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Tuesday’s analyst upgrades and downgrades

The Ford's Essex Engine Plant in Windsor, Ont.


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

Investors should be more interested in the premise of Seven Generations Energy Ltd.'s (VII-T) first formal vertical integration project than the actual event, according to Raymond James analyst Kurt Molnar.

On Monday, the Calgary-based company entered into a development agreement with Steelhead LNG to explore infrastructure opportunities and new overseas markets for Canadian natural gas. Seven Generations acquired a minority ownership interest in Steelhead in the deal. The deal was funded using capital already allocated to market access initiatives.

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"The truth of the matter is that, if the Steelhead project proceeds, then it will be years down the road before it offers direct dividends to Seven Generations through the potential for better natural gas price realizations," said Mr. Molnar.

"Seven Generations has made it clear their relationship with Steelhead will not be exclusive when it comes to LNG leverage, nor will it be exclusive when it comes to means to pursue ways to increase natural gas prices above North American benchmarks."

He added: "We think this is a theme you will see throughout the Seven Generations hydrocarbon cocktail. If the company has already carved out a position of superior potential marginal economics due to the product mix they have captured in their resource, the way to gross up the value of that cocktail is to capture ways to realize price above and beyond that discounted at particular North American hubs and futures markets. The scale of resource and inventory now controlled by Seven Generations will allow the company to directly market each of their condensate, their NGLs and their gas and to pursue ways to leverage their particular hydrocarbons into better price realizations through direct markets and/or direct projects. We think that investors should expect today's news to be the first of a series of such efforts on the diversity of different hydrocarbons that Seven Generations is already producing. In effect, by not just pursuing what the broader markets offer at particular hubs or futures markets Seven Generations is pursuing the potential for 'price plus' realizations on its commodities and effectively adding 'steel toes' to their competitive position at the toe of the boot. In the latter part of 2017 we have bumped up our price realizations forecast for Seven Generations' sales of NGLs and natural gas to reflect our expectation for more success in this regard and the potential for both short-term and long-term benefits."

Mr. Molnar maintained his "strong buy" rating for Seven Generation stock, and he raised his target price to $39.50 from $37. The analyst consensus price target is $35.21, according to Thomson Reuters.

"While the likes of Advantage and Peyto manage their competitive positions in the boot by being the absolute lowest cost providers of natural gas, Seven Generations' focus on Kakwa was due to strong reservoir and resource characteristics, but perhaps most importantly, on the premise of a superior hydrocarbon cocktail," he said. "Kakwa's competitive position on the hydrocarbon chessboard is a function of high condensate ratios, high liquids ratios and prolific gas rates. The combination is what has allowed Seven Generations to hold the premise for their position at toe of the boot. The derivative of their success in this regard has been a rapid pace of development along with a low cost of capital which can then be self-perpetuating so long as execution continues to match or exceed expectations."


FirstService Corp. (FSV-Q; FSV-T) is a "wonderful company at a good price," said RBC Dominion Securities analyst Michael Smith.

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He initiated coverage of the Toronto-based property management company with an "outperform" rating, emphasizing it is a market leader in "large, highly fragmented industries."

"The company is made up of two divisions: (1) FirstService Residential, North America's No. 1 manager of residential communities with over $1-billion in revenues (greater-than 2-times nearest competitor) and market share of only 5 per cent in a $20-billion-plus industry; and (2) FirstService Brands, a leading provider of branded property services through franchises and company-owned operations. The company has a No. 1 market position in seven of its eight brands and is a top-three player in the eighth, yet its market share is greater-than 5 per cent in all cases. Importantly, these multi-billion dollar industries are large, highly fragmented and ripe for continued consolidation. Importantly, we highlight FirstService Residential's historical 95%+ renewal rate for property management contracts making a significant portion of the company's revenue recurring. Indeed, even during the financial crisis the business posted modest revenue growth."

Mr. Smith also stressed the importance of the company's 17-per-cent insider ownership, saying: "We think it is significant for two reasons. First, we believe it indicates shareholder alignment and drives an 'owner' mindset as opposed to a 'corporate' mindset. This, in our view, is the fundamental reason why the company has a growth-oriented entrepreneurial corporate culture. Indeed, we think the fruits of this mindset are clearly evident by a 20-year history of vibrant growth that saw a corresponding share price CAGR [compound annual growth rate] of over 20 per cent, exceptional by any measure, in our opinion. Second, we think substantial insider ownership is also significant in the context of the multi-voting share structure of the company, which provides Chairman and Founder Jay Hennick with de facto control. Taken together, we think management and the board are far more driven and aligned with shareholders because of the substantial insider ownership and the stability afforded by the multi-voting share structure."

First Service has a "big opportunity" for growth, according to the analyst, on the back of its "thoughtfully" laid out five-year plan. Those objectives include growth targets of 2-times revenue, 2.5-times EBITDA and 3-times earnings per share, which Mr. Smith feels are achievable.

"Indeed, the company has grown revenues at an 11-per-cent CAGR over the past five years and a CAGR of more than 20 per cent since 1995," he said. "Over the past 20-plus years, revenue growth has been primarily organic (nearly two-thirds) with supplemental tuck-in acquisitions (nearly one-third). Should FirstService achieve its growth targets, revenue is projected to reach $2.5-billion by 2020, representing a 15-per-cent CAGR, while EBITDA and EPS are projected to grow to $258-million and $3.60 per share, representing CAGRs of 20 per cent and 25 per cent, respectively."

He set a price target of $56 (U.S.) for the stock. Consensus is $44.63.

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"Since the June 2015 spin-out, FSV shares performed exceedingly well, with a price return of 62 per cent," the analyst said. "Thanks to rising earnings estimates, multiples remain largely unchanged since the spin-out at 13.6x EV/EBITDA (up 0.7 times) and 25.3x P/E (down 0.4 times). While we don't factor in multiple expansion, one could argue it would be warranted given the company's above-average growth profile with 2015-2018E EBITDA and EPS CAGRs of 20 per cent and 22 per cent, respectively, compared to consensus estimates of just 6 per cent and 8 per cent for the peers. Indeed, on a PEG basis FirstService looks attractively priced at 0.9x compared to peers which are trading at 2.7x."


Citing a deterioration in both volume and pricing trends for trucks in North America, Buckingham analyst Joseph Amaturo downgraded Ford Motor Co. (F-N) to "neutral" from "buy."

"We believe that production estimates, accrual EPS and automotive free cash flow could be under pressure through 2017," he said. "Moreover, given the expectation for rising interest rates and ATP pressure driven by moderating U.S. light vehicle demand, we now believe there is greater than a 50-per-cent chance of downside earnings risk in 2017 and 2018."

Mr. Amaturo said he also expects the passenger car market to remain challenging, placing pressure on production estimates, earnings and free cash flow.

He reduced his target for the stock to $12 (U.S.) from $16. The analyst average is $13.22, according to Bloomberg.

Elsewhere, Nomura analyst Anindya Das said the company is likely to retain its market share in the lucrative pickup segment, which will benefit from an improving U.S. housing market.

He initiated coverage of the stock with a "buy" rating and $14 target.

"The company is poised to remain competitive in the fast growing and popular crossover segment on the strength of its highly recognized Explorer, Edge, and Escape models," he said. "The company's automotive finance business should continue to contribute a significant and steady source of group profits, leveraging Ford's US presence and we expect Ford's cumulative earnings in automotive markets outside North America to steadily improve. Finally, Ford stock offers a very attractive dividend yield, with a steady cash flow from the company's North American operations and a healthy automotive net cash position, helping to support future payouts. We expect Ford to pay out $0.75 per share in FY2017 (including supplemental dividends), yielding 6.2 per cent, the highest among its peers."

Mr. Das also initiated coverage of General Motors Co. (GM-N) with a "neutral" rating and $33 (U.S.) target, versus a $36.94 consensus.


Columbia Sportswear Co. (COLM-Q) is set up for a "solid" second half of the calendar year with a "robust" gross margin recovery opportunity to follow in 2017, said Canaccord Genuity analyst Camilo Lyon.

Following meetings with the apparel and footwear company's management last week, Mr. Lyon said he believes both macro and "idiosyncratic" factors are improving. Accordingly, he upgraded his rating for the stock to "buy" from "hold."

"We see the pieces in place for upside to our 2H16 revenue and earnings estimates, and more importantly, a return to high-single digit [HSD] revenue growth and mid-teens EPS growth in 2017," said Mr. Lyon. "Over the next four years, we believe consistent HSD revenue growth, ERP [enterprise resource planning] systems leverage, DTC [direct-to-customer] mix shift benefits, sustained expense leverage, and diminishing FX headwinds could drive EBIT margins up to 13 per cent from 10.6 per cent currently, adding 68 cents to EPS off a base of $2.37 this year driving $4.20 in earnings power in 2020 ($3.15 discounted to present value)."

Mr. Lyon called the company's second-half guidance "conservative," citing the potential for favourable weather patterns and reorder upside.

"We believe the company's guidance for the 2H16 safeguards the downside risk as Q3 orders have already begun shipping with no changes to order patterns," he said. "In other words, the shortfall in orders that plagued GIII [G-III Apparel Group Ltd.] during its Q2 call are company specific (not industry wide) and bear no relation to COLM or the way its order book was finalized. In fact, COLM's orders were finalized earlier in the year (April) and thus contain virtually no cancellation risk in Q3. As for Q4, should weather cooperate as we believe it will, we expect reorders to materialize to a level that drives upside to our Q4 estimates. COLM is planning on a normal weather pattern despite wholesale orders coming in below that due to similar conservatism by retailers across channels (sporting goods, specialty, and department stores). We thus see a likely scenario in which reorders materialize in early Q4 which COLM will either fulfill with on-hand inventory or keep for its growing and higher margin DTC business (37 per cent of sales)."

Mr. Lyon raised his price target for the stock to $72 (U.S) from $59. Consensus is $64.62.


Despite a strong performance thus far in 2016, there is more room for shares of Royal Gold Inc. (RGLD-Q) to grow, said Canaccord Genuity analyst Peter Bures.

Royal Gold is up 107 per cent in the year to date, outperforming its peers by 34 per cent. Mr. Bures said that growth can continue if the company deploys its liquidity toward additional stream/royalty acquisitions.

On Monday, it announced a $70-million (U.S.) acquisition of a 3.75-per-cent net value royalty from private interest for Barrick Gold's Cortez mine, including the Crossroads deposit.

"The company continues to have (we estimate) $500-million of available liquidity and is likely pursuing additional transactions," said Mr. Bures. "The company has indicated a desire to lower its dependence on any single royalty/stream to sub-15-per-cent revenue contribution. We believe this could be achieved with available liquidity as well as organic production growth. We estimate gold-equivalent sales to increase by 43 per cent over the next two years – one of the more aggressive organic growth profiles in the royalty/ stream space."

With a "buy" rating, he raised his target price for the stock to $105 (U.S.) from $100. Consensus is $92.38.


In other analyst actions:

Encana Corp. (ECA-N, ECA-T) was downgraded to "sector underperform" from "sector perform" at Scotia Capital by analyst Jason Bouvier. His target rose by $1 (U.S.) to $10. The analyst average is $10.41.

B2Gold Corp. (BTO-T) was raised to "buy" from "neutral" by Dundee analyst Ron Stewart. His 12-month target price rose $4.50 from $4.25 per share. The average is $5.25.

Macquarie analyst Matt Murphy initiated coverage of Lundin Mining Corp. (LUN-T) with an "outperform" rating and $6 target. The average is $6.29.

Mr. Murphy also initiated coverage of the following stocks:

- Teck Resources Ltd. (TCK.B-T) with a "neutral" rating and $24 target. The average is $21.18.
- Nevsun Resources Ltd. (NSU-T) with a "neutral" rating and $4.50 target. The average is $5.72.
- HudBay Minerals Inc. (HBM-T) with a "neutral" rating and $5 target. The average is $7.79.
- Turquoise Hill Resources Ltd. (TRQ-T) with a "neutral" rating and $4.10 target. The average is $4.95.
- First Quantum Minerals Ltd. (FM-T) with a "underperform" rating and $9.25 target. The average is $12.71.

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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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