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Thursday's analyst upgrades and downgrades

People visit a Tesla Model S car during the Auto China 2016 in Beijing, China, April 23, 2016.

Jason Lee/Reuters

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

EnerCare Inc. (ECI-T) has "solid" growth prospects across all its segments, according to Desjardins Securities analyst Mark Jarvi.

"In our view, each segment (home services, Service Experts (SE) and sub-metering) has a constructive growth outlook and we believe ECI could accelerate its capital deployment (increased rental growth and/or tuck-in acquisitions)," said Mr. Jarvi, following meetings with the company's management for institutional marketing.

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"[Internal rates of return] for the rental and sub-metering markets remain strong (in the mid-teens range), while ECI's cost of capital continues to improve — this means ECI remains well-positioned to drive continued value creation for shareholders. We believe one of the most significant questions that cannot yet be fully answered revolves around the growth and evolution of the SE business—ECI is preparing to launch rentals starting with SE's Canadian operations (representing 20 per cent of SE's EBITDA) in 4Q16 and selected U.S. states in 1Q17, but at this point we do not have a clear picture on how successful rentals might become through the SE platform. However, at current trading levels, we believe the uncertainties around SE in terms of rental potential and margin expansion are largely baked into the current share price. Overall, we believe ECI's non-promotional management can deliver on solid growth and we continue to view ECI as a strong total return (yield plus growth) story."

Mr. Jarvi said the possibility for "solid" growth across all three segments was evident throughout the meetings, which could drive both top-line growth and improved costs. He believes the home service segment can grow EnerCare's EBITDA compound annual growth rate at 4-6 per cent, the SE segment has a "reasonable" forecast of 8-10 per cent and the sub-metering and corporate segments can contribute 15-20 per cent and 4-6 per cent, respectively.

"Continued application of technology and increased cross-selling efforts are emerging as key opportunities to unlock value," he said.

He added: "Capital deployment could accelerate (financing flexibility in place), driving valuation upside. ECI has experienced favourable tailwinds in its cost of capital while still finding ways to deploy capital at attractive mid-teen IRRs. We believe capex demands could increase as [heating, ventilation and air conditioning] rentals accelerate and ECI looks to make selective tuck-in acquisitions in a fragmented HVAC industry. Increased capital deployment should drive further value creation and the capex can be covered by incremental leverage (in proportion to EBITDA growth), the potential addition of a DRIP and/or use of current financial liquidity."

Maintaining a "buy" rating for the stock, Mr. Jarvi raised his target by a loonie to $21. The analyst consensus price target is $19.70, according to Thomson Reuters.

"We view ECI as a strong total return opportunity that should deliver solid growth with an attractive (growing) dividend," he said.

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RBC Dominion Securities analyst Greg Pardy raised his target price for stock of Encana Corp. (ECA-N, ECA-T), touting its "increasingly attractive outlook."

He made the move following the Calgary-based energy producer's investor day in New York, which he said emphasized the depth and technical details of its drilling inventory across its Big Four plays and provided more "meat to the bone" on its five-year growth plan.

"What seems clear is that the Permian and Montney will remain the twin engines fueling Encana's targeted margin expansion and production growth over the next five years," said Mr. Pardy. "Encana is committed to all of its Big Four plays, in part given the benefit of flexibility that such diversification affords."

"In early September, Encana unveiled its updated 2016-21 strategy which pointed toward 60-per-cent corporate production growth, a doubling of its upstream margins as light oil & condensate become a bigger part of the mix, and 300-per-cent cash flow growth. This plan was framed in the context of a stable $55 WTI and $3 Henry Hub price outlook, and would consume about 15 per cent (1,500) of Encana's estimated 10,000 premium drilling locations across its Big Four plays. The company has identified 20,000 total drilling locations, including 10,000 in the Permian, 9,300 in the Montney, 1,000 in the Duvernay, and 600 in the Eagle Ford. Encana's growth initiatives are supported by absolute Permian production tripling to quadrupling, Montney gas doubling with liquids growing 4-5x, and stable Eagle Ford and Duvernay production on a combined basis. The plan encompasses 2017 capital spending in excess of cash flow, but this investment should become self-funding thereafter. Asset acquisitions or dispositions are not a part of the equation."

Mr. Pardy said the company's recent $1.15-billion common equity offering was initially a surprise to him, however he now says it makes "perfect sense."

"Had Encana not done so, unveiling its five-year growth plan would only have begged questions surrounding funding and oil prices," he said. "Alongside cost improvements, Encana's equity offering and accelerated growth profile have a favorable impact on its balance sheet leverage ratios."

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He maintained a "sector perform" rating for the stock and bumped his target to $13 from $12. Consensus is $11.28.

"On balance, we think there are very few rocks that can be thrown at Encana's fundamental outlook moving forward, but clearly delivery is crucial," said Mr. Pardy. "ith its five-year plan laid out — and credibly backed up by operating efficiency gains and its funding sources, Encana has now become an execution story, with its main potential catalysts revolving around its quarterly operating results, and any further asset dispositions. We are not inclined to chase Encana's shares given recent outperformance, but would look to add the stock amid a pull-back."

Elsewhere, AltaCorp analyst Nicholas Lupick upgraded the stock to "sector perform" from "sector underperform" and raised his target to $11 from $9.

Macquarie analyst Brian Bagnell upgraded it to "neutral" from "underperform" with an $11 target, up from $8.

Raymond James analyst Jason Frew reinstated coverage with a "outperform" rating and $14 target.

"ECA is now poised to grow production and cash flow meaningfully over the medium term with an inventory of over 10k 'premium' locations concentrated in the Permian and Montney stacked plays," said Mr. Frew. "ECA's premium inventory is conservatively based on 1) proven horizons, 2) oil and condensate hydrocarbons; and, 3) standard spacing. Growth should accelerate mid-2017 and into 2018 as a growth budget is deployed in 2017 and as new facilities come on-stream in the Montney."

He also said: "With a more focused portfolio and higher levels of spending, we believe ECA is set to deliver relatively strong cash flow growth over the medium term. As growth accelerates in 2018, valuation looks particularly compelling at a meaningful discount to large cap peers, while the balance sheet moves in line."

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Walt Disney Co. (DIS-N) is still months away from breakout out of its trading range, said RBC Dominion Securities analyst Steven Cahill.

"Disney is breaking into new valuation territory as secular worries at Cable and downward fiscal year 2017 consensus revisions (and concern about expensive M&A) have left the stock at its biggest valuation gap to the S&P500 in some time," said Mr. Cahill. "With the stock less-than $95 for the first time since late 2014 we think investors are wondering whether this is an opportunistic entry point, or a longer-term downward reset driven by heightened fears and lower EPS growth.

"We think the answer lies in the efficacy of estimates. Disney is a complex (beauty and) beast given the 5 operating segments, each with its own set of distinct revenue and cost drivers and an endless set of one-off timing events (e.g. NBA costs step-up this year and+ more regular season games on the new contract but the final is unlikely to be as successful. Modelling Disney accurately is no simple feat, so when estimates start to get cut, as they currently are for FY17, we think investors lack conviction to call the floor on forward EPS. This leaves the stock without support, perhaps exacerbated by the ongoing debate around ESPN and sub erosion."

After undertaking an "extensive" segment-by-segment modelling exercise, Mr. Cahill said he thinks the stock will remain depressed for "some time" with "the 'look through' to FY18 taking longer than some anticipate."

"We think there are a number of segment operating income drivers that aren't being estimated well," the analyst said. "At Cable Nets, we model programming expense growth of 12.2 per cent in FY17 comprised of 4.5-per-cent core and $570-million for the NBA step-up, abating to 4.0-per-cent programming cost growth in FY18. Our FY17/18 Cable OI estimates are below consensus by some $250-$300-million p.a. At Broadcasting, we think Hulu losses will be a bigger drag on OI than consensus has baked in. While it's well known that FY17 is an impossible comp for the Studio, we think estimates are still too high due to revenue share from [Consumer Products and Interactive Media]. Finally, pension accounting could drag Parks margins - a metric that investors are sensitive to. Combining the FY17 estimate opportunities and risks we see more downside than upside near term."

Mr. Cahill lowered his 2017 earnings per share projection to $1.11 from $1.18.

With an unchanged "sector perform" rating, he also dropped his target to $98 from $113. Consensus is $107.78.

"Taking all of this together, we do think DIS has good prospects of rerating when growth acceleration comes into view," said Mr. Cahill. "However, we think there could be 6 months or more between now and then, and a lot could happen in between. Adding up the potential FY17 opportunities and risk points, we think there could be share price downside of $4.50 or 5 per cent based on the current price. However, we think the net opportunity/risk picture improves as FY18 comes materially into view with more upside to our segment OI and the possibility that succession and M&A worries will have abated."

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Solid demand and product mix should drive strong iPhone average sales price trends for Apple Inc. (AAPL-Q), said Canaccord Genuity analyst T. Michael Walkley.

"Our U.S. surveys consistently indicate iPhone 7 Plus models out of stock more often than the iPhone 7," said Mr. Walkley. "Feedback indicates Plus models are particularly popular with consumers as a result of the dual camera system. Between the aggressive U.S. carrier promotions, favorable premium tier competitive environment due to the continued Galaxy Note 7 battery issues, improved iPhone 7 features and functionality, and stronger than anticipated initial consumer demand, we believe initial iPhone 7 sales continue to trend positively."

Accordingly, he raised his iPhone estimates for the December quarter to 76.5 million from 75 million. He also maintained his above-consensus ASP of $671 (U.S.), noting the iPhone 7 Plus is "increasingly" popular because of its dual camera system.

"We believe the mix of sales between iPhone Plus is stronger than last year and should have a positive impact on ASPs," the analyst said. "With iPhone 7 Plus consistently out of stock nationwide, we believe Apple is on track to re-stock these SKUs [stock keeping units] by the middle to end of October, in time for the holiday season. iPhone 7 Plus starts at $769 or $130 more than an iPhone 7, a $30 increase over prior models as a result of improved camera functionality. Further, the popular Jet Black model of the iPhone 7 and 7 Plus only starts at 128GB adding an additional $100 to the lowest price SKU for this very popular model, and this should benefit ASPs. Finally, we believe iPhone ASPs are benefitting from normal early adopter mix of higher memory SKUs across all models."

"Between the aggressive U.S. carrier promotions, favorable premium tier competitive environment due to the Galaxy Note 7 battery issues resulting in a product recall, and stronger than anticipated initial consumer demand, we believe initial replacement sales for the iPhone 7 in the U.S. market remains strong, leading us to slightly increase our December quarter iPhone estimate. We estimate roughly 20 million U.S. consumers have already paid off their iPhone 6 devices, resulting in a large base to benefit from very attractive carrier upgrade offers for the iPhone 7. Given this dynamic and the large installed base of U.S. iPhone consumers, we believe our upgrade sales estimates for the iPhone 7 could still prove conservative despite our increased U.S. iPhone sales estimate."

Mr. Walkley raised his 2017 and 2018 sales projections for the company, and he raised his earnings per share estimates to $9.07 and $10.18, respectively, from $8.93 and $10.12.

He did not change his "buy" rating or target price of $140 for the stock. Consensus is $126.96.

"We believe the iPhone 6 and iPhone 6s products enabled Apple to materially increase its market share and installed base of the premium tier smartphone market," he said. "We believe these trends resulted in the iPhone installed base growing to over 500-million exiting calendar year 2015 with overall connected Apple devices exceeding 1-billion users. This impressive installed base should drive strong future iPhone replacement sales and earnings, as well as cash flow generation to fund strong long-term capital returns programs of $250-billion through fiscal 2018."

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In a research note on the software and IT services sector, Raymond James analyst Steven Li provided updates on CGI Group Inc. (GIB.A-T, GIB-N) and Open Text Corp. (OTEX-Q, OTC-T).

"There has been quite a bit of news flow and hence a healthy debate around both CGI (Brexit, new CEO, Scotland, Accenture recent Q) and Open Text (its weak 4Q, acquisition of Documentum, hint at an equity raise) recently," he said. "We would be buyers of both CGI and Open Text ahead of their upcoming earnings reports (CGI – Nov. 9; Open Text – TBD, but typically last week in Oct/first week in Nov)."

For CGI, Mr. Li is forecasting fourth-quarter revenue of $2.64-billion and earnings per share of 91 cents, compared to the consensus of $2.62-billion and 90 cents.

"For F4Q16, we are looking for a solid quarter with further improvement in organic growth. Bookings might be a little soft (seasonally slower summer in Europe; we counted only 5 contracts announced this quarter)," he said. "We are forecasting another strong cash flow performance. We expect improved organic growth plus strong cash flow would likely result in some share price outperformance."

"At 17x forward P/E, CGI has not traded at these levels in the past 10 years. That said, we note IT vendor peer, Accenture, has also seen a multiple expansion driven by its 'new' segment outperformance (Digital, Cloud, Security now 40 per cent of Accenture's revenues and growing 30 per cent). While CGI does not break out its revenues (yet) into a 'New' segment, we estimate IP (20 per cent), Cloud and Cyber could easily add up to 25-30-per-cent of revenues for CGI and would be growing at 20 per cent."

Mr. Li maintained an "outperform" rating for the stock and raised his target to $69 from $65. Consensus is $67.10.

The analyst is projecting first-quarter 2017 revenue of $505-million (U.S.) for Open Text and earnings per share of 90 cents. The consensus estimates are $496-million and 88 cents.

"We are coming off a weaker-than-expected 4Q, with Americas license weak at down 18 per cent year over year," he said. "We believe 4Q16 had a tough comparable and also saw some timing issues (slippage), in which case we should see a strong rebound in 1Q – that's a favourable set-up for 1Q17."

Noting its valuation "still has room to go higher," he did not change his "outperform" rating and $80 target for the stock. Consensus is $69.11.

"OTEX currently trades at 12.3 times calendar 2017 estimated EBITDA and 13.1x C2017E price to earnings," the analyst said. "Historically, OTEX has spent most of its time trading between 7-14x EBITDA and 10-16x EPS. We believe there is room for a higher multiple if they execute. Also, other Canadian software M&A plays currently trade at even higher multiples (18x C2017E EBITDA)."

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The auto sector's "next leg is down," according to Goldman analyst David Tamberrino.

He expects earnings at U.S. auto makers to decline over the next two years due to negative pricing and lower production.

Accordingly, he downgraded the sector to "cautious" from "neutral."

"The U.S. auto cycle peaked in 2015 and is currently being held at a plateaued level by increasing OEM incentives," he said in a research note.

Predicting delays to its much-hyped Model 3 will hurt share performance, Mr. Tamberino cut Tesla Motors Inc. (TSLA-Q) to "neutral" from "buy" and lowered his target to $185 from $240. The average is $250.92.

He also cited the company's interest in SolarCity Corp. as a concern.

"Combination of Tesla and SolarCity - two high growth, high cash burn businesses, creates a higher risk entity," he said.

Mr. Tamberino downgraded Lear Corp. (LEA-N) to "sell" from "neutral" on valuation, suggesting the company's expectations are elevated following a series of conservative forecasts.

He lowered his target to $107 (U.S.) from $116, while the analyst average is $137.36, according to Bloomberg.

He also downgraded BorgWarner Inc. (BWA-N) to "neutral" from "buy" with a target of $35 from $37. The average is $39.21.

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In other analyst actions:

Spin Master Corp. (TOY-T) was rated a new "buy" at Cormark Securities by analyst David McFadgen with a target price of $38 per share. The analyst average is $34.42.

Sandler O'Neill & Partners LP analyst Jeffery Harte downgraded JPMorgan Chase & Co. (JPM-N) to "hold" from "buy" with a target of $72 (U.S.). The consensus average is $71.57.

Mr. Harte also downgraded Morgan Stanley (MS-N) to "hold" from "buy" with a target of $33 (unchanged). The average is $33.69.

Axiom Capital analyst Gordon Johnson upgraded SolarCity Corp. (SCTY-Q) to "hold" from "sell." He did not specify a target price. The average is $23.56.

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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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