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Wednesday’s analyst upgrades and downgrades

Canadian Pacific was among our list of large Canadian stocks with downside risk

DARRYL DYC/THE CANADIAN PRES

Inside the Market's roundup of some of today's key analyst actions. This file will be updated during the trading day.

A BMO Nesbitt Burns analyst has raised his Canadian Pacific Railway Ltd. share-price target, citing the Calgary-based carrier's improved efficiency and intermodal service.

Fadi Chamoun, who also raised CP's rating to "outperform" from "sector perform," said the Class 1 railway is poised to benefit as new heavy crude loading facilities come onstream in Western Canada this year. Most of the new oil-by-rail terminals are on CP lines, Mr. Chamoun said in a research note to clients.

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"Our valuation is … based on 17.5 times our forward EPS estimate which pushes up our target price to $205 (Canadian) from $180 previously," Mr. Chamoun said. "Our target multiple represents a 12-per-cent premium to the S&P 500, which is supported by the above-average earnings and cash flow growth of CP Rail."

Mr. Chamoun raised his earnings estimates by 5.2 per cent and 5.4 per cent for 2015 and 2016, respectively. He said profits should rise as demand improves in three market segments: crude, sand for fracking, and intermodal.

Under chief executive officer Hunter Harrison, the railway has idled locomotives, reduced the workforce by 4,800 and is expected to make more cuts to boost productivity. CP has improved its fuel efficiency by changing its operating plan and running longer trains. And while its tough western corridor will make it hard to match Canadian National Railway's fuel efficiency, CP is expected to make more improvements, said Mr. Chamoun, who is among a growing list of analysts that have raised their outlook for the company.

The average 12-month price target among analysts is $174.55, according to Thomson Reuters. Last week, Credit Suisse added the railway to its U.S. Focus list, considering the stock as one of its top investment ideas in the U.S. equity market. Credit Suisse also has a $205 price target.

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Recent headlines about Bank of Nova Scotia's plans to monetize its stake in CI Financial Corp. appears to have had little impact on the fund company's underlying business, as it enjoyed net sales in May at one of its highest monthly levels ever, said Desjardins Securities analyst Gary Ho.

After market close Tuesday, CI Financial said May assets under management were $98.2-billion, up 18.2 per cent from a year earlier, as it reported robust May sales.

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"To us, this validates that recent news on the company had minimal impact on its underlying business, which we view positively," Mr. Ho said in a research note. "More importantly, management believes that given its growing net income and declining leverage, it has capacity for share buybacks, dividend growth and strategic investment opportunities."

He raised his price target to $40.50 (Canadian) from $38.50 and reiterated his "buy-average risk" rating.

He thinks that if CI Financial increased its leverage to buy back shares, it would add between 58 cents to $2 to its share price, and still leave room for dividend hikes.

He's forecasting a 5 per cent dividend increase in the second half of 2014 and 11 per cent in 2015.

"Fundamentally, we continue to favour CI–our top pick in the asset management space. There are three main attributes we like about CI: (1) strong management team that is focused on expense management/margins, (2) affiliation with key distribution partners, and (3) historically solid fund performance, which has supported strong net inflows even through more difficult market environments. We also forecast healthy assents under management growth in 2014 and 2015," he said.

The analyst consensus target for CI Financial over the next year is $39.50.

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There are ways for SNC-Lavalin Inc. to find productive uses for its recent cash windfall, despite investor concerns to the contrary, Canaccord Genuity analyst Yuri Lynk said.

The Montreal-based engineering and construction firm recently sold its stake in AltaLink, a power transmission company, for $3.2-billion.

The problem is what to do with that money. SNC's string of recent scandals still weighs heavily on the stock's valuation, making possible acquisition targets expensive by comparison.

The best option for SNC to deploy its cash is through a large acquisition, Mr. Lynk said. "When we compare M&A to the alternatives, namely a share repurchase or special dividend, it appears to have the most potential upside."

Canaccord lowered its price target on SNC to $60 (Canadian) from $63, while maintaining a "buy" rating. The analyst consensus target is $58.62.

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RBC Dominion Securities has initiated coverage of Osisko Gold Royalties Ltd. with an "outperform" rating and an $18 (Canadian) price target.

Osisko is to be spun out from the acquisition of Osisko Mining, which was announced in April in a joint $3.9-billion bid from Yamana Gold Inc. and Agnico Eagle Gold Inc.

The cornerstone of Osisko is a 5 per cent royalty in the Canadian Malartic gold mine in northwestern Quebec.

"We think Osisko has all the elements needed to build a successful royalty business," RBC analyst Dan Rollins said. The company's assets are poised to generate substantial cash flow growth, with which Osisko could expand or pay dividends, he said.

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The biggest question for Onex Corp. is what to do with all its cash, says CIBC World Markets analyst Paul Holden.

At its annual investor day on June 3, Onex announced it is buying $350- to $450-billion in collateralized loan obligations (CLO), which is more than Mr. Holden had expected. He also expects Onex to deploy up to $100-million in share buybacks over the next year.

"That stills leaves around $2-billion that needs to be invested through the core private equity business and the acquisition environment remains challenging," he says. "Growth at OCP has exceeded expectations and the 2017 assets under management target was increased from $5-billion to $10-billion with CLOs to fuel the growth."

The event was held the day before Onex confirmed a Globe and Mail report that Nigel Wright, former chief of staff to Prime Minister Stephen Harper, will return to the company.

Mr. Holden says he remains confident in management's ability to generate attractive returns over time and to grow fee-generating assets under management.

He maintains his "sector performer" rating and $70 (Canadian) target price. The analyst consensus price target is $67.04.

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In other analyst actions:

Standard & Poor's removed its debt ratings on Goldcorp from creditwatch, where they had been placed with negative implications in January. The outlook is now stable. S&P cited expectations that the company will generate meaningful growth in cash flow from increased gold production.

Cowen And Co. raised its price target on Transforce to $29 (Canadian) from $26 and maintained an "outperform" rating.

TD Securities raised its price target on Maple Leaf Foods to $23 from $21 and maintained a "buy" rating.

Salman Partners started coverage on Brazil Resources with a "speculative buy" rating and $2 (Canadian) price target.

Sterne Agee downgraded Coach to "neutral" from "buy" and cut its price target to $41 (U.S.) from $51.

Stifel Nicolaus upgraded AutoZone to "buy" from "hold" with a price target of $570 (U.S.).

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About the Author
Investment Editor

Darcy Keith is The Globe and Mail's Investment Editor. He has been a business journalist since 1992 and joined the Report on Business in 2010 from Yahoo! Canada, where he was the senior editor of finance. More

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