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 Apple Inc. (AAPL-Q) have outperformed thus far this year, according to Mizuho Securities analyst Abhey Lamba, who believes enthusiasm for its upcoming product cycle is "fully captured at current levels."

Seeing "limited upside to estimates from here on out," he lowered the tech giant's stock to "neutral" from "buy."

It's the second downgraded in a week for Apple, following Pacific Crest analyst Andy Hargreaves's move to "sector weight from overweight" with a $145 (U.S.) target price on June 5.

Though Mr. Lamba expects a "very robust product cycle" for the coming holiday season and into 2018, he expects investors to be underwhelmed, believing a significant portion of the sales will come from current customers replacing an older model.

"Further gains on the stock could be limited until there is more meaningful expansion in the installed base, higher recurring revenue growth from existing users or deeper penetration of the installed base via new product categories," he said.

"We do not expect the new iPhone to turn any of these levers in the near-term."

Mr. Lamba also expressed concern over both supply and production based on the iPhone 8's new features.

"In addition, our Japan research team believes that there could be broader adoption of OLED-based screens, thereby, leading to lower-end SKUs [stock keeping units] also potentially sporting the new panel at some point next year," the analyst said. "As such, we think adoption of the new devices could potentially become more prolonged as customers are likely to wait for future launches that could offer further advances in technology at lower price points. In our view, Apple's pricing is likely to become the main hurdle to meaningful expansion of its installed base. While some near-term upgrade activity may be associated with failing hardware of aged devices, customers with the flexibility to extend the life of their devices may choose to do so until OLED panel and incremental functionality are more widely available. As a result, the product cycle could end up being more prolonged this time around versus prior launches."

He lowered his target price for the stock to $150 (U.S.) from $160. The analyst average price target is currently $164.23, according to Bloomberg data.

"At 15 times and 11 times NTM [next 12 month] EPS [earnings per share] and FCF [free cash flow], the stock is trading near the upper-end of its recent valuation range and we believe it is tough to expect the multiple to expand," said Mr. Lamba. "With limited upside to EPS or FCF estimates, we think the stock is fully valued."

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TD Securities analyst Michael Tupholme upgraded Russel Metals Inc. (RUS-T) to "buy" from "hold," calling its risk-reward profile "attractive."

"RUS is down 12 per cent since reporting better-than-expected Q1/17 results on May 3," the analyst said. "We are not overly surprised by the stock's recent weakness (we cautioned about this possibility after RUS' Q1/17 results), as U.S. domestic steel prices have been under pressure of-late (i.e, HRC is down 11 per cent since peaking in early-April). Recent oil price weakness also appears to have weighed on RUS. "

"Russel's valuation is compelling, in our view. RUS is trading at an enterprise value to forward 12-month  EBITDA multiple of 7.7 times (on our estimates) , a 17-per-cent discount to its five-year average of 9.3 times. Notably, RUS has not traded at a forward valuation this low in over two years, while its 6.3-per-cent dividend yield is relatively healthy by historical standards."

Mr. Tupholme also touted the Mississauga-based company's "favourable" near-term outlook, feeling it is "well-positioned" to benefit from improving demand.

"Further, although U.S. steel prices have weakened in recent months, we see several factors as offering downside support (i.e., low service center inventory months of supply, narrowing import-export spreads, and price hikes announced by numerous U.S. mills last week)," he said. "n the Energy Products segment, we expect increased drilling activity to continue to drive improved demand over at least the near-term."

"Finally, we note that the U.S. Department of Commerce (DOC) is expected to conclude and report on its current Section 232 investigation into steel imports this month (possibly as early as this week). Undoubtedly, we view this investigation and any subsequent action that may be taken by President Trump (i.e., possible imposition of tariffs/quotas on imported steel) as a 'wildcard' event that could have a variety of different implications for Russel. That said, as discussed below, we believe the investigation carries more upside potential than downside risk for Russel."

He maintained a $30 target for the stock. The average is $30.55.

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Expecting 2017 to be a transition year for Mogo Finance Technology Inc. (MOGO-T), Canaccord Genuity analyst Kevin Wright believes it "may be time for a breather."

Following last week's closure of its $15-million financing to be used toward its loan portfolio, Mr. Wright downgraded the Vancouver-based financial technology company to "hold" from "speculative buy."

"We continue to believe that the company has a good trajectory for revenue growth from its loan book in 2018E with the potential to realize incremental platform revenue from its mortgage brokerage and prepaid card segments which are very much in their infancy," he said. "2017 is expected to be a transition year before the company potentially returns to growth in 2018. Growth is expected to be driven by (1) its loan book as long-term loan interest is expected to offset the intentional migration away from short-term loans, (2) mortgage brokerage commissions, and (3) prepaid card transactions. The new segments of mortgage and prepaid cards are a meaningful portion of our sales estimates for 2018 so we will want to see evidence that the company can show traction in the back half of 2017."

Mr. Wright said the financing, which will be utilized to increase loan obligations over the next four to six quarters, took longer than he anticipated to close. However, he sees it as a good sign that Mogo has investor support to grow its loan book. He projects $60-million in new loans by the end of 2018.

"Given the four to six quarters that it likely takes management to deploy funds we expect limited impact to our financial outlook in 2017 which remains broadly unchanged though adjusted EBITDA is now expected to be in positive territory amid cost cutting," he said. "On the back of the financing, we expect higher revenue in 2018 based on a larger loan book. We now estimate revenue of $68.8 million (from $63.8-million) and adjusted EBITDA of $9.0-million (from $7.6-million) largely on expected cost savings noted during its Q1/17 conference call. We note that revenue ramp in new products of mortgage and prepaid cards represent nearly 21 per cent of our 2018 revenue estimates; we will revisit these estimates as the company reports its Q3/17 and Q4/17. This should help inform our view of whether the company is executing on deployment of products through its technology platform or if the company is relying more heavily on loans to fuel growth."

Mr. Wright increased his target price for the stock to $3.75, which is also the consensus, from $3.25.

"We like the company's lending business because of its long history of originating loans coupled with the low cost of acquisition from its Postmedia partnership," he said. "We have made adjustments to our financial outlook to reflect the deployment of new loans and rolled forward our valuation to 2018E while maintaining our one turn discount to peers. We have raised our target … based on 2018 estimated enterprise value/sales of 1.7 times versus peers at 2.6 times. Given the uncertainty around new product growth, we view a one turn discount as appropriate as there is risk of our new business estimates proving optimistic. The stock has shown tremendous returns for shareholders since its lows in October, up 220 per cent and up 27 per cent in the past three months. Nonetheless, with an implied negative 10-per-cent return to our target we have been prompted to lower our rating."

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Hudson's Bay Co. (HBC-T) is likely to remain focused on cost reduction initiatives going forward amid a challenging retail environment, said RBC Dominion Securities analyst Sabahat Khan.

Mr. Khan lowered his target price for shares of the Canadian retail giant following the release of first-quarter financial results, which featured earnings before interest, taxes, depreciation and amortization that fell below his expectations (a loss of $21-million versus forecast of a $55-million profit).

"HBC announced a sizable 'Transformation Plan' that the company expects will generate $350-million in annual savings by the end of fiscal 2018," he said. "Major elements of this initiative include the establishment of a number of shared services hubs and the reduction of approximately 2,000 positions across the organization. We are encouraged by the magnitude of the restructuring program (i.e. scale of headcount rationalization and expected savings); however, we have only reflected modest contribution from these initiatives in our forecasts. We expect top-line trends and Adj. EBITDA margins to remain pressured over near-to-medium term, and believe the cost reduction initiatives announced could help neutralize some of these headwinds. Management noted that a "significant majority" of the savings are expected to come from the headcount reductions.

"Over the coming quarters, we will be looking for updates on the amount of savings realized and whether these savings are sufficient to offset the challenges faced by HBC and the broader department store segment (i.e., is the company able to maintain EBITDA margins). Approximately $170-million of savings are expected to be realized by the end of fiscal 2017. Management noted that initiatives necessary to realize $125-million of the savings have already been completed as of Q1 2017 reporting."

Mr. Khan called the company's dividend reduction (to 5 cents annually from 25 cents) a "prudent step" toward cash conservation, citing its "heightened" debt position and "sizable" capex budget for 2017. He said he expects HBC to "moderate" those capex plans if the outlook becomes more challenging later in the year.

He dropped his price target for the stock to $9 from $13. Consensus is $13.35.

Elsewhere, BMO Nesbitt Burns analyst Wayne Hood lowered his Street-high target to $28 from $31 with an "outperform" rating (unchanged).

Mr. Hood said: "We see a long-term four-pronged value creation strategy (operating and acquiring global iconic branded department stores, creating cross-synergies via M&A, better controlling the life cycle of merchandise through the off price and flash web site channels, and surfacing the value of the underlying real estate) that is not fully reflected in the stock."

CIBC World Markets analyst Mark Petrie moved his target to $10.50 from $13 and maintained a "neutral" rating.

"The cost-cutting plan is substantial, but we suspect much of the savings will be reinvested in digital initiatives," said Mr. Petrie. "The entire department store space has been severely challenged of late and there are few signs of that trend changing anytime soon. Until industry square footage is reduced and HBC is able to generate higher margins from online sales or improve traffic to its physical stores, we expect the company's earnings to remain suppressed."

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International Petroleum Corp. (IPCO-T) is an "unmatched platform for growth," said BMO Nesbitt Burns analyst David Round.

He initiated coverage of the IPC, formed as a spin-off of Lundin Petroleum AB's assets in Malaysia, France and the Netherlands, with an "outperform" rating.

"Lundin companies have a strong track record of value generation, and IPC's strong management team, cash-generative operations, and a seeming abundance of opportunities provide a strong basis from which to continue this trend, in our view," he said.

Mr. Round pointed to the company's "clear" inorganic growth strategy as well as its cash flow potential.

"Management has likely identified, and will continue to identify, opportunities that have suffered under-investment, have tangible development or exploration upside, or are simply attractively priced within a willing seller's portfolio," he said. "Management's ability to increase focus on IPC's existing assets is also likely to yield incremental value."

"Highly cash-generative assets support the growth story. We estimate IPC's assets are capable of initially generating in excess of $100 million per annum, implying a yield in excess of 30%. Current commitments are low (less-than 10 per cent of cash lows needed to fund capex), implying that the balance can be allocated to M&A opportunities."

He set a target price of $5.70.

"IPC's relatively low-risk, cash-generative model stands apart from the rest of the International E&P sector," the analyst said. "The shares are trading at a 20-per-cent discount to our valuation, which, in our view, represents a compelling opportunity for investors given the attractiveness of IPC's assets. We fully expect IPC's expertise and positioning in the cycle to facilitate future value creation so believe our core NAV [net asset value] of $5.70 per share should be a floor for the stock with IPC better positioned than most to capture opportunities that have proved accretive for peers recently."

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Citing a higher EBITDA forecast and multiple expansion, RBC Dominion Securities analyst Wes Golladay raised his target price for both Marriott International Inc. (MAR-Q) and Hilton Worldwide Holdings Inc. (HLT-N).

Hiking his target for Bethesda, Md.-based Marriott to $109 (U.S.) from $92, versus a consensus of $103.65, Mr. Golladay said: "We believe the multiple expansion has been driven by greater appreciation for Marriott's organic growth profile and for the visibility for growth from a consumer discretionary name. Moreover, the credit card fee opportunity was an incremental positive."

The analyst expects the company's unit growth to "remain elevated," saying its pipeline equates to 36-per-cent growth" which provides solid visibility for unit growth beyond MAR's analyst day model, which called for a 6.5-per-cent CAGR [compound annual growth rate] of net unit growth through 2019."

"RevPAR [revenue per available room] growth, which is likely to remain modest over the near term as the U.S. lodging industry remains in a low-growth mode, is likely to add an extra layer of growth," he said.

Mr. Golladay said the company's opportunity to renegotiate its credit card agreements is an "incremental positive" as well. Its deal with Chase expires in 2018 followed by its American Express deal in 2020.

"The programs contributed $1.3-billion to the loyalty program in 2016, with MAR receiving $173-million of fees," he said. "Due to the undisclosed complex formulas supporting the agreement between MAR and the credit card companies and MAR and owners, the range of potential outcomes is wide. While the timing and ultimate upside vs. the existing deals are unclear, the fee component was indicated to be at least 20 per cent higher or $35-million.

"There are other potential benefits of a credit card deal. MAR's cobranded credit cards generated $60 billion of sales in 2016 for which the co-brand partner charged an interchange fee. In some co-branded partnerships, the interchange fee is reduced or not charged for the purchase of goods or services from the partner (ex. card user books a night at a Marriott hotel). MAR's hotels currently pay fees for credit card transactions, but management indicated that it would look to renegotiate the fees lower. While MAR does not own most of its hotels, the lower fees would benefit owners and further bolster the advantages of affiliating with MAR. Importantly, the exchange fee is an important profit driver for the partner, and the more non-partner transaction the better. Of the $60-billion of sales, $56-million was derived from outside of Marriott (93 per cent)."

He maintained an "outperform" rating for Marriott.

Also with an unchanged "outperform" rating, the analyst raised his target for Hilton to $71 (U.S.) from $62. Consensus is $66.23.

"We believe the multiple expansion has been driven by a greater appreciation for the organic growth profile of post-spin HLT and an appreciation for the visibility for growth from a consumer discretionary name," said Mr. Golladay. "Moreover, the credit card fee opportunity is an incremental positive."

Similarly, Mr. Golladay expects unit growth to be the primary growth driver for the McLean, Va.-based company.

"We believe HLT is on track to deliver elevated unit growth in 2017 and modest RevPAR growth will add an extra layer of growth," he said. "In total, we expect fees to grow 7 per cent – 9 per cent. Importantly, unit growth should remain elevated for the next few years, which provides visibility for incremental growth. International markets account for nearly half the pipeline and new brands are fueling growth in the U.S. The Tru by Hilton brand has accounted for 30 per cent of the mid-scale brand pipeline according to Smith Travel Research. While RevPAR growth has been low, it has stabilized and concerns of a deceleration appear to have abated. Importantly, system-wide growth should remain elevated for the next five years and should be able to offset any potential softness in RevPAR growth. HLT indicated 1-per-cent RevPAR growth equates to 10,000 room additions. The current pipeline totals 325,000 rooms including 168,000 that are under construction."

He added: "Hilton currently has two co-branded credit card partners (American Express and Citigroup), but both deals expire at the end of the year. On June 1st, HLT announced it had selected American Express to be the sole partner for its co-branded credit card starting on January 1st, 2018. For modeling purposes, we have assumed HLT would earn $65-million from its credit card co-partnership in 2017 and the fee would increase $35-million next year. HLT does not disclose details regarding its co-branded partnership, so we are taking what we believe is a conservative approach to modeling the segment."

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In other analyst actions:

 Pivotal Research Group LLC analyst Brian Wieser downgraded Adobe Systems Inc. (ADBE-Q) to "sell" from "hold" with a target of $112 (U.S.), up from $109. The average is $146.41.