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Thursday’s analyst upgrades and downgrades

A Shaw Communications sign at the company's headquarters in Calgary on Jan. 14, 2015.


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

FirstService Corp. (FSV-Q, FSV-T) continues to "deliver in spades," said Raymond James analyst Frederic Bastien.

However, he downgraded his rating for the Toronto-based residential property management company to "market perform" from "outperform" based on valuation, calling it expensive on both an absolute and relative basis.

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"The stock is trading at an EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization] multiple of 16.1 times our 2017 forecasts and at 17.0 times consensus figures, versus the average forward multiple of 14.0 times it has commanded since the June 2015 split from Colliers International," said Mr. Bastien. "At the same time FirstService's premium to its closest comps has never been larger — varying from 3.9 multiple points using our estimates to 4.4 multiple points using consensus. Although we feel FirstService's scarcity value and above-average growth prospects justify its premium, we're hard pressed painting a scenario where this gap widens further from here."

On Wednesday, in conjunction with its annual general meeting in Toronto, FirstService announced the acquisition of "another market-leading franchise" to its Paul Davis Restoration Operations in Omaha. Mr. Bastien projects the deal will contribute $10-million in revenues and EBITDA margins of 8-10 per cent after paying at the "low end" of its 4-5 times EBITDA target range.

"With [Wednesday's] transaction, last month's California Closets purchase in the Golden State and the January acquisition of Paul Davis National, the division has already surpassed the M&A targets we had previously set forth for 2017," the analyst said. "Since we continue to model two more tuck-ins for the balance of this year, we bumped our estimates and target price modestly higher."

Ahead of the release of its quarterly results on April 26, Mr. Bastien is forecasting an earnings beat with an EBITDA forecast of $18-million, ahead of the consensus of $14-million, which he said reflects 6-per-cent organic growth company wide as well as a 2-per-cent improvement in FirstService Brands' margin (to 7.5 per cent).

He raised his target price for the stock to $61 (U.S.) from $60. The analyst consensus price target is currently $55.25, according to Thomson Reuters.

"We are big fans of FirstService. So much so that we did not hesitate selecting its stock as our Best Pick for 2017 (on Dec. 12, 2016) even as other perfectly suitable alternatives in our coverage universe traded at more attractive valuations," said Mr. Bastien. "But with the share price up a healthy 37 per cent since then, compared to a gain of only 4 per cent for the S&P 500, we feel that FirstService's envious leadership position in North America's big and fragmented market for residential property services is getting appropriate recognition from the Street."

Elsewhere, CIBC World Markets analyst Stephanie Price raised her target for the stock to $64 (U.S.), from $56, with a "neutral" rating after meeting with the management of its Brands division. She raised her growth expectation for that division to 14 per cent (from 10 per cent) for 2017 based on its acquisition strategy and the expectation of further upside from larger deals, which will add recurring and maintenance revenue.


Industrial Alliance Securities analyst Brad Sturges downgraded his rating for Automotive Properties Real Estate Investment Trust (APR.UN-T), citing its "strong total return performance since its initial public offering in July 2015."

Moving the stock to "hold" from "buy," he pointed to the Toronto-based REIT's total return of 30 per cent since the IPO, compared to a 17-per-cent return for the S&P/TSX Capped REIT Index.

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"We believe that APR's premium valuation to its estimated NAV [net asset value] may limit the REIT's near-term price appreciation prospects," said Mr. Sturges. "APR provides investors an attractive 7.1-per-cent yield and trades at a relative discount valuation to its North American commercial REIT peers. The REIT's investment considerations also include the potential for additional distribution increases over time, an above-average remaining WALT [weighted average lease term to maturity] that provides defensive, stable cash flow and moderate growth prospects over time, and funds from operations per unit and adjusted FFO per unit growth prospects that reflect moderate annual SP-NOI [same-property net operating income] growth year over year and APR's potential access to a possible pipeline of related and third-party acquisition opportunities. However, these investment considerations are offset by the REIT's premium to its estimated NAV, and APR's investment risks that include high geographic and tenant concentration risks, perceived conflict of interest risks resulting from its external asset management trust structure, and below average unit liquidity."

Mr. Struges raised his target price to $11.50 per unit, which is the consensus, from $11.25.

"APR is uniquely positioned in the Canadian REIT landscape as the only REIT to solely focus on owning Canadian automotive dealership assets," he said. "APR's above-average remaining WALT combined with contractual rent increases offers investors greater cash flow stability and moderate income growth over time, which provides similar investment characteristics to that of longterm bonds with residual value exposure.

"At Dec. 31, the REIT's dealership properties have a WALT of 13.6 years, which compares to an average of 6.4 years for its Canadian-listed commercial REIT peers. APR's above-average remaining WALT combined with contractual rent increases offers investors greater cash flow stability and moderate income growth over time. We expect moderate SP-NOI growth for 2017 of 1.5 per cent year over year, reflecting contractual rent escalation clauses combined with stable occupancies."


Though he cannot find "specific" catalysts in its future, Raymond James analyst Andrew Bradford believes the current price for Horizon North Logistics Inc. (HNL-T) "is a good level at which to buy."

Accordingly, he upgraded the stock to "outperform" from "market perform."

"The company has repeatedly demonstrated creativity, which could create its own upside," said Mr. Bradford.

On Wednesday, the Calgary-based company announced its Industrial division has been awarded a three-year contract for the provision of camp solutions in the Qikiqtaaluk Region of Nunavut. It will provide a turnkey 380 person hybrid camp as well as services at the customer's existing camp facilities, according to the company.

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"Horizon North continues to demonstrate creativity in an otherwise adverse market for remote accommodations," said the analyst. "HNL has secured a $62-million contract over 3 years (which we assume will generate $12 to $15-million EBITDA over the same period). The contract takes HNL far outside of the western Canadian economy."

He added: "The various volumes of beds, new capital deployments, and their respective timing make forecasting highly uncertain. That said, we expect HNL's 380-bed camp will come from its existing inventory and the $7-million capital cost will relate mostly to moving and site preparation. On the revenue and EBITDA side of the ledger, $20-million revenue per year at a 20% to 25% margin seems reasonable as a starting point. This implies $4-million to $5-million in incremental annualized EBITDA over the next 3 years – perhaps longer as HNL will be the incumbent service provider. If our estimates even approximate the projects true economics, the return for HNL from this project should be reasonably high."

Mr. Bradford maintained a target price for the stock of $2. Consensus is $2.44.


Shaw Communications Inc. (SJR.B-T, SJR-N) is regaining its subscriber footing, said RBC Dominion Securities analyst Drew McReynolds in response to better-than-anticipated second-quarter results.

The analyst called the company's quarterly consumer revenue generating units (RGUs) result a "positive surprise" with net losses falling a mere 6,000, versus his expectation of a 30,000 subscriber drop and the decline of 42,000 in the same period of fiscal 2016. In explaining the year-over-year improvement, he pointed to its television segment (down 7,000 versus a decline of 26,000 a year ago) and Internet (up 13,000 versus 4,000 in 2016).

"Management attributed the improved RGU performance to the combination of WideOpen Internet 150 and the positive flow-through for television, early X1 traction with the quarter including three months of X1 in-market in Calgary and one month in-market in Vancouver, and two-year ValuePlan and bundled offerings," he said. "While better Consumer RGUs came at some expense to ARPU [average revenue per user] growth (up 2.6 per cent year over year in Q2/17 versus up 3.6 per cent in Q1/17), on balance, we view the trade-off as a positive considering the extent of the RGU improvement year over year well as surprisingly stable Consumer EBITDA margins. Although management did not commit to sustained positive television net additions indefinitely given a still intense competitive environment and formidable competitor in TELUS, management does expect television net additions to turn positive in Q3/17 suggesting early BlueSky TV traction is positive."

Mr. McReynolds called it a "good" quarter for wireless net additions too, however he said it's still a "transition" year. Wireless additions of 33,000 topped his 20,000 estimate.

"Management cautioned that given an intense competitive environment, quarterly wireless net additions will be volatile pending greater LTE deployment (expected mid-2017) and more LTE handsets (expected mid-2017)," he said. "Despite the better than expected wireless subscriber growth, we continue to view calendar 2017 as largely a transition year for wireless with greater subscriber and ARPU traction commencing in earnest in 2018."

Mr. McReynolds maintained an "outperform" rating for the stock and raised his target by a loonie to $30. The analyst average is $29.07, according to Bloomberg.

"In a maturing and competitively intense Canadian telecom industry, we see potential for sustained high-single-digit NAV [net asset value] growth driven by wireless, as well as improved wireline performance with X1 and 1 Gbps Internet deployments," the analyst said. "This renewed Shaw growth story will not be without its challenges, including execution, managing heavy wireless capex requirements, and facing a very strong wireline competitor in TELUS in Western Canada. Nevertheless, we believe the potential upside should Shaw gain wireless/wireline traction outweighs the downside and looks compelling relative to large-cap peers."

Elsewhere, Desjardins Securities analyst Maher Yaghi also raised his target to $30 (from $28.50) with a "hold" rating.

"SJR reported results that were financially in line, while subscriber numbers exceeded expectations. Management also guided to positive TV sub growth for the rest of FY17 due to the retention potential of BlueSky TV," he said. "We have significantly reduced our wireline sub losses; however, the stock's valuation remains elevated given the operational risk of the wireless strategy, as additional capex will be required to make the venture profitable in the longer term, in our view."

"We believe SJR is currently fairly valued as it trades at par with its peers and generates below-average EBITDA growth, but provides a decent dividend yield. We are supportive of the wireless venture, but we estimate its contribution to EBITDA growth will be modest over the medium term. Wireline subscriber trends are improving, but we will need to see more good results on that front before we become convinced that TV subs have stabilized."

Canaccord Genuity's Aravinda Galappatthige's target rise to $28 from $26 with a "hold" rating.

He said: "For us to place a target price of $31/$32, we would have to envisage a 9-times-plus enterprise value/EBITDA multiple on 2018 estimate which is a rarity in the Canadian Telecom space. On the other hand, while sub trends can get even stronger, we cannot assume a material upward revision to 2018 EBITDA considering X1 related costs and higher cost inflation in wireless. Further, given that a significant component of the thesis here is based on the wireless business, we would prefer to remain on the side lines during a period of some potential volatility in that segment."


CIBC World Markets analyst Todd Coupland raised his target price for Shopify Inc. (SHOP-N, SHOP-T) to $100 (U.S.) from $70.

Consensus is $67.75.

"We expect Shopify to continue to exceed expectations and be rerated once it achieves positive earnings," he said. "The first test will be in Q4/17 when the company is expected to have positive adjusted EBIT. After this, margins should continue to move towards the 2020 aspirational goal of 20 per cent.

"We also maintain that a price-to-sales metric remains an appropriate valuation tool until 2020 or when earnings and cash flow become positive. We believe that Shopify's momentum should continue and that its shares remain attractive and should be purchased."

He did not touch his "outperformer" rating.


Boeing Co. (BA-N) stock is in a "holding pattern," said Canaccord Genuity analyst Ken Herbert.

Ahead of the release of its first-quarter financial results on April 26, Mr. Herbert lowered his earnings per share projection to $1.94 (U.S.) from $2.08 as well as his free cash flow estimate to "basically break-even" to fall in line with the company's guidance. However, he said there is some upside to his lowered expectation.

Mr. Herbert said he adjusted his outlook to reflect the company's lower 737 and 777 deliveries as well as the timing of associated with Saudi F-15 cash receipts. A lack of any C-17 deliveries, compared to three a year ago, also weighed.

"One of the enduring stories in the commercial aerospace sector has been the continued strength in the industry fundamentals, which has provided a floor on concerns with the cycle and helped with confidence around the BA FCF story," the analyst said. "Note the February passenger traffic month was negatively impacted by timing of the 2016 leap year. On a normalized basis, passenger traffic growth was [approximately] 8.6 per cent in February, consistent with the January 2017 growth.

"Moreover, we have not yet seen any negative impact on either airline profitability or the current industry backlogs. However, it does not yet appear that the recent upward movement in fuel prices has increased the pace of aircraft retirements. For example, retirements are running still down 25 [er cent over levels last year, which was a slow year for retirements. While again it is difficult to see airlines yet cancelling 737 or A320 orders, or even for deferrals to materially increase, this will put incremental pressure on the cycle, and leasing companies, in particular, which will likely eventually create more pressure on Boeing. We continue to believe Boeing and Airbus will hit the upper range of the NB rate increases they have announced, as this is important for the FCF story to work for Boeing."

With a "hold" rating, Mr. Herbert raised his target price for the stock to $170 (U.S.) from $162 after slightly increasing his full-year 2017 and 2018 EPS projections (to $9.22 and $10.20, respectively, from $9.20 and $10.10). Consensus is $179.43.

"We believe the cash deployment provides a floor on valuation, but we see a lack of near-term positive catalysts now that the stock has basically made up for any 2016 underperformance with a strong Q1/17," he said.

He added: "We believe BA stock is fairly valued, and will be range-bound with incremental downward pressure due to potential risks with wide-body demand, macro issues, tax and trade uncertainty, and potential development spending risk."


The second-quarter guidance for Delta Air Lines Inc. (DAL-N) is supportive of a pricing recovery, said Citi analyst Kevin Crissey.

Alongside the release of its first-quarter financial results on Wednesday, which Mr. Crissey said had no surprises, the airline guided second-quarter passenger revenue per available seat miles (PRASM) growth to a range of a rise of 1-3 per cent, compared to the analyst's projection of 1.2 per cent.

"We expect investors to take this guidance with a grain of salt given the Q1 miss, but we are slightly raising our PRASM forecast 60 basis points to 1.8 per cent year over year and holding near the low end of the company's 17-19-per-cent margin target for Q2 (at 17.3 per cent). Our data suggests that the domestic pricing recovery did pause in February, but it has since resumed in April and May. Management confirmed that it plans to hold the line on capacity and set the Q2 range for ASM growth at an increase of 0-1 per cent year over year."

Delta reported first-quarter earnings per share of 77 cents (U.S.), topping the projections of both Mr. Crissey (73 cents) and the consensus (75 cents). Adjusting operating income of $969-million also exceeded his expectation ($960-million).

"While Q1 PRASM disappointed (ended flat year over year), the improvement from Jan/Feb into March, driven by domestic and Latin American markets, is expected to continue into Q2," he said.

Based on the results and guidance, he raised his target price for the stock to $63 from $62 with a "buy" rating. The average is $60.50.

"DAL shares are trading at just 7.3 times our 2018 EPS estimate and are the cheapest, lowest risk way to play the airlines earnings recovery in 2018, in our view," he said.

"With shares down 8 per cent year to date on very little change in consensus earnings estimates, DAL is the second worst performing stock in our space. Advocating for the shares has been futile after the Q1 pricing head-fake sent investors skittering away concerned about industry capacity. The chatter we're hearing from investors is that DAL has been over-earning and will have to 'give some back' either in the form of lower yield premiums to peers (which are now at 109 per cent) or falling market share. At a PEG of just 0.4 times on our 2017/18 EPS estimates and a 12-per-cent free cash flow (FCF) yield, we'd argue that there is more than a plausible 'give back' already priced in here."

Elsewhere, Morningstar analyst Chris Higgins raised his rating for the stock to "buy" from "hold" without a specified target.


Citing a "strong" outlook, CIBC World Markets analyst Scott Fromson expects Ritchie Bros. Auctioneers Inc. (RBA-N, RBA-T) to maintain its premium valuation.

He initiated coverage of the stock with an "outperformer" rating and $36 (U.S.) target. Consensus is $35.89.

"RBA's multiple distribution channels, broad geographic coverage and long-standing relationships combine to form a powerful value-added proposition," said Mr. Fromson. "RBA adds value to its customers in construction, transportation, agriculture and resources by simplifying and reducing the costs of managing their heavy equipment assets. RBA's growth has come from organic sources, internal investment and acquisitions. Growth numbers illustrate the strength of RBA's business model: 10-year CAGRs [compound annual growth rates] are 8.1 per cent for revenues and 7.3 per cent for EBITDA.

"We see two potential catalysts. First, RBA's acquisition of IronPlanet, the largest online competitor, will add significant revenues, increase diversification and secure Ritchie Bros.' position as the leading global player in the used heavy equipment auction business, both online and off. IronPlanet will also significantly bolster RBA's relationship with Caterpillar. Closing is expected in Q2/17. Second, we see RBA shares as a way for long-term investors to play the potential U.S. infrastructure build. Our analysis suggests that RBA moves directionally with heavy equipment manufacturers but with lower volatility; we do not see recent evidence that RBA is countercyclical. The IronPlanet acquisition should add further stability to RBA's revenue growth profile from distribution channel expansion."


Buckingham Research analyst John Zolidis raised his target price for shares of Dollarama Inc. (DOL-T) to $130 from $102.

The analyst consensus price target is $120.38.

"We are impressed with Dollarama's recent performance," he said. "The company has posted very strong same-store sales gains and margin performance which we believe can continue. Our revised estimates are above the Street. Unfortunately, we have been too cautious on the stock and have missed an opportunity to get involved at a more attractive price. While our revised PT implies some upside, it is insufficient to justify adding incrementally to positions at current levels, in our opinion. We would look for a pull-back in order to a reevaluate and potentially get more constructive. We see 34 per cent/24 per cent upside/downside in our best/ worst case scenario."

Mr. Zolidis raised his 2017 and 2018 earnings per share projections to $4.32 and $4.98, respectively, from $4.14 and $4.75.

"The company has multiple comp drivers in place that should continue to aid reported same-store sales," he said. "Most of these impact the average transaction size. We expect some pressure on transactions at same-stores due to trip consolidation and the impact of e-commerce on retail traffic overall. While we would prefer to see a balance of traffic and transaction size increases in same-store sales, we believe the overall comp gain will remain very attractive. In addition, it's worth noting that higher average transaction size creates increased leverage across the model."

Mr. Zolidis maintained a "neutral" rating for the stock.


In other analyst actions:

Cormark Securities Inc. analyst Garett Ursu upgraded Birchcliff Energy Ltd. (BIR-T) to "top pick" from "buy" and raised his target to $14.50 from $14. The average is $11.80.

Cormark Securities Inc. analyst Maggie Macdougall initiated coverage of AirBoss of America Corp. (BOS-T) with a "buy" rating and $14.75 target. The average is $14.19.

Barkerville Gold Mines Ltd. (BGM-X) was rated new "speculative buy" at Cormark Securities by analyst Tyron Breytenbach with a target of $1.50. The average is $1.

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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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