Monday’s analyst upgrades and downgrades

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

Canadian National Railway Co.'s (CNR-T, CNI-N) operations in Prince Rupert, B.C., are a "well-kept secret poised for a bright future," said Desjardins Securities analyst Benoit Poirier.

Calling it a "key competitive advantage" for CN in an analyst note reviewing a recent tour of the facility, Mr. Poirier said: "All key stakeholders highlighted Prince Rupert's unique attributes, which include the following: (1) closest North American port to Asia; (2) deepest natural harbour in North America; (3) safe, sheltered and efficient access from international shipping lanes; (4) superior and uncongested rail and road connection to North American markets; and (5) strong community and labour support for expansion. CN's total transit time from Shanghai to Chicago is four days faster than LA/Long Beach and Vancouver."

He said the railway company's management sees "a bright future" for the Prince Rupert operations.

"In 2006, about 3 per cent of CN's revenue was derived from Prince Rupert. Following major investments, the operations grew significantly and now represent 7 per cent of total revenue. Looking beyond 2016, assuming it reaches 2.4 million TEUs [twenty foot equivalent units] by 2025, we calculate incremental revenue of $1.0-billion versus the current run rate of 1.0–1.1 million TEUs. Moreover, other opportunities with coal and other bulk commodities could contribute another $550-million to revenue."

Mr. Poirier maintained a "hold" rating and $106 target for CN shares. The analyst consensus price target is $103.05.

"We believe CN remains a quality stock, with volume growth and operating performance that should continue to outperform vs peers in 2017," he said. "That said, we believe these positives are already reflected in the current share price, as we foresee only 9-per-cent potential return to our target (based on our 2019 estimates). In addition, we see potential for only modest operational improvement in the coming years given CN's best-in-class performance."

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Apple Inc.'s (AAPL-Q) release of the iPhone 8 is a "game changer," according to RBC Dominion Securities analyst Amit Daryanani, previewing the tech giant's much-hyped Sept. 12 new product event.

"This year's September event is easily the most anticipated iPhone launch given expectations for the first major form factor change since the iPhone 6 cycle and excitement surrounding a host of revolutionary features/capabilities alongside evolutionary updates surrounding the flagship device," said Mr. Daryanani . "In addition, we expect Apple to introduce a new TV Product (4K streaming capability) and better standalone Watch (LTE-enabled). Although expectations remain high, we think the event still has potential to surprise investors on the upside, particularly as some of the new iPhone features are demonstrated live. Based on our recent survey results and our expectations of a higher ASP for the flagship iPhone ($999-$1,199 range) we think fundamentally, the new device has the potential to drive unit, ASP, and gross margin upside for AAPL in December quarter & beyond."

Mr. Daryanani highlighted his top 10 expectations for the event, noting: "Optically, the next generation flagship iPhone will feature a brand new form factor with an OLED display that spans edge-to-edge (approximately 5.8 inches). We think the new device will also include multiple new features to enhance the consumer experience. Key upgrades include: 1) Upgraded A11 processors manufactured by TSMC (10nm process), 2) wireless/inductive charging capability (most exciting new feature based on our survey), 3) virtual home button embedded in the display, 4) 3-D facial recognition sensor for front-facing camera (potential replacement to Touch ID), 5) AR enabled rear-facing vertical dual lens camera, 6) glass front and back with stainless steel edges, 7) improved water resistance, 8) 3GB of RAM, 9) 64GB and 256GB storage tiers, and 10) improved water resistance. We also expect Apple to introduce two new LCD iPhones (4.7 inches and 5.5 inches) alongside the OLED device with glass bodies/aluminum frames and upgraded processors. We expect pricing for the OLED device to start at $999 while the LCD models should be priced similarly to the current 7/7-plus."

He has an "outperform" rating and $180 (U.S.) target for Apple shares. Consensus is $170.06.

"We believe AAPL's current stock price creates an attractive entry point for investors to benefit from its ability to return to revenue and EPS growth in FY17," he said. "We believe multiple catalysts remain as the company benefits from: (1) iPhone ramps; (2) Mac/iPad refresh cycle; (3) potential iTV launch or other major product lines; and (4) improvements in capital allocation policy. We believe the fundamental reality remains that AAPL's valuation is materially sub-par to what we anticipate is its long-term revenue and EPS potential."

Meanwhile, Macquarie analyst Benjamin Schachter, who has an "outperform" rating and $180 target on the stock, said Apple's "visible innovation" will drive demand.

Mr. Schachter said: "We remain bullish on AAPL and continue to be in the 'supercycle' camp on the next iPhone, as well as its ability to drive app sales. We expect the next iPhone to include innovations that will be clearly visible, marketable, and useful for the mass-market globally. The days of pure spec increases driving demand are long over. Our confidence comes in large part from our view of pent-up demand. If we look back to the iPhone 6, our view is that simply having a larger screen was a key factor that led to the largest iPhone upgrade cycle. Since then, there has been relatively limited innovation and visible change. We think that with expected innovations around AR, wireless charging, viewable screen size, OLED, and more, the next iPhone is clearly poised for its largest upgrade cycle yet. While we'll leave it to others to specifically estimate unit impacts of potential supply chain delays, our view is that as long as demand is as strong as we expect, AAPL will (as always) eventually be able to meet demand. If units are delayed from Sep into Dec or Mar quarters, it won't meaningfully impact our valuation. We are slightly increasing our FY19 iPhone unit estimates as well as our Services revenue to reflect increased confidence in the new innovation to drive hardware and software (including AR-based apps) demand (while being aware that supply issues may impact our fiscal 2018 estimates)."

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Raymond James analyst Johann Rodrigues added StorageVault Canada Inc. (SVI-X) to the firm's "Canadian Analyst Current Favourites" list.

"StorageVault, at current levels, provides investors with a very compelling entry point into a stock and sector that is still in the early innings of its evolution," said Mr. Rodrigues.

"We expect StorageVault should grow same-property net operating income (SPNOI), funds from operations (FFO) and net asset value (NAV) at a rate that is largely unparalleled in the Canadian real estate sector, and as the only public Canadian storage company, it is the only way for investors to play an asset class that has been the top performer in the U.S. over the last 10, 15, and 20 year period. We expect the Canadian self-storage space to follow a similar path, with SPNOI growth expectations between 8-10 per cent for at least the next two to three years, during which time, we expect FFO per unit to more than double. With the closing of the Sentinel acquisition, we think the company is also now of sufficient scale that it should begin to attract the attention of U.S. investors. The stock has traded off its high, with a fairly small premium to NAV compared to historical levels, and we think a string of strong quarters will be the trigger for it to move higher again."

Mr. Rodrigues has a "strong buy" rating and $3 target for shares of the Toronto-based company. The analyst consensus price target is $3.61.

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Barkerville Gold Mines Ltd. (BGM-X) has been "reinvigorated" after investors shunned its previous management, according to Industrial Alliance Securities analyst George Topping.

He initiated coverage of the Toronto-based junior gold exploration and development company with a "speculative buy" rating.

"The previous management team suffered from poor market perception, the peak of which was a widely derided 2012 resource estimate by Peter George, QP, for a 10.6 million ounces at 5.3 grams per ton Indicated resource with potential for a further 65-90 million ounces," said Mr. Topping. "Barkerville's current management team was installed from mid-2015 and is experienced in both exploration and development."

Mr. Topping emphasized the company's exploration success thus far at its Cariboo gold project in British Columbia, which features three underground mines and one one-pit mine, noting: "Management initiated an aggressive exploration program in 2016 with a planned 120 kilometres of drilling per year for the next four years. The results from 190 holes across three distinct zones, Island Mountain, Cow Mountain, and Barkerville Mountain, have averaged 13.0g/t over 2.3 metres at depth of 224 metre. There are currently 10 drills working the property."

"While current drilling is focused on delineating a resource for a large mine development, regionally, there is good potential along the 67-kilometre trend. There is likely material value in the planned 30,000 metres p.a. district-scale exploration program."

Mr. Topping set a price target for Barkerville shares of $1.50. The analyst average target is currently $1.60.

"Barkerville's value will be derived from its exploration success or failure," he said. "Given the positive results to date, we believe success is the much more probable outcome. We note valuations on resource companies tend to vary between 5-10 per cent of the in-situ value of the resource. If we choose a value in between those end points, the current enterprise value of $244-million would require a 2.5Moz resource valued at $100/oz to support it. We believe an updated resource estimate including Cow Mountain and Island Mountain should handily exceed this number."

He added: "A management team accustomed to rapid exploration and development, combined with technical know-how and excellent drilling results to date, should drive fund flow into BGM."

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Brick Brewing Co. Ltd. (BRB-T) displayed "impressive" sales volume growth in the second quarter despite weak industry trends, said Laurentian Bank Securities analyst John Chu.

On Sept. 8, the Kitchener, Ont.-based company reported a rise in total branded sales of 10.6 per cent year over year during a period that saw Ontario industry beer volumes fall by 8.4 per cent.

"This suggests market share gains for Brick driven by its strong brand portfolio, its brand redesign and the grocery channel," said Mr. Chu.

Quarterly adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $3-million was in line with the $3.1-million projection of both Mr. Chu and the Street. Sales of $15.9-million exceeded both the analyst's estimate ($15-million) and the consensus ($15.6-million).

"Sales were better-than-expected driven by strong volumes across most key brands (Waterloo, Landshark/Margaritaville, with Laker showing good growth but a little below our estimates), as well as Other Beer Brands, Seagrams and copacking volumes," the analyst said. "Product mix resulted in softer margins."

"Our sales forecast is essentially unchanged as we lowered our Laker volume growth modestly and accounted for the loss of Formosa Springs and Red Barron brands to the Formosa plant sale (represented less-than 2 per cent of BRB's total sales volumes); this was offset by higher growth expectations from Waterloo, Landshark /Margaritaville, Seagrams and co-packing. We also lowered our margin assumptions to reflect FQ2, offset partially by increased efficiencies (SM&A) from the consolidated Kitchener facility; as a result, our EBITDA is down a little."

Calling the stock "cheap," Mr. Chu maintained a "buy" rating. He raised his target to $4.70 from $4.60. Consensus is $4.50.

Elsewhere, Industrial Alliance Securities analyst Brian Pow also increased his target by a dime (to $4.50) with an unchanged "buy" rating.

Mr. Pow said: "We view the Q2/FY18 results positively. BRB continues to show strong volume growth. The downward pressure on gross margins is expected to be partially offset by cost savings from the supply chain consolidation project (estimated at $600,000 per year)."

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Though he remains optimistic about its "leadership position in a market that remains early in the online share shift," Credit Suisse analyst Paul Bieber thinks shares of GrubHub Inc. (GRUB-N) now contain "an optimistic scenario on the magnitude of accretion from recent acquisitions."

He lowered the New York-based company, which provides an online and mobile platform for restaurant pick-up and delivery orders, to "neutral" from "outperform."

"We estimate that recent acquisitions (Eat24, Fooddler and OrderUp) have the potential to generate $17- $58-million in EBITDA in 2018 but we think GRUB will likely guide to the low end of the accretion range in January," said Mr. Bieber. "Assuming the low end of the accretion range, shares are fairly valued at 18 times 2018 enterprise value/EBITDA and 39 times 2018 Non-GAAP EPS. As such, we are lowering our rating to Neutral and await a more attractive entry point."

His target for the stock rose to $53 (U.S.) from $50. Consensus is $52.89.

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Believing its organic growth opportunities are underappreciated, BMO Nesbitt Burns analyst Devin Dodge initiated coverage of Brookfield Infrastructure Partners LP (BIP-N, BIP.UN-T) with an "outperform" rating.

"Over the past two years, BIP's backlog of internal capital projects has doubled, underpinned by projects in its U.K. regulated distribution business, European telecom infrastructure operator and various businesses in Brazil (toll roads, electrical transmission, rail)," said Mr. Dodge. "Going forward, we expect BIP's capital backlog to remain strong with potential upside as new mandates are awarded. BIP has targeted a number of initiatives across its businesses that could add $1.5-2.0-billion to its existing backlog (Q2/17: $2.4-billion) within the next 6 to 12 months. We believe these organic growth opportunities tend to generate attractive returns with below-average risk."

The analyst also emphasized BIP's "strong" track record of earnings growth, noting: "Over the last seven years, BIP has increased its FFO/unit by a CAGR of 22%. We believe this reflects the company's ability to secure new investments, attractive organic growth opportunities, and operational improvements in the underlying businesses. With a strong backlog of growth capital projects and the benefits from recently completed transactions, we expect the strong growth momentum to continue and project FFO/unit growth to average ~15% over the next three year."

He set a $48 (U.S.) target. The consensus average is $44.65.

"In light of the outlook for FFO/unit and distribution growth to exceed targeted levels, we believe BIP's valuation is attractive," said Mr. Dodge. "BIP is currently trading at a 3-per-cent discount to its historical average P/AFFO multiple with a yield of 4.0 per cent."

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In other analyst actions:

TD Securities analyst Aaron MacNeil initiated coverage of Trinidad Drilling Ltd. (TDG-T) with a "buy" rating and $2.25 target. The analyst average target is $2.87.

Mr. MacNeil also initiated coverage of the following stocks:

• Calfrac Well Services Ltd. (CFW-T) with a “buy” and $5 target. The average target is $4.98.
• Precision Drilling Corp. (PD-T) with “action list buy” and a $6 target. The average is $5.51.
• Western Energy Services Corp. (WRG-T) with a “hold” and $1.50 target. The average is $2.11.
• Ensign Energy Services Inc. (ESI-T) with a “buy” and $7.50 target. The average is $8.02.
• Step Energy Services Ltd. (STEP-T) with a “buy” and $12 target. The average is $14.

Scotia Capital analyst Trevor Turnbull upgraded Centerra Gold Inc. (CG-T) to "sector outperform" from "sector perform" and raised his target to $11 from $8. The average is $8.75.

Scotia Capital analyst Ovais Habib downgraded Richmont Mines Inc. (RIC-T) to "tender" from "sector outperform" with a target of $12.25. The average is $13.67.

Laurentian Bank Securities analyst Ryan Hanley also downgraded Richmont to "tender" from "buy" without  specified target.