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Tuesday’s analyst upgrades and downgrades

A truck hauls a load at Teck Resources Coal Mountain operation near Sparwood, B.C.

The Canadian Press

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

CIBC World Markets analyst Robert Bek upgraded his rating for stock of Cogeco Inc. (CGO-T) as the discount to his net asset value projection approaches a record higher.

"Cogeco Inc. (CGO) is one of those rare breeds of company in the S&P/TSX where value is largely derived from holdings in another publicly traded vehicle," he said. "In the case of CGO, this would be through its underlying ownership of 15.7 million shares of Cogeco Communications (CCA), which comprise about 93.5 per cent of CGO's net asset value. The remaining 6.5 per cent of CGO's asset value is derived from its ownership of 13 radio stations across Quebec and a news agency, and through the management fees charged by CGO to CCA. Given this structure, one would think that the underlying performance of the two stocks would track each other to some extent. This simply hasn't been the case of late. Since the start of 2014, CGO shares have traded sideways (up a modest 1.5 per cent) while shares in CCA are up some 25.5 per cent over that period."

Raising it to "sector outperformer" from "sector performer," Mr. Bek said the recent performance Cogeco Inc. stock relative to CCA "is not perfectly efficient all the time and that there is some level of mis-pricing."

"The market has actually ascribed a negative value to the non-CCA assets at CGO since late 2014  and this has stretched out of late, with the current market implied valuation for the CGO stubco sitting at -$5.39 per share, which, in our opinion, is extreme," the analyst said. "Radio results (not just at CGO but across the industry) have proven to be quite resilient through the years, and recently issued F2017 guidance indicates that CGO management expects radio results to continue to hold in. At the same time, recent changes to the structure of management fees have, in theory, shifted some value from CCA to CGO, as these fees are now paid to CGO on a monthly basis at a rate of 0.85 per cent of CCA's consolidated revenue with no cap, whereas previously they were capped at 2 per cent of CCA gross annual revenues (plus inflation).

"CGO generated $18.5-million in management fees in fiscal 2016 (the first year under the new structure), up from $9.9-million in fiscal 2015. Given this higher stream of income comes directly out of CCA, rational economics would suggest that the change in fees should have worked to narrow the valuation gap between CGO and CCA. Instead, the gap has actually widened in CCA's favour. While radio assets and management fees (for that matter) aren't necessarily all that sexy, the fact of the matter is that CGO still generates somewhere in the neighbourhood of $25-million in annual EBITDA from these sources and, given minimal cash requirements, the conversion of this stream of EBITDA to free cash flow (FCF) remains quite strong. For the market to be ascribing negative value to cash-generating assets simply doesn't make much, if any, sense to us."

Mr. Bek raised his target price for the stock to $61 from $59. The analyst consensus is $69.33, according to Thomson Reuters.

"With CGO shares trading below the implied value of the publicly traded CCA stake, and the discount to our NAV near historical highs at [approximately] 20.7 per cent, we are upgrading CGO to Sector Outperformer with a $61.00 price target," he said. A"t current levels, the return to our price target for CGO sits at [about] 23 per cent, compared to 22 per cent at CCA, and while we would still advise investors to play CCA upside directly through CCA first (given liquidity constraints at CGO), we also see CGO shares as representing compelling value at current levels. Furthermore, for longer-term investors who subscribe to an endgame thesis for CCA, there may be more upside in owning CGO shares given our view that the premium paid in any takeout would be greater for CGO than CCA (given voting control over CCA rests at the CGO level). That being said, we are not in the camp that subscribes to an endgame thesis for CCA at present."

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Canaccord Genuity analyst Peter Bures upgraded Premier Gold Mines Ltd. (PG-T) based on a lower implied risk as it moves from an exploration company to a producer.

Mr. Bures moved his rating for the stock, upon assuming coverage, to "buy" from "speculative buy," saying the company has "changed rapidly this year," with Barrick's re-start of the South Arturo project in Nevada, of which Premier holds a 40-per-cent stake, and the acquisition of Yamana Gold Inc.'s Mercedes mine in Mexico.

"Premier is now on track to produce 100-110,000 ounces gold in 2016. Taking Mercedes' year-to-date track record along with the restart at South Arturo (higher grades), we believe this to be achievable," said Mr. Bures.

"The exploration/development component of the story remains – Hardrock [project in Northwestern Ontario] continues to carry most of the valuation upside, in our view, and with Centerra's recently announced dividend cut (in part driven by Kyrgyz politicking), PG's share price appears to have run into some headwinds. PG has underperformed the TSX Venture by almost 20 per cent in one month. We believe this to be an over-reaction and view the current share price as an excellent entry point into an attractively valued, self-funded, exploration name."

Mr. Bures played down the company's third-quarter results, which included an earnings per share loss of 3 cents and negative cash flow per share of 4 cents. Noting it's the first quarter in the company's history featuring revenue from the sale of produced gold, he said investors should not consider these results "at this early stage" as run-rate heading into the fourth quarter and 2017.

"PG finished the quarter with $42-million cash and $28-million in finished goods," he said. "Working capital was $84.8-million versus our $44.7-million estimate. We estimate the company will generate positive cash flow in each of the next two years (using our forward curve metal prices), and will thus maintain financial flexibility for its exploration and development programs, especially at Cove and Hardrock."

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He kept a price target of $5.50. Consensus is $5.56.

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The pullback in price of gold and gold equities provides a significant near-term headwind for Sprott Inc. (SII-T), said CIBC World Markets analyst Paul Holden.

Despite emphasizing the "substantial" optionality of its balance sheet and ability to find new growth opportunities, Mr. Holden downgraded the stock to "sector performer" from "sector outperformer" based on the impact of that fall on both performance fees and assets under management.

"While we see many positive developments for the company, the story remains closely tied to the price of gold and related equities," said Mr. Holden. "For that reason, fund performance has tailed off in recent months and we are reducing our 2016E for performance fees from $27-million to $19-million."

He lowered his target price for the stock to $2.75 from $3.50. Consensus is $2.57.

"Sprott is in the process of re-positioning its business, a difficult and time consuming process," said Mr. Holden. "The company is successfully growing AUM through newer products now that redemptions on legacy products look to be in the past. Performance fees are an important part of Sprott's business model. After a strong start to 2016 fund performance has started to tail-off with a drop in the price of gold. The outlook for 2016 performance is no longer as positive as it was just a few months ago."

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Harley-Davidson Inc.'s (HOG-N) potential for growth has improved, according to RBC Dominion Securities analyst Joseph Spak.

Adding he'd previously been using a lower target multiple due to perceived risks to growth, Mr. Spak upgraded the stock to "sector perform" from "underperform."

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"Our Underperform thesis had been predicated on: 1) difficult industry demand; 2) concern over dealer inventory; 3) elevated 2017–18 consensus estimates," said the analyst. "These pressures factored into our decision to utilize a lower multiple for valuation. However, in reassessing our thesis, we have to acknowledge at least the potential for better economic growth, which is gripping the market. A review of where that growth could come from plays into HOG's demographics. Further, while we are not changing estimates, our 2017/18 EPS forecasts are now only 3 per cent/2 per cent below consensus vs. 7 per cent/15per cent prior. Net, we wouldn't chase the stock and we still believe there could be potential downside less than upside at current levels, but we admit we were wrong on the stock call and are cutting our losses."

Mr. Spak said he's hesitant to say the policies of U.S. president-elect Donald Trump will be able to bail out the company's shipping strategy and inventory issues; howeve,r he said "the odds look better than before."

"Recall that our checks had shown excitement around HOG's MY17 lineup; we just didn't believe that would necessarily convert into demand," he said. "However, Trump's policies including tax cuts and increased infrastructure spending could invigorate growth and hence consumer spending. Further, more construction jobs from increased infrastructure spend plays squarely into HOG's core consumer … While there is still uncertainty as to what gets implemented, the potential for improved growth trajectory appears present."

"We have written a lot about Trump and autos … Perhaps the biggest element of uncertainty relates to the potential dismantling of NAFTA (Trump has the power to withdraw with six months' notice) and the protectionism rhetoric. This would cause a large headache for auto OEMs [original equipment manufacturers] given how their value chains are set up. HOG's manufacturing base is predominantly in the U.S. (none in Mexico/Canada). It's important to remember that HOG is technically in the Auto indices, so on a relative basis versus the other 'traditional' auto OEMs, HOG may face less uncertainty. This could impact some positioning."

Mr. Spak raised his target price for the stock to $57 (U.S.) from $46. Consensus is $53.

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Raymond James analyst Michael Overvelde lowered his target price for Alaris Royalty Corp. (AD-T) to reflect lower growth and higher risk.

"In our view, Alaris' investment portfolio currently features a higher-than-ever level of problematic investments that have, to varying degrees, become impaired in their ability to make regularly scheduled distribution payments, pressuring Alaris' operating cash flows and dividend coverage in the process," said Mr. Overvelde. "In the near-term, we expect that Alaris' valuation will remain constrained towards the low end of its historical valuation range until redemption and distribution deferral issues with certain of these 'watch list' investments are resolved. We believe there is very little risk to its current dividend payout, however, even in the event of further negative developments regarding its watch list investments, and would expect its payout ratio to improve following any additional investment and/or favourable investment-related development."

On Nov. 9, the Calgary-based company reported third-quarter normalized earnings before interest, taxes, depreciation and amortization (EBITDA) per share of 58 cents, falling below the analyst's projection of 64 cents.

Mr. Overvelde said the result was "due entirely to royalty revenues that came in below our forecast, the result of a change in the approach to accounting for unpaid distributions from two of its investee partners, as discussed below. Lower-than-expected operating costs provided a partial offset, but are not expected to continue at such low levels going forward."

He added: "Royalties and distributions of $22.9-million were $3.3-million lower than our forecast, as the company ceased accruing for unpaid distributions from both SCR and Kimco, which had collectively represented $3.5-million of our 3Q16 revenue forecast (i.e., revenues were otherwise in-line with expectations). Prior to 3Q16, Alaris had treated unpaid distributions from these partners as deferred payments, accruing for them in revenues and adding them to receivables on the balance sheet. Since Alaris does not expect to receive any cash payments from either of these partners until mid-2017 at the earliest, it has decided to stop accruing for these distribution streams, a more conservative accounting approach that we believe more appropriately reflects the recovery risk related to these unpaid amounts."

Mr. Overvelde emphasized Alaris revealed a lack of no "new materially negative developments" for its investments with its results.

"In the cases of Group SM and KMH, however, we regard no news as bad news as Alaris' investment in each is currently unproductive, and for Group SM we believe the potential of a favourable outcome may be diminishing with the passage of time," he said. "Alaris exited 3Q16 with investments in 15 partners, of which 10 are currently performing well, in aggregate, in our opinion. The other five partners are what we refer to as its 'watch list' investments, whose earnings coverage ratios are all below 1.0x and which have, to varying degrees, stopped making contracted distribution payments to Alaris."

Mr. Overvelde reduced his normalized EBITDA forecast for 2017 to $84.7-million from $115.5-million to reflect a reduced revenue forecast from SCR Mining Technology Inc. and Kimco.

"We continue to see more downside than upside risk in our outlook for Alaris' various 'watch list' investments and wouldn't be surprised to see more negative headlines involving these partners in coming quarters," he said. "Most notably, we are concerned that further delays in the resolution of Group SM's lawsuit might potentially result in liquidity issues for that partner that could add risk to the value of Alaris' investment and to the likelihood that full cash payment of Group SM's scheduled distribution might eventually be restored. While any negative developments related to the timing and extent of capital recoveries and restoration of distribution payments from watch list partners could result in further write-downs, we don't see the potential for such developments to negatively impact our operating cash flow forecasts or, therefore, Alaris' ongoing ability to cover its dividend. Any favourable resolutions, however, could represent upside potential to its cash flow outlook if involving either accelerated repayment of amounts owed (i.e., which could be reinvested earlier in yielding investments) or an earlier restoration of cash distributions."

He maintained an "outperform" rating for the stock, but he dropped his target price to $23 from $30. Consensus is $24.96.

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With oil and gas headwinds largely behind it, Badger Daylighting Ltd. (BAD-T) is well-positioned to grow, according to BMO Nesbitt Burns analyst Bert Powell.

On Monday, the Calgary-based provider of non-destructive excavating services reported third-quarter adjusted earnings per share of 38 cents, a cent below Mr. Powell's projection but two cents ahead of the Street. Revenue of $113-million also just missed the analyst's estimate ($115-million) while topping the consensus ($109-million).

"Overall, it appears that BAD continued to be negatively impacted by the headwinds in the Oil & Gas market, but was able to more than offset that headwind with growth in other segments," said Mr. Powell. "We believe that as the largest, vertically integrated player, BAD is well positioned to capitalize on the growth opportunities. BAD should be well positioned for any build in U.S. infrastructure. We have nothing built into our forecast for any recovery in the Oil & Gas market, but we understand that there is a busy winter season planned in the oil patch in Canada. Some capacity has left the market, positioning BAD to capitalize on any potential work.

"BAD seems to be doing better on its cash conversion cycle and it has improved every quarter this year compared to last year. A focus on working capital management continues, especially around accounts receivable; and we would expect continued, albeit more modest, improvements."

Mr. Powell raised his target price for the stock to $33 from $31 with an "outperform" rating. The analyst average is $31.74, according to Bloomberg.

"We have no fleet growth forecast in our estimates in Canada for 2017 and 2018, which we believe is appropriately conservative at this point," he said. "Our U.S. fleet growth rate is mid-single digits. We believe that as the leading hydrovac service provider, BAD continues to be well positioned to grow."

Elsewhere, the stock was cut to "market perform" from "buy" by Cormark Securities analyst Gavin Fairweather with a target of $31 (unchanged).

Acumen Capital analyst Brian Pow raised his target to $31.20 from $30.30 with a "buy" rating.

He said: "Overall, Badger is ahead of our expectations on the recent management change, and key markets (Eastern Canada and U.S.) are continuing to show improvements. We see weakness in the O&G regions nearing the bottom, and anticipate continued improvements in utilization as tempered build rates are maintained."

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Expressing a lack of confidence in its 2017 guidance, Raymond James analyst Ken Avalos lowered his target price for units of Boardwalk Real Estate Investment Trust (BEI.UN-T).

"Initial 2017 guidance for SPNOI [same property net operating income] of [a decline of] 8 per cent to [a decline of] 3 per cent may seem reasonable, but there is little to indicate improvement to the macro in Alberta that would accelerate absorption and drive rent stabilization," he said. "Management had to revise guidance lower three times in 2016 so it's likely the Street is in 'show me' mode in at this point."

Mr. Avalos stressed the "continued" pressure on the state of the market in Alberta, including a lack of job creation. He said the sole positive may be the fact that immigration "remains solid."

"Net absorption of supply added the last few years as the oil market crashed has been negative, driving increased occupancy and pressure on rents/increased concessions," he said. "On the plus side, we begin to anniversary difficult comps in 2017, but until results reflect improvement, sentiment will likely remain negative."

On Nov. 10, Boardwalk reported third-quarter funds from operations of 73 cents per unit, missing Mr. Avalos's estimate by 8 cents and the consensus of 7 cents. It was a decline of 20 per cent year over year, due largely to lower occupancy rates and net operating income.

He called the SPNOI decline of 14.6 per cent from 2015 "meaningfully" with revenue falling 7.6 per cent and operating costs rising 5.1 per cent.

"It was a rough operating quarter, with surprises to the downside across the board," said Mr. Avalos. "A third downward revision to SPNOI guidance will further ding the Street's view of management's ability to handicap the downside. We think newly introduced 2017 guidance should be taken with a grain of salt. The pain should continue into 4Q16 before getting better in 2H17 when comps become easier."

Mr. Avalos lowered his 2016 and 2017 FFO per unit projections to $2.97 and $2.80, respectively, from $3.13 and $3.19.

"With little to no visibility on FFO at this point in the cycle, we think long-term investors need to think about the asset value from an NAV [net asset value] and replacement cost perspective," he said. "Long-term investors should own shares here with the knowledge there is not a near-term catalyst, but the deep value embedded in the portfolio will eventually align with the public trading price."

Mr. Avalos kept his "outperform" rating for the stock and lowered his target to $52.50 from $60. Consensus is $47.16.

"The reality is that despite the negatives, we think value in the shares is evident, particularly after the recent selloff," he said. "The market is pricing in an NOI decline of 15 per cent to 25 per cent on what we think are realistic cap rates for a Boardwalk-like portfolio, if traded on depressed NOI. The stock is also trading well below replacement cost. While painful, the risk of selling shares down here is that some type of transaction occurs to unlock value, management or third-party driven. Thus we remain with the units."

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In other analyst actions:

Calling it a "unique coking coal and zinc focused FCF machine," Goldman Sachs analyst Andrew Quail upgraded Teck Resources Ltd. (TCK.B-T) to "buy" from "neutral" based on higher coking coal and copper prices estimates. He raised his target to $41 from $27. The analyst average is $31, according to Bloomberg.

BMO Nesbitt Burns analyst Lana Chan downgraded BB&T Corp. (BBT-N) to "market perform" from "outperform." She raised her target price to $45 (U.S.) from $43. The average is $41.27. She said: " In our view, BBT has run out of catalysts to continue to outperform in the new rate environment — we step to the sidelines post the stock's rise since the presidential election (up 10 per cent since Nov. 8).

Avigilon Corp. (AVO-T) was raised to "outperform" from "sector perform" at RBC Capital by equity analyst Steven Arthur. He raised his target to $16 from $13. The average is $15.07.

Pan American Silver Corp. (PAA-T, PAAS-Q) was raised to "buy" from "hold" by Canaccord Genuity's Peter Bures. He raised his target to $24.34 from $23.33. The average is $27.40.

Guggenheim Securities analyst Eric Wasserstrom downgraded Wells Fargo & Co. (WFC-N) to "sell" from "neutral." He has a target price of $47 (U.S). The average is $49.90.

Mr. Wasserstrom downgraded Bank of America Corp. (BAC-N) to "neutral" from "buy." He did not specify a target. The average analyst target is $18.59 (U.S.).

BMO Nesbitt Burns analyst Lana Chan downgraded BB&T Corp. (BBT-N) to "market perform" from "outperform." She raised her target price to $45 (U.S.) from $43. The average is $41.27.

Raymond James analyst Tavis McCourt downgraded Harman International Industries Inc. (HAR-N) to "outperform" from "strong buy" with a target of $112 (U.S.), up from $100. The average target is $98.60.

Stifel analyst David Ross downgraded FedEx Corp. (FDX-N) to "hold" from "buy." He has a target price of $186 (U.S.), compared to the average of $189.15.

Viacom Inc. (VIAB-Q) was downgraded to "market perform" from "outperform" at FBR Capital Markets by analyst Barton Crockett with a target of $44 (U.S.), down from $56. The average is $41.63.

RBC Dominion Securities analyst Brad Heffern upgraded Western Refining Inc. (WNR-N) to "outperform" from "sector perform" and raised his target to $35 (U.S.) from $31. Consensus is $29.18. Mr. Heffern said: "We have always admired WNR's assets, but strategic uncertainty and/or the balance sheet have kept us on the sidelines. With the NTI acquisition in the rear-view mirror and our expectation that widening Permian crude spreads could be a significant tailwind and solve much of the balance sheet issue, we are upgrading WNR."

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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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