Thursday’s analyst upgrades and downgrades

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

Canaccord Genuity analyst Scott Chan expects to see accelerated U.S. growth from Canadian Imperial Bank of Commerce (CM-T, CM-N) on the back of "strong" early progress at PrivateBank.

The analyst raised his U.S. growth targets for PrivateBank, which it acquired in June of 2017 for $5-billion (U.S.), noting he'd previously left intact his "conservative" estimates following "strong" year-end results, released in late November, and a "positive" Investor Day in mid-December.

"[PrivateBank] began operating as CIBC Bank USA, extending the CIBC brand across North America. Recall, CIBC Bank USA reported exceptional Q4/F17 results (first full quarter from acquisition) highlighted by: (1) net income of $65-million U.S. (up 33 per cent year over year); (2) loan growth (average) up 14 per cent year over year; and (3) solid credit quality," said Mr. Chan. "After more details on its U.S. strategy at their Investor day, we are revising our CIBC Bank USA estimates higher mainly for loan growth and margin, reflecting NI growth of low double-digits (now more in line with Midwest peers). We believe above average growth is more achievable medium term due to: (1) positive US fundamentals; (2) benefit from cross border platform; (3) improved efficiency as PVTB retention costs decline; and (4) lower corporate taxes (we have not modeled yet)."

With his changes, he raised his fiscal 2018 and 2019 earnings per share estimates for CIBC to $11.21 and $11.90, respectively, from $11.04 and $11.66, which he noted implies EPS growth of 1 per cent, and 6 per cent.

Mr. Chan touted CIBC's peer-low valuation and highest dividend yield, adding: "CM had a great fiscal 2017 with EPS (adjusted) growth of 9 per cent, and industry high ROE of 18 per cent. Currently, CM trades at price-to-earnings (fiscal 2018 estimate) of 10.8 times, which is at an industry low representing a 10-per-cent discount to the Big-6 average of 12.0 times. Further, CM offers the largest dividend yield at 4.3 per cent (versus avg. of 3.7 per cent). We see value in CM stock, and potential for above average growth medium-term. CIBC is targeting 17 per cent of earnings coming from its U.S. segment (versus 9 per cent in F2017) by 2020 (targeting NI growth of 10-12 per cent) and 25 per cent of US earnings proportion long-term (7-10 years). Over time, we believe gradual progression towards its targets will continue to improve CM's relative P/E valuation vs. peers."

Keeping a "buy" rating, Mr. Chan raised his target price for CIBC shares to $131 from $126. The average target on the Street is $129.01, according to Bloomberg data.

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Orla Mining Ltd. (OLA-X) is "well positioned" against its exploration and development peers, said Raymond James analyst Tara Hassan.

She initiated coverage of the Vancouver-based development-stage mineral exploration company with an "outperform" rating, citing its "advanced and lower-cost asset base, experienced and successful management team and Board, and strong shareholder registry that include strategic investors and sizable insider ownership."

Ms. Hassan said Orla has built an intriguing project pipeline in just over 12 months through two transactions, which landed it a pair of advanced development assets in the Camino Rojo project in Mexico and Cerro Quema, its initial project in Panama.

"Both of these projects have seen extensive exploration and technical work completed and offers the opportunity to be developed as low-cost heap leach projects," she said. "We believe this positions Orla favourably amongst its development peers, many of which are single-asset companies and require larger investments to reach a production decision and larger capital needs for construction."

"While both Camino Rojo and Cerro Quema have seen a substantial amount of exploration work completed and are advanced projects, we believe the Orla team has the potential to unlock further upside at these projects through the drill bit. At Camino Rojo, there is the obvious sulphide potential, but beyond that we see opportunities on the regional land package which has seen limited work. At Cerro Quema, while we do not see substantial upside on the oxide resource, we are encouraged by initial results drilling copper-gold sulphide targets."

Ms. Hassan set a price target of $2.50 for Orla shares, which is 3 cents less than the current average on the Street.

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Quebec could become a "meaningful" earnings contributor for goeasy Ltd. (GSY-T), said Desjardins Securities analyst Gary Ho.

In a research note focused on the inroads the Mississauga-based company, which leases furniture and appliances and offers consumer loans, is making into the province, Mr. Ho emphasized the "attractive" attributes of the Quebec market, including lower delinquency and debt levels.

"Management announced the launch of easyfinancial stores into Quebec in late 2016," said Mr. Ho. "Within its first year of operations, the company targeted 11 branch openings by year-end 2017, and we believe it is on track to meet or exceed this goal. Over the coming years, the company plans to expand store count to 40–50 branches across Quebec. With limited options for non-prime consumer credit in Québec (Fairstone being the other dominant competitor along with other credit card providers) and the exit of two incumbents following the financial crisis (Wells Fargo and HSBC), the Quebec expansion will be, in our view, a substantial driver of loan book growth and thus earnings growth over the coming years."

Mr. Ho also emphasized his belief that Quebec is currently underserved.

"Currently, the Quebec non-prime credit market (excluding major banks, auto and credit cards) is dominated by Fairstone Financial (previously CitiFinancial). Fairstone has over 50 branches across Quebec. Prior to the financial crisis, HSBC and Wells Fargo had operated in Québec. Together with CitiFinancial, we believe these three players had 100+ locations at one point. We foresee the loan book growing to $100–130-million for easyfinancial over the next few years. This would help soak up some of the excess demand left underserved by the exit of Wells Fargo and HSBC. We believe this is achievable and goeasy could compete effectively with Fairstone to form a duopoly in the non-prime consumer lending space."

"Four key regulatory differences between Quebec and the rest of Canada. (1) interest rates, (2) more stringent disclosure requirements, (3) licencing requirement, and (4) no payday loan providers in Quebec."

With an unchanged "buy" rating, Mr. Ho raised his target for goeasy shares by a loonie to $43, citing both "greater" comfort in loan book growth and its ability to reach its 2020 targets. The average target is now $44.17.

"Our investment thesis is predicated on: (1) management executing on future targets given its solid track record on meeting/exceeding past targets—new 2020 loan portfolio guidance points to the loan book doubling; (2) with the exit of two incumbents, the nonprime consumer lending market is underserved, in our view, which creates a unique opportunity to expand (particularly into Québec); (3) with scale, the business could generate a 20-per-cent-plus ROE [return on equity]; and (4) we expect double-digit dividend growth over the next few years (we expect a 15-per-cent dividend increase with 4Q17 results)," he said.

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Credit Suisse analyst Curt Woodsworth said he sees "endless" pathways for Stelco Holdings Inc. (STLC-T) to drive valuation creation following a series of investor meetings in the United States last week with chief executive officer Alan Kestenbaum and chief financial officer Donald Newman.

"[We] came away with increased conviction in management's ability to create value both organically and through acquisitions," said the analyst. "Stelco has numerous pathways to increase EBITDA generation, and we believe the valuation multiple should expand to reflect optionality on M&A, compelling growth potential via mix shift, and best-in-class execution on FCF conversion."

Mr. Woodworth called the Hamilton-based steel company's organic growth potential "compelling," noting the company's confidence in its ability to produce volume growth and an enhanced product mix through both commercial incentives and operational execution.

He also touted the potential of a restart at its Hamilton facility, noting: "Stelco would not comment on the restart dynamic at Hamilton and thus we would not expect any decision on this front until late 2018. Therefore, the slab short position creates some uncertainty for 2018 as Stelco seeks to maximize volumes and to de-risk the slab price risk. We believe Stelco could look to hedge this exposure by locking into fixed prices for HRC [hot-rolled coil]. Note that merchant slabs have about a three month lag relative to one month for HRC sales.

"Another option to solve for the excess rolling dynamic would be an acquisition of Algoma, which is currently in bankruptcy but has a net long position in slab. There was an affidavit filed confirming Stelco was in discussions with the Algoma union. Local press reports note that the union representing Algoma filed affidavits denouncing a motion to lift the stay that would allow collective bargaining to start up again. They also expressed concerns regarding health/safety standards at the company and unfunded legacy liabilities."

Mr. Woodsworth raised his target price for Stelco shares to $30 from $24. The average is $25.75.

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Though he believes it's the best positioned U.S. company among consumer electronics retailers, Telsey Advisory Group analyst Joseph Feldman downgraded his rating for Best Buy Co. Inc. (BBY-N), believing it faces difficult year-over-year sales comparisons and its current valuation given the stock is at record-high levels.

"The low hanging fruit has already been picked, and going forward, the company is increasing investments in technology, labor, and supply chain to maintain its leadership position," said Mr. Feldman. "The overall product cycle remains average in 2018, with no highly-anticipated launches. Smart-home devices and appliances remain growth areas, while we anticipate weaker trends in computing and mobile phones."

Projecting a drop in same store sales of 1.5 per cent in the second quarter and 1 per cent in the third quarter, Mr. Feldman dropped the stock to "market perform" from "outperform." He did raise his target to $81 (U.S.) from $62, which exceeds the average target of $65.86 among analysts currently covering stock.

At the same time, Mr. Feldman upgraded a trio of stocks:

- Lowe's Companies Inc. (LOW-N) to "outperform" from "market perform" with a target of $124 (U.S.), jumping from $83. The average is $105.33

- Dick's Sporting Goods Inc. (DKS-N) to "outperform" from "market perform" with a $42 (U.S.) target, rising from $25. The average is $32.82.

- Dollar General Corp. (DG-N) to "outperform" from "market perform" with a target of $120 (U.S.), rising from $98. The average is $102.63.

He also downgraded Tractor Supply Co. (TSCO-Q) to "market perform" from "outperform" with an $83 (U.S.) target, up from $62. The average is $75.54

His colleague Cristina Fernandez upgraded Michaels Companies Inc. (MIK-Q) to "outperform" from "market perform" and raised her target to $32 (U.S.) from $23. The average is $26.64.

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In other analyst actions:

Macquarie initiated coverage of Bluestone Resources Inc. (BSR-X) with an "outperform" rating and $2.25 target.