low-grade Snowfield deposit."

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Despite "soft" fourth-quarter results, HNZ Group Inc.'s (HNZ-T) "more positive tone" on its outlook is "encouraging," said Desjardins Securities analyst Benoit Poirier.

On March 16, the Montreal-based provider of helicopter transportation and related support services reported quarterly revenue of $51-million, an increase of 4.4 per cent year over year and ahead of the projections of both Mr. Poirier ($41-million) and the Street ($45-million). Adjusted earnings per share of a loss of 21 cents fell below the analyst's estimate (a 13-cent loss) and the Street (6-cent loss).

"The year-over-year revenue increase was largely due to growth in ancillary revenue, while offshore and onshore revenue was roughly unchanged versus a year ago," said Mr. Poirier. "Flown hours came in at 8,304, up 0.2 per cent year over year. EBITDA margin was disappointing and reflects both a challenging market and competitive pressure.

"HNZ still sees 20 sizeable opportunities at bidding stage but pricing remains uncertain. This compares with 24 as of 3Q16. These opportunities are mainly focused on offshore oil & gas production support operations. Management does not plan to bid on all of these given it must evaluate their economics. We understand that pricing on these contracts remains uncertain as HNZ noted that some opportunities are the result of customers renegotiating contract terms in order to save costs. Nevertheless, we believe HNZ is well positioned to win some opportunities given its lower cost structure versus some of its competitors."

Mr. Poirier emphasized a "slightly more positive" outlook despite market uncertainty.

"The company's more bullish view vs 3Q16 is supported by the recent signing of several multi-year contracts in the offshore oil & gas market, along with an extension of the Nova Scotia Emergency Health contract until 2032," he said. "HNZ also intends to use its strong balance sheet to grow its business through organic or M&A opportunities."

Mr. Poirier raised his 2017 adjusted EPS projection to 73 cents from 71 cents to reflect the contributions of its ExxonMobil Canada/Encana contract in Nova Scotia. His 2018 estimate is 79 cents.

With a "buy" rating (unchanged), his target price for HNZ stock rose by a loonie to $17. Consensus is $14.75.

"While ongoing softness in the industry will likely continue until there is a sustainable rebound in commodity prices, we remain positive on HNZ as we expect the company to generate positive FCF in 2017 (we expect $15-million)," said Mr. Poirier. "In our view, positive free cash flow, combined with the solid balance sheet, provides plenty of opportunity for cash deployment (M&A, partnerships and share buybacks) and reinforces HNZ's credibility versus peers when bidding on long-term contracts. In the meantime, the fleet appraisal value of $13 per share should provide downside support, especially at the current valuation."

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Citing a "difficult" macro environment for restaurants south of the border and increased competition from non-traditional venues, like convenience stores, Canaccord Genuity analyst Lynne Collier downgraded Sonic Corp. (SONC-Q) to "hold" from "buy."

"Our more cautious stance is predicated on: (1) our view that industry sales will continue to be challenging and intense promoting/discounting will remain a theme as QSR [quick restaurant] companies fight for market share; (2) our belief that SONC's sales in recent months have been soft and Street estimates for Q2 could be high; and (3) a lack of identifiable catalysts for material SSS improvement in the coming months," she said.

Ahead of the release of its second-quarter results on March 28, she lowered her 2017 and 2018 earnings per share estimates to $1.22 (U.S.) and $1.36, respectively, from $1.25 and $1.43.

"We applaud management's recent movement to a 95-per-cent franchise model," said Ms. Collier. "Further, we recognize that expectations are low and many of these concerns are already reflected in shares (trading at just 10.7 times next 12 months EBITDA). However, we see shares as range-bound in the coming months until better visibility around comps emerges."

Her target price for the stock fell to $24 (U.S.) from $30. Consensus is $28.21.

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In other analyst actions:

Premium Brands Holdings Corp. (PBH-T) was downgraded to "market perform" from "buy" at Cormark Securities by analyst Kyle McPhee with a $80 target, up from $76. The analyst average target price is $81.91, according to Bloomberg.

Morgan Stanley analyst Kai Pan initiated coverage of Berkshire Hathaway Inc. (BRK.A-N) with a "equal-weight" rating and target of $275,000 (U.S.). The average is $282,250.

Tiffany & Co. (TIF-N) was raised to "outperform" from "market perform" at William Blair by analyst Dylan Carden without a specified target. The average is $94.52 (U.S.).

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