Wednesday's analyst upgrades and downgrades

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

North American railways saw a significant pick-up in shipment volumes over the last three months after the severe winter weather made for a slow start to this year, said CIBC World Markets analyst Kevin Chiang as he raised his price targets on both Canadian Pacific Railway Ltd. and Canadian National Railway Co.

"Exiting Q2/14, we have seen a significant step up in volumes from the Canadian and U.S. rails, reinforcing the fact that the service issues over the winter were primarily weather-related and that there was a significant amount of pent-up demand in the sector," Mr. Chiang said in a research note.

He increased his financial estimates for both Canadian railways to reflect the volume growth in the latest quarter. As a result, his rating on CP Rail was upgraded to "sector outperformer" from "sector performer" and his price target went to $225 (Canadian) from $180. His price target on CN Rail was raised to $76 (Canadian) from $65 but he maintained a "sector performer" rating.

As his ratings would suggest, CP Rail is now his favourite Canadian railway.

"While we expect CN to continue to deliver EPS growth of 10 per cent to 15 per cent , and likely at the top end of this range, we continue to expect CP to post best-in-class earnings growth over the medium term," Mr. Chiang said.

He admitted that he has been "too conservative" when judging CP's earnings potential. "As CP leverages its position as a 'low-cost carrier' in North America, it can provide better service and obtain better pricing. And with rail volume growth benefiting from a strong outlook for bulk volumes, significant growth in domestic intermodal, and an opportunity to now grow its international intermodal, we could see revenue growth in the 10 per cent range with an EPS compound annual growth rate from 2014-2018 of about 20 per cent," he said in a research note.

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Investors seeking exposure to Canadian oil and gas should make PrairieSky Royalty Ltd. a core component of their portfolio, said CIBC World Markets analyst Arthur Grayfer as he initiated coverage on the Encana spinoff with a "sector outperformer" rating and $43 (Canadian) price target.

"PrairieSky Royalty stands out as a unique investment opportunity that offers long-term growth visibility in production, cash flow and the dividend with little capital outlay," he said in a research note. "Notwithstanding the rapid share price ascent and premium valuation, we believe there is upside to current levels given PrairieSky's meaningful resource opportunity and optionality, strong operating margin, near- and longer-term growth potential, and strong financial capacity."

PrairieSky shares surged more than 30 per cent in late May as it made its trading debut on the Toronto Stock Exchange. But the stock hasn't made a lot of upward progress since then, hitting a peak so far of $40.31.

RBC Dominion Securities also initiated coverage on PrairieSky today with a $43 price target, but gave it a less enthusiastic "sector perform" rating.

And TD Securities initiated coverage with a "buy" rating and $45 target. "Although PrairieSky appears to trade at a significant premium to conventional explorers and producers, we believe that such analysis is superficial, and we encourage investors to look beyond what we consider to be less relevant headline valuation metrics," commented TD analyst Aaron Bilkoski. He notes PrairieSky has the lowest all-in payout ratio within his coverage group, no debt, is forecast to accumulate cash through 2014 and 2015, and looks well positioned for future dividend increases.

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With few big acquisition opportunities, Jean Coutu Group Inc.'s shares appear to have limited upside in the year ahead, Canaccord Genuity analyst Derek Dley said.

The Quebec pharmacy chain is expected to report modest same-store sales growth in its first-quarter earnings announcement scheduled for Tuesday, Mr. Dley said. He reiterated his "hold" rating on Jean Coutu's shares and raised his price target to $20.50 (Canadian) from $20.

"Given what we believe are limited acquisition opportunities outside of smaller independent operators, and relatively soft earnings growth over the course of our forecast period, we believe the shares of Jean Coutu are fully valued at current levels," Mr. Dley said.

The analyst consensus price target for Jean Coutu over the next year is $21.42, according to Thomson Reuters data.

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Management at Perpetual Energy Inc. has provided improved guidance on its strategic and operational prospects, BMO Nesbitt Burns analyst Gordon Tait noted as he upgraded his rating to "outperform" from "market perform" and raised his price target to $2.75 (Canadian) from $2.

The company, which last week announced a joint venture agreement to pump natural gas at its East Edson property in west-central Alberta, has boosted its production forecasts for this year and next.

"We believe Perpetual is turning the corner in restructuring its asset base and presents a value story for investors with a slightly higher risk tolerance," Mr. Tait said.

The analyst consensus price target over the next year is $1.99.

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The strength of Franco-Nevada Corp.'s oil and gas royalty business warrants an increased valuation, RBC Dominion Securities analyst Stephen Walker said.

While Franco-Nevada is focused on generating royalties from precious metals assets, the company's energy portfolio will likely remain a key holding representing 15 per cent to 20 per cent of revenues, Mr. Walker said.

Franco-Nevada's oil and gas assets generate substantial cash flow and offer a level of diversification against mining revenues, Mr. Walker said. He doubled his valuation multiples on the energy holdings, resulting in a price target increase to Franco-Nevada's shares to $71 (Canadian) from $64. The analyst maintained an "outperform" rating on the stock.

"Franco remains a preferred name with its track record of creating shareholder value and increasing dividends," Mr. Walker said.

The analyst consensus price target for Franco-Nevada over the next year is $51.83.

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In other analyst actions:

Paradigm raised its price target on Air Canada to $14 (Canadian) from $9.50 and maintained a "buy" rating.

Desjardins Securities cut its price target on Labrador Iron Mines Holdings to 2 (Canadian) cents a share from 10 cents and maintained a "sell" rating.

RBC Dominion Securities raised its price target on Martinrea International to $17 (Canadian) from $15 and maintained an "outperform" rating.

Deutsche bank upgraded Bank of America to "buy" from "hold" and raised its price target to $18 (U.S.) from $16.50.

Raymond James downgraded Harley-Davidson to "market perform" from "strong buy" and removed its $84 (U.S.) price target.

Credit Suisse downgraded Hormel Foods to "neutral" from "outperform" but raised its price target to $50 (U.S.) from $49.

Barclays downgraded Bristol-Myers Squibb to "equalweight" from "overweight" and cut its price target to $46 (U.S.) from $65.

Barclays upgraded Eli Lilly to "equalweight" from "underweight" with a price target of $63 (U.S.).

Evercore Partners raised its price target on Apple to $115 (U.S.) from $100 and maintained an "overweight" rating.

Goldman Sachs downgraded El Paso Pipeline Partners to "sell" from "neutral" with a price target of $33.

Atlantic Equities upgraded Oracle to "overweight" from "neutral" and raised its price target to $48 (U.S.) from $39.

Baird downgraded U.S. Bancorp to "neutral" from "outperform" and maintained a $44 (U.S.) price target.

Susquehanna upgraded Baker Hughes to "positive" from "neutral" with a price target of $90 (U.S.).

Macquarie upgraded Urban Outfitters to "outperform" from "neutral" and raised its price target to $43 (U.S.) from $37.