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Thursday's analyst upgrades and downgrades

A flare burns over the Exxon Mobil Corp. Torrance refinery after an explosion and fire in Los Angeles, California, U.S., on Wednesday, Feb. 18, 2015. An explosion this morning at the Exxon Mobil Corp. refinery is creating concerns that limited oil refining capacity in California could raise fuel prices.

Patrick T. Fallon/Bloomberg

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

2017 is shaping up to be "robust" for WSP Global Inc. (WSP-T), according to Raymond James analyst Frederic Bastien.

In reaction to "solid" fourth-quarter 2016 results, released Wednesday, Mr. Bastien upgraded his rating for the Montreal-based professional services company to "strong buy" from "outperform." He also added the stock to Raymond James' Analyst Current Favourites list.

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"We continue to believe WSP Global should be at the core of every infrastructure portfolio," he said. "Our recommendation rests on the firm's entrepreneurial DNA, strong technical expertise, proven roll-up model, healthy balance sheet and ever-growing diversification. It also helps that WSP stands to capitalize on a projected upswing in transportation infrastructure spending across most industrialized regions of the world.

"For proof, consider that the firm was recently appointed as design partner for both the Kuala Lumpur to Singapore high-speed rail project as well as HS2's Phase 2B, which will connect Birmingham to Manchester and Leeds. This adds to a long list of high-profile projects WSP is already busy working on closer to home, including Montreal's Turcot Interchange, the new Pensacola Bay Bridge in Florida, the redevelopment of LaGuardia Airport's Central Terminal and California's high-speed rail (HSR) project. Notwithstanding this momentum, WSP's stock trades at a notable discount to the peer group's average forward EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization] multiples, which runs contrary to the 0.5 multiple point premium it has commanded for the past five years. We don't see this discrepancy lasting long."

Mr. Bastien maintained a $55 target price for the stock. The analyst consensus price target is $49.64, according to Thomson Reuters.

Elsewhere, Desjardins Securities analyst Benoit Poirier upgraded the stock to "buy" from "hold" and raised his target price to $52 from $48.

"We view WSP's current valuation of 9.5 times EV/EBITDA FY1 as attractive versus its historical average (five-year average of 10.3x) for a company with an attractive dividend yield of 3.2 per cent," said Mr. Poirier. "In addition, we believe that the solid balance sheet and FCF [free cash flow] prospects (5.2-per-cent yield) provide dry powder for M&A in the short to mid-term. We are also encouraged by WSP's record backlog and positive tone on its outlook amid prospects of increased public and P3 [public-private partnerships] spending in the US, the UK, Canada and Australia."

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Exxon Mobil Corp.'s (XOM-N) valuation metrics against the market are "starting to look more normal," according to Credit Suisse analyst Edward Westlake.

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Despite noting there are cheaper major U.S. energy companies and faster growth pure play Permian shale players in the sector, Mr. Westlake said ExxonMobil's "relative overvaluation" has "subsided." Accordingly, he raised his rating for the stock to "neutral" from "underperform."

"Back in 2014 when we highlighted an oil correction looked imminent, and when we downgraded XOM to underperform in early 2015, our thought process was very much signaling our view that XOM should underperform versus the S&P," said Mr. Westlake. "Since then XOM has underperformed the S&P by 25 per cent. The dividend yield is now wider than it has been for a decade on a relative basis.

"At our $65 per barrel Brent, the free cashflow (a better valuation metric) would be 100 basis points above the Russell 1000. This is not just a maintenance level of free cashflow. XOM's $25-billion of spend is driving value growth. Hence it is easy to envisage a TSR [total shareholder return] of 7-8 per cent with Brent in the $60s per barrel. With 70-per-cent liquids linked production, there is lots of XOM option value to higher oil prices if they materialize (plentiful shale notwithstanding). This call is very much a 'relative to the S&P call.' XOM's presentation (and CVX's next week) had the obligatory Permian advert. Many folks will therefore just remain long the Permian players. There are other Majors which are demonstrably cheaper (e.g. RDS and in Canada). However, in absolute terms, XOM shares are now more fairly valued."

Mr. Westlake also emphasized the company's excitement about the future in justifying his rating move.

"XOM continue to believe that the scale and return on their investment portfolio is improving," he said. "This underpins confidence in a slightly higher production outlook, improving free cashflow and a growing dividend."

He added: "With a downturn in commodity prices and the shale revolution it seems odd that XOM can be so optimistic – the oil price still matters. Partly this reflects their belief in the ability to structure businesses that can outcompete both on cost and technology. We would also argue that the underlying decline treadmill and growing energy use as population expands and GDP rises creates a substantial investment need. XOM's $25-billion per annum is a fraction of what needs to be spent. Allocate this capital to large resources where technology can improve recovery factors, to growing chemical demand and higher valued refined products and XOM should create a ROCE above cost of capital through the cycle for years to come. Running a tight balance sheet also creates occasional cyclical opportunities to acquire assets at pennies on the dollar – our ExxonVolcker Rule. XOM's advantage lies in its global reach to take advantage of distressed opportunities in whichever geography, hydrocarbon, or industry (e.g. chemicals) they arise."

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Mr. Westlake raised his price target for the stock to $83 (U.S.) from $78. Consensus is $88.23.

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Canaccord Genuity analyst Robert Young expects a "strong" 2017 from Kinaxis Inc. (KXS-T).

He raised his target price for shares of the Kanata, Ont.-based provider of cloud-based subscription software for supply chain operations in reaction to its fourth-quarter 2016 financial results, released Tuesday.

"Kinaxis delivered another solid quarter of strong subscription revenue growth up 34 per cent year over year; however, slower professional services revenue growth driven by maturation of the channel led to a slightly weaker than expected top line," said Mr. Young. "Increased costs related to headcount growth, data center expansion, and increased OpEx tied to recent customer wins given Kinaxis' practice of expensing all period costs led to a miss on the bottom line. In Q4, revenue grew 25 per cent while EBITDA margins were just over 21 per cent. Net revenue retention remained at over 100 per cent. Again, the company delivered strong growth and EBITDA margin, the leading combination of which is the cornerstone of our premium valuation."

Mr. Young was also encouraged by the company's "strong" guidance for the 2017 fiscal year, saying Kinaxis "did not disappoint" investors with expectations that exceeded both his projections and the Street's estimates.

"Furthermore, Kinaxis is seeing multiple drivers of pipeline growth including direct sales efforts bolstered by an improving profile and new sources of unaided lead generation, growing contribution from the channel, new regions including Korea and Japan, as well as existing customer expansion," the analyst said A" larger number of opportunities of growing size is the overall theme. Moreover growth is shifting further to new wins, with 65 per cent of subscription growth being driven by a healthy pipeline of new customers in F2017 (from 60 per cent in F2016) while the remainder is driven by existing customer expansion. In our view, this is a healthy mix. By the numbers - For 2017 the company expects top-line revenue of $140-$144-million with underlying subscription revenue growth of 25-27 per cent. The guide includes the impact of a planned customer roll-off (BlackBerry) in H1 ($1-million in each of Q1 and Q2) Adjusted EBITDA margin is expected to range from 24-26 per cent. The subscription revenue growth has stabilized after 2016 where professional services growth was stronger. We expect Kinaxis is conservative in its guidance at the outset of the year, similar to Q4/F15, and precedes the opportunity for further customer wins given its strong funnel which could ratchet guidance higher through F2017.

"Our view on Kinaxis is that its software provides strong ROI to its customers in hard dollar savings. The SaaS delivery model outsources IT, application and database while the RapidResponse application itself provides real supply chain efficiencies. We would argue that in a difficult revenue environment, supply chain efficiencies will become increasingly important. In addition, we believe this offers strong pricing control, consistent with the past."

With a "buy" rating (unchanged), Mr. Young increased his target price for Kinaxis shares to $80 from $74. Consensus is $79.42.

"Kinaxis remains a very strong combination of revenue growth and EBITDA margin, and we believe this supports a premium valuation … Kinaxis is either the highest or amongst the highest ranked for growth and profitability," he said. "The company drives very strong ROI for its customers and we would argue that in a difficult revenue environment, supply chain efficiencies will become more important. Kinaxis has a leading combination of growth and profitability amongst cloud software peers. Furthermore, Kinaxis offers hard dollar benefits from supply chain efficiencies which protect it from being cut when enterprise whittles down its vendor list in tough times. We argue there is a scarcity premium paid in Canada on profitable subscription software with a strong execution history."

BMO Nesbitt Burns analyst Thanos Moschopoulos raised his target to $83 from $74 with an "outperform" rating.

He said: "We believe that Kinaxis is very well positioned in its core markets, based on the strong customer and industry feedback we've received, and evidenced by the company's impressive customer list and growth rate. In our view, the company's strong underlying growth should drive ongoing long-term upside to the share price."

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BMO Nesbitt Burns analyst Sohrab Movahedi raised his target price for National Bank of Canada (NA-T) in response to its first-quarter 2017 financial results.

"NA's earnings per share of $1.35 was ahead of our expectations of $1.30 and consensus of $1.26 and included a $1-million pre-tax gain (2-3 cents after tax) related to a change in NA's insurance distribution model," said the analyst. "Operating results were otherwise higher double digits year over year across the primary segments: P&C up 18 per cent (higher risk-adjusted margins; lower expenses), Wealth Management up 26 per cent (AUA/AUM growth and better NIX), and Financial Markets up 23 per cent (record trading quarter). PCL ratio was stable at 19 basis points and the CET1 ratio was 10.6 per cent."

With a "market perform" rating, Mr. Movahedi bumped his target to $60 from $56. Consensus is $59.52.

"We have a guarded view of NA's capital management discipline," he said. "The bank benefits from the duopoly in Quebec, which is offset by a higher proportion of earnings coming from less predictable, and therefore, lower-multiple wholesale earnings. NA's international expansion strategy, while likely to help with earnings growth, does come with additional risks."

Elsewhere, Credit Suisse analyst Nick Stodgill callled the results a "strong start" to 2017, raising his target to $57 from $54 with an "underperform" rating.

"All businesses posted strong growth this quarter but we continue to believe NA's valuation (3 per cent above average) reflects the positive catalysts we see on the horizon, including benefits of efficiency initiatives, release of the sectoral and higher dividend growth," said Mr. Stodgill.

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McDonald's Corp. (MCD-N) is "delivering against high expectations," said Credit Suisse analyst Jason West after attending the fast food giant's annual investor day in Chicago on Wednesday.

"Updated long-term guidance came in generally better than expected (based on our recent conversations), with particular focus likely being paid to incremental G&A savings and lower run-rate capex post the U.S. reimage initiative (which should be complete by 2020)," said Mr. West. "Management is now targeting 2019 G&A of $1.8-1.9-billion (below consensus $1.94-billion). This will bring G&A to just under 2 per cent of system sales on our model, closer in line with franchise peers. Run-rate capex will decline to $1.2-billion by the 2019-2020 timeframe (depending on cadence of U.S. remodels, which MCD will help fund), down from $1.8-billion in 2016 and $1.7-billion planned for 2017. Together, this would drive run-rate free cash flow (post reimaging of U.S. estate) to $5.8-billion on our model, up from $4.2-billion in 2016. At a 4.5-per-cent yield, that could translate to a $170 stock within 3-4 years (8-10-per-cent compound annual return)."

Based on the guidance, Mr. West lowered his 2017 earnings per share projection by 4 cents to $6.01. His 2018 estimate rose by 2 cents to $6.46.

With an "outperform" rating, his target price for McDonald's stock jumped to $137 from $130. Consensus is $131.50.

"We continue to see value in MCD's long-term cash-generating potential: management is targeting total capital returns of $22-24-billion over the next three years (approximately 20 per cent of market cap)," said Mr. West. "Returns should increase over time as MCD's capex spend comes down. We also view mgmt.'s increased focus on digital/mobile in the U.S. as a positive step to return that business to growth. Market expectations are high, but the combination of cost savings, capital returns and turnaround potential for the US business could continue to drive the stock higher, in our view. Key risks include increased use of discounting among competitors and execution on G&A and capex targets."

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RBC Dominion Securities analyst Shelby Tucker called Pattern Energy Group Inc.'s (PEGI-Q, PEG-T) 2017 guidance "light" and expects investors to focus on its development activities going forward.

"On balance, we continue to side with management that it makes strategic sense for Pattern Energy to participate in development activities, and we expect long-term fundamental investors to be generally more supportive," said Mr. Tucker. "However, some investors who may be adverse to development include pure 'YieldCo' and shorter-term investors, and building shareholder support for this shift in strategy will remain a key focus for management. As such, management indicated that it will be publishing a 'white paper' to explain the financial benefits and risks of development."

On Wednesday, the San Francisco-based wind power producer announced fourth-quarter financial results that largely met Mr. Tucker's expectations. Adjusted earnings before interest, taxes, depreciation and amortization of $85-million (U.S.), slightly above his projection ($84-million) and the consensus estimate ($79-milllion).

"Management reiterated its target to double the generation portfolio to over 5,000 MW by 2020," the analyst said. "We believe a key factor in achieving the target is having access to a competitive source of capital to fund growth. In addition, management is targeting to achieve approximately $15-million of savings in operating and overhead costs over the next 3–5 years."

Mr. Tucker reduced his 2017, 2018 and 2019 adjusted cash flow from operations projections to $2.29, $2.41, and $2.40, respectively, from $2.49, $2.50, and $2.47 in order to reflect higher expense costs, a recent high-yield debt offering and the company's 2017 guidance.

He also lowered his target price to $24 (U.S.) for Pattern stock (from $25) with an "outperform" rating. Consensus is $30.08.

"The company should be able to grow its dividend by growing the assets under management," he said. "Through its parent, PEG LP, Pattern has the opportunity to acquire an additional 1,366 MW that would be 'dropped down' from PEG LP through a ROFO mechanism. We expect management to achieve its targeted 10–12-per-cent dividend growth target through 2017. Moreover, valuation looks attractive, as the company trades at a meaningful discount to the value of its existing portfolio alone ($22/share), with additional upside from the execution of its growth backlog ($2/share)."

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In other analyst actions:

DREAM Unlimited Corp. (DRM-T) was raised to "buy" from "hold" at TD Securities by analyst Sam Damiani with a target of $9. The analyst average target price is $9.50, according to Bloomberg.

Secure Energy Services Inc. (SES-T) was raised to "strong buy" from "buy" at Industrial Alliance by analyst Elias Foscolos. His target rose to $13 from $12.25, while the average is $13.70.

TripAdvisor Inc. (TRIP-Q) was downgraded to "neutral" from "overweight" by Piper Jaffray analyst Michael Olson with a target of $47 (U.S.), down from $60. The average is $47.05.

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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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