Thursday's analyst upgrades and downgrades

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

Though he expressed concern over the "pace of adaption to the digital era" for Canadian Tire Corporation Ltd. (CTC.A-T), Desjardins Securities analyst Keith Howlett upgraded its stock based on recent price weakness.

Moving the retailer to "buy" from "hold," Mr. Howlett expects Canadian Tire to be a beneficiary if Sears Canada Inc. (SCC-T) exits the market.

"Canadian Tire has been an ongoing beneficiary of sales erosion at Sears Canada over the last 7–10 years," he said. "Canadian Tire's namesake stores currently compete with Sears Canada in tools and hardware, home environment appliances (humidifiers, air conditioners, vacuums, etc), outdoor power equipment (snowblowers, ridemowers, etc), small kitchen appliances and tableware, selected home installation services and exercise equipment.

"Canadian Tire has been attentive in recent years to opportunities that could arise from Sears Canada's turmoil. In our view, it was the struggles of Sears Canada that caused Canadian Tire to test sales of major appliances, as well as a much expanded offering of home services. Canadian Tire ultimately decided to exit its short-lived experiment of selling major appliances. It has also scaled back its home services offerings to ones that relate directly to installation of products sold within Canadian Tire stores. We also expect Mark's to be a modest beneficiary in the casual apparel and footwear categories from the exit of Sears Canada, should it occur. Should Sears Canada exit the market, Canadian Tire will obtain its final sales dividend from Sears Canada. Our experience from past chain closures (Kmart, Zellers, Target, etc) is that the 8–12-week inventory liquidation period is less impactful on the remaining competitors than expected, while the post-exit sales lift is generally less than anticipated and challenging to measure. Sales disperse across a myriad of remaining retailers."

Mr. Howlett said owned and private-label brands are likely to also play a key role in Canadian Tire's growth moving forward. He said the company's move toward improving "breadth and depth" of its national brand offerings over the last 10 years "appeared to be aligned with consumer demand."

"Owned brands, and exclusive arrangements with third-party brand owners, represent a measure of protection from the incursion of online commerce," he said. "The longer-term ambition of Canadian Tire is to sell owned brands online to global markets, or to wholesale the products to retailers in other countries."

He also emphasized the significance of the company's renewed digital push.

"The U.S. retail landscape is in disarray, as the most challenged major retailers reduce square footage and the more successful reduce or freeze store opening plans," he said. "With approximately one-third less retail square footage per capita than in the U.S., the Canadian retail landscape may (potentially) be modestly less exposed to a painful readjustment process. Canadian Tire continues to direct substantial resources to adapting to the digital world. We applaud the effort, but now is the time, in our view, for measurable progress against defined commercial objectives. The ongoing results should be clearly quantified and communicated to investors. Most major U.S. retailers are disclosing their online sales. Some such as Foot Locker and Williams-Sonoma also explicitly report the profitability of the online/direct channel.

"The management team is being organized around the objective of serving the customer effectively across all distribution channels and across all banners. A senior executive from Home Depot Canada has recently been added to the executive team to focus on delivery of the omni-channel promise."

Mr. Howlett maintained a $169 target price for shares of Canadian Tire. The analyst average price target is $176.89, according to Bloomberg data.

"With the exception of 1Q17, Canadian Tire has posted stellar same-store sales results in recent quarters, in contrast to most established retailers in the U.S. and Canada," he said. "2Q has also likely been challenging due to the delayed, or absent, spring. Anxiety with nearterm results, combined with the ongoing spectre of the impact of online competition, has resulted in an attractive entry point, in our view."

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Canaccord Genuity analyst Tony Lesiak predicts Eldorado Gold Corp. (ELD-T, EGO-N) will be able to successfully revise the environment impact statement governing its high-grade gold-copper deposit in the Halkidiki Peninsula of northern Greece.

However, Mr. Lesiak said the current Syriza government remains "adversarial," leading to "elevated near-term headline risk."

Accordingly, he downgraded the company's stock to "speculative buy" from "buy."

On June 8 in a statement posted on the website of the country's Ministry of Energy and Environment, minister Giorgos Stathakis requested steps be taken toward initiating arbitration proceedings over the company's development project. Eldorado responding by saying it has yet to receive formal notification of proceeding.

"Project economics and potential margins remain robust," said Mr. Lesiak. "Legacy environmental damage has been reclaimed at Olympias with a long-term storage solution implemented. Overall, 5,000 direct and indirect jobs are to be created in a country with 23-per-cent unemployment and 48-per-cent youth unemployment. On social license building, ELD has the silent majority with NGO opposition and one quarter of the local villages in the historical Halkidiki mining area the vocal minority. Management cited growing support from the general Greek population after ELD's numerous court victories and development progress. Unfortunately, rather than embracing the significant investment by ELD (represents an estimated 0.3-per-cent boost to GDP), the current Syriza government have continually challenged (and lost) the validity of ELD's permits. The Ministry of Energy and the Environment (MOE) recently announced that it is seeking nonbinding arbitration against ELD. While unclear, we suspect the arbitration pertains to the in-country processing obligation that is integral to the EIS that governs ELD's Halkidiki assets (Olympias, Skouries and Stratoni) that comprise 47 per cent of our NAV [net asset value]."

Mr. Lesiak feels Eldorado is in compliance with the obligations laid out in the EIS and feels there is no basis for a potential legal challenge from the Greek government.

"The key issue for ELD is that the flash smelting processing option chosen as the basis for the EIS is not the current best available technology and still has significant technical challenges, in our view," he said. "According to management, under the EIS, ELD has until 2023 to solve the processing issue. A more desirable outcome could be to renegotiate the EIS with a future, potentially more investment friendly, government to allow for the continued sale of concentrates longer term (now getting better terms) or establishment of a better technology (pressure oxidation). Still, there is a tangible risk that ELD could have its EIS revoked in 2023 forcing the closure of Olympias, Skouries and Stratoni. The status quo is not sustainable longer term. The next scheduled Greek election is in October 2019; however, a snap election looks probable in the spring or fall of 2018 after rising discord sets in with the new austerity measures to be enacted in 2018. The key opposition party is shown to have a 15-20-per-cent lead in polls in April."

He kept a price target of $6 for Eldorado shares. Consensus is $6.08.

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Industrial Alliance Securities analyst Neil Linsdell expects additional market share gains for North West Company Inc. (NWC-T) as it continues to focus on its "Top 40 Markets and Top Categories" initiatives.

Following Wednesday's release of better-than-anticipated first-quarter financial results, Mr. Linsdell upgraded the Winnipeg-based company to "buy" from "hold."

"Overall, we see traction from these efforts leading to better cash flow and increasing dividends," he said. "We also view the [Roadtown Wholesale Trading Ltd.] acquisition as one of many opportunities in the region as NWC looks to make more tuck-in acquisitions (in the Caribbean and elsewhere). 2017 will focus on implementing post-acquisition plans, with an emphasis on growing RTW and [North Star Air] NSA to their full potential. NWC remains an attractive defensive stock for yield-seeking investors as we continue to remain positive over the longer term despite challenging environments in some of its markets."

North West reported quarterly revenue of $476.8-million, up 8 per cent from the previous year and ahead of Mr. Linsdell's projection of $465.9-million. Earnings before interest, taxes, depreciation and amortization of $40.2-million represented a 10.5-per-cent rise year over year, also topping the analyst's estimate ($39.1-million).

Mr. Linsdell hiked his target for the stock to $34 from $32.50. Consensus is $32.57.

Elsewhere, CIBC World Markets analyst Mark Petrie increased his target to $32 from $30.50 with an unchanged "neutral" rating.

"Momentum is growing in Canada and the Top Markets initiative is turning a corner; International is buoyant under quite unfavourable conditions; and M&A has been impressive with room for more," said Mr. Petrie. "Valuation and potential downside in International keeps us from getting too positive, but North West is a solid holding for patient investors."

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Heroux-Devtek Inc. (HRX-T) is "well positioned" in the aerospace and defence industry, according to RBC Dominion Securities analyst Derek Spronck.

He initiated coverage of the Longueuil, Que.-based company with an "outperform" rating.

"We think HRX is well positioned relative to its competitors thanks to its expanded capabilities and low-cost structure, which has led to a pick-up in new contracts," said Mr. Spronck. "The key is that investments in new plants have now been made, and as capex declines and production rates move higher, HRX is set to see an inflection in FCF (CFO-capex). Secondly, we like the way HRX is managed. Capital allocation has been prudent, and the CEO personally owns 10 per cent of the company's stock, which creates strong alignment with shareholders."

"Although we are seven years into the current aero up-cycle, we continue to see attractive secular growth prospects. Traffic growth and airline profitability remain positive, and while lower fuel prices have pushed new aircraft orders out, they have also extended the duration of the current aero up-cycle. In Defense, global military spending is increasing, and we are likely to see improved multiples for some time. Accordingly, we are comfortable with current sector valuations, with upside coming from a potential turn in business jets and helicopter."

Mr. Spronck said the company's stock now sports an attractive valuation following a dip of 25 per cent after it announced a production rate decline in December.

"We believe part of the disconnect between our view of value on HRX versus the market's may reflect different time horizons," the analyst said. "HRX operates in an environment of long-term customer contracts. After it wins a new contract, HRX typically faces startup costs that have a negative impact on earnings and FCF but are more than offset through increased profitability in later years. We believe we are at this operating/investment juncture, and with a longer time horizon, we see HRX shares offering attractive upside potential."

Mr. Spronck set a price target of $17 for the stock. Consensus is $14.35.

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Canaccord Genuity analyst Michael Graham believes the U.S. technology sector's powerful FANG group of stocks are likely to continue to reward investors.

"Since our last FANG update six months ago, FANG has trounced the S&P, with FB, AMZN, NFLX, and GOOGL up 31 per cent, 31 per cent, 30 per cent, and 27 per cent, respectively, compared with the S&P up 11 per cent," he said. "We have seen several theories attempting to explain this outperformance, including several centered on the rise of passive investing fueling momentum buying. We believe simply that these four stocks represent a large portion of the growth opportunities within large cap tech, and six months ago all the valuations were quite reasonable. We still largely believe in the growth, but the valuations are a bit less obvious."

However, Mr. Graham said he's "taking a step back" on Alphabet Inc. (GOOGL-Q), downgrading his rating for the stock to "hold" from "buy."

"We think this year is fine, and next year has a very good chance at achieving the sentimental 20% Google Properties growth level," he said. "However, we think much of the growth over the past two years is due to ad load increases on mobile search and YouTube, which (especially the former) will be hard to repeat;  our refreshed detailed segment analysis suggests firmly that consensus gross margin estimates are too high, and while revenue growth mostly makes up for this, we believe this limits the potential for upward EPS revisions; and  GOOGL's P/E [price-to-earnings] multiple of 24 times is expensive by historical standards, and puts the stock within a pitching wedge of our $1,000 price target."

He maintained his $1,000 (U.S.) target, versus an analyst average of  $1,066.06.

"We look at GOOGL valuation levels over the past seven years on an absolute basis and relative to MSFT," he said. "The stock is trading at valuation levels that usually precede multiple contraction."

In a research note on the four stocks, Mr. Graham also made a pair of target price changes.

He moved Amazon.com Inc. to $1,200 from $1,150 with a "buy" rating. The average is $1119.97.

"We have had more investors focused on AMZN free cash flow recently, and note the company generates a FCF yield on 2018 of approximately 3.4 per cent," said Mr. Graham. "Given the growth and widespread belief that margins could be structurally materially higher in a slower-growth phase, we believe this modest FCF yield does help investors feel better about AMZN's valuation."

Mr. Graham raised his target for Netflix Inc. to $175 from $165 with a "buy" rating. The average is $160.55.

"We acknowledge that Netflix continues to trade at a premium valuation, but we continue to believe that subscriber momentum and the original content strategy will continue to support the stock," he said. "That said, while the stock has shown it can easily withstand a one-quarter blip in subscriber growth, the downside if things are worse than that could be severe in the short term given the lack of near term profit support."

His target of $175 for Facebook Inc. ("buy" rating) did not change. The average is $171.84.

"Though it has experienced exceptional gains like the rest of the FANG stocks, it currently trades close to the P/E multiple of GOOGL (25 times versus 24 times 2018 GAAP EPS), despite growing revenue over 10 points faster (28 per cent versus 17 per cent)," the analyst said. "We think the elements that may temper sentiment (ad load moderation, gross margin pressure) can be effectively overcome by new initiatives (Instagram, video, engagement, pricing)."

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Raymond James analysts resumed coverage of senior and intermediate gold producers as well as the precious metals royalty/streaming companies on Thursday.

"We are forecasting an average gold price of $1,263 (U.S.) per ounce in 2017 (year-to-date average is $1,235/oz) reflecting our expectation for a stronger gold price in the second half of 2017 given we believe the gold price reflects the market expectation of further ti ghtening action from the U.S. and better demand from upcoming holiday seasons," said analysts Brian MacArthur, Farooq Hamed and Tara Hassan.

"For 2018 and longer term we use a flat $1,300 per ounce gold price to reflect industry average all-in sustaining cost support."

The following stocks received "outperform" ratings:

• Agnico Eagle Mines Ltd. (AEM-N, AEM-T) with a target of $61 (U.S.). Consensus: $52.90.
• Alamos Gold Inc. (AGI-T, AGI-N) with a target of $11.50 (Canadian). Consensus: $13.12.
• Detour Gold Corp. (DGC-T) with a $24 target. Consensus: $23.14.
• Franco-Nevada Corp. (FNV-N, FNV-T) with a $85 (U.S.) target. Consensus: $70.57.
• Kinross Gold Corp. (KGC-N, K-T) with a $6 (U.S.) target. Consensus: $4.95.
• Maverix Metals Inc. (MMX-X) with a $1.80 (Canadian) target. Consensus: $2.40.
• Newmont Mining Corp. (NEM-N) with a $43 (U.S.) target. Consensus: $39.24.
• Osisko Gold Royalties Ltd. (OR-T, OR-N) with a $20 (Canadian) target. Consensus: $19.71.
• Wheaton Precious Metals Corp. (WPM-N, WPM-T) with a $27 (U.S.) target. Consensus: $27.75.

These stocks received "market perform" ratings:

• Barrick Gold Corp. (ABX-N, ABX-T) with a $19 (U.S.) target. Consensus: $20.44.
• Goldcorp Inc. (GG-N, G-T) with a $17 (U.S.) target. Consensus: $18.45.
• IAMGOLD Corp. (IAG-N, IMG-T) with a $6 (U.S.) target. Consensus: $5.56.
• New Gold Inc. (NGD-N, NGD-T) with a $3.50 (U.S.) target. Consensus:  $3.61.
• Royal Gold Inc. (RGLD-Q) with a $88 (U.S.) target. Consensus: $86.82.
• Yamana Gold Inc. (AUY-N, YRI-T) with a $3.25 target. Consensus: $4.34.

"Given the high risk nature of the industry, to gain exposure to gold's unique characteristics we believe investors should have a portfolio of equities to mitigate the risk," the analyst said. "Our preferred equities for this portfolio rank well under our framework in the context of value and include AEM, AGI, DGC, KGC and NEM for the producers and FNV, OR and WPM from the royalties."

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In other analyst actions:

RBC Dominion Securities analyst Geoffrey Kwan upgraded Home Capital Group Inc. (HCG-T) to "sector perform" from "underperform" and raised his target to $14 from $8. The analyst average target is $11.89.

Macquarie analyst Giasone Salati upgraded Thomson Reuters Corp. (TRI-T) to "outperform" from "neutral." His target rose to $70 from $49.90, compared to the average of $62.74.

Laurentian Bank Securities analyst Ryan Hanley initiated coverage of Richmont Mines Inc. (RIC-T) with a "buy" rating and $12.75 target. The average is $14.15.

Raymond James analyst Brian Macarthur initiated coverage of Maverix Metals Inc. (MMX-X) with an "outperform" rating and $1.80 target.

D.A. Davidson & Co analyst Linda Bolton Weiser downgraded Mattel Inc. (MAT-Q) to "neutral" from "buy" and lowered his target to $24 (U.S.) from $30. The average is $25.64.

Macquarie analyst Timothy Nollen downgraded Time Inc. (TIME-N) to "neutral" from "outperform" with a $15 (U.S.) target, which is the current consensus.