Tuesday'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 Gabriel Dechaine said he is "waiting for bullish 2017 signals" for Canadian banks.

In a research report previewing fourth-quarter earnings season, which kicks off on Nov. 29, Mr. Dechaine said he is forecasting average earnings per share growth of 2 per cent, noting the discussion around housing "could be positive (for a change)."

Mr. Dechaine said: "It was a busy quarter for developments in Canada's mortgage market: (1) The Minister of Finance announced a series of measures aimed at cooling the market; (2) as a result of these measures, several mono-line mortgage providers have quantified the reduction in volume growth they anticipate; (3) B.C.'s tax on foreign buyers has resulted in sharp declines in Vancouver's real estate transaction volumes; and (4) in the wake of the Trump-driven rise in rates, banks have increased prices on new mortgage originations. We believe recent regulatory changes and the surprise rise in rates have improved the earnings outlook for the Canadian mortgage business due to a combination of lessened competition and potential margin improvement."

However, he said the current low-rate environment has not helped the banks, and should act as a ratings tailwind.

"The low rate environment has not helped the banks. In recent weeks, the rate discussion has become more constructive with a steeper yield curve and increased certainty of Fed action," said Mr. Dechaine. "In our view, there are three key areas of focus: (1) updated guidance, notably from TD, on the impact of U.S. Fed rate hikes; (2) potential upside, and timing thereof, from higher Canadian 5-year yields on margins; and (3) an indication from banks on what level of rates would become a concern, specifically as it relates to consumer debt affordability."

Mr. Dechaine introduced his 2018 EPS projections, projecting growth of 4 to 7 per cent. With those estimates, he raised his target price for stocks by an average of 5 per cent to reflect forward price-to-earnings multiples.

"Since reporting Q3/16 results the banks have outperformed the market by 220 basis points," he said. "Such outperformance historically translates into limited upside potential during the earnings reports. However, within this average we believe laggards offer compelling short-term upside potential. One of these is CM (540bps underperformance vs. peers) and we detail our views on this short-term trading idea in a recent report. We also believe NA and RY offer good upside potential heading into the quarter due to healthy capital generation and potentially strong guidance on upcoming Q1/17 trading/capital markets revenue performance."

His changes were:

- Bank of Montreal (BMO-T, hold) to $91 from $88. Consensus: $87.85.
- Bank of Nova Scotia (BNS-T, buy) to $78 from $75. Consensus: $75.24.
- Canadian Imperial Bank of Commerce (CM-T, hold) to $108 from $104. Consensus: $107.09.
- Canadian Western Bank (CWB-T, hold) to $27 from $26. Consensus: $26.73.
- Laurentian Bank of Canada (LB-T, buy) to $57 from $54. Consensus: $52.91.
- National Bank of Canada (NA-T, buy) to $53 from $51. Consensus: $51.92.
- Royal Bank of Canada (RY-T, buy) to $95 from $89. Consensus: $86.45.
- Toronto Dominion Bank (TD-T, hold) to $63 from $59. Consensus: $62.65.

He added: "Separately, we are forecasting dividend increases for BMO, NA, CWB and LB (up 3 per cent, on average). We note that while CM is 'on schedule' for a dividend increase, we believe it will keep the current payout flat until post-PVTB acquisition close."

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The fourth-quarter results for Datawind Inc. (DW-T) show its growth thesis is intact, said Canaccord Genuity analyst Kevin Wright.

However, given its cash balance was $0.8-million as of Sept. 30, Mr. Wright thinks the Mississauga-based tech company will find its ability to raise cash "challenging given recent events."

Accordingly, he downgraded its stock to "sell" from "under review."

"Datawind reported its long-awaited Q4/F16 financial results and its [first half fiscal 2017] numbers on Monday," said Mr. Wright. "Recall that the company ran into delays with its previous auditor, prompting management to replace the firm with its new auditor. Datawind outlined the cause of the delays in a press release dated Sept. 6 and announced a successor auditor on Sept. 29. We expect that the company may fight public perception related to the audit delays despite better than expected revenue and units sold."

Datawind reported "strong" unit sales growth over the last nine months of 1.08 million, above the analyst's projection of 816,000, leading to "excellent" top line growth. Sales over that period of $60.4-million also beat Mr. Wright's estimate ($55.5-million). Earnings before interest, taxes, depreciation and amortization of negative $1.1-million did fall short of his expectation (positive $3.1-million).

"We believe that the company has a large addressable market for its products but given the low cash we wonder how the company will fund new inventory," said Mr. Wright.

"While growth was clear, low cash levels were also obvious. The company ended Q2/F17 estimate (Sept. 2016) with $0.8-million which was propped up by a recent equity raise of $2.5-million. This was significantly lower than the company noted in its KPI update on Sept. 6 which highlighted $5.0-million as of June 30. Eroding cash levels pose a major risk in our view."

Mr. Wright did say the fact that the auditor did not find improprieties in its financials should ease investor concern. He expects the stock's trading halt to be lifted imminently.

"All things considered we believe that a low cash balance and the negative perception associated with delayed financials, a cease trade order and the subsequent replacement of auditors are likely to impede the company's ability to raise capital," he said.

He dropped his target price for the stock to 75 cents from $4.50. The analyst consensus is $5.

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Credit Suisse analyst Ralph Profiti raised his target price for HudBay Minerals Inc. (HBM-T) in reaction to the technical report on its Constancia mine in Peru.

The Toronto-based company expects the facility to average annual copper production of 110,000 tonnes at cash costs of 97 cents per pound and sustaining cash costs of $1.27 per pound.

Mr. Profiti said the update was slightly better than expected "due to a phased development strategy at Pampacancha aimed at higher metals values and lower strip ratios during initial years."

He raised his 2017 earnings before interest, taxes, depreciation and amortization projection by approximately 3 per cent and his 2018 estimate by 1 per cent due to the report. His earnings per share expectations rose to 1 cent and 4 cents, respectively, from negative 2 cents and 11 cents. His net asset value per share estimate rose 5 per cent to $8.79.

"We see Constancia at the high-end of production guidance in fiscal 2016," he said. "Year-to-date Constancia copper production of 99,000 is tracking slightly ahead of FY16 guidance of 110-130,000 (83 per cent) on positive copper grade reconciliation from the near-surface ores (117 per cent from Jan. 2015 to Jun. 2016). Any positive reconciliation in 2017 would likely be somewhat lower due to a reduced proportion of near-surface ore in the 2017 plan. Year-to-date unit costs are tracking at the high-end at $8.13 per tonne versus FY16 guidance of $7.30-8.20 per tonne and versys revised LOM [life-of-mine] average of $7.91 per tonne."

Mr. Profiti maintained his "neutral" rating for the stock and bumped his target to $8.50 from $7. Consensus is $7.85.

Elsewhere, CIBC World Markets analyst Alec Kodatsky kept a "sector performer" rating and raised his target to $8 from $7.50.

"2016 remains somewhat of a year of transition for the company as Constancia continues to ramp to full production in the first half of the year and operations at other recent investment project mature," he said. "We see the company in a holding pattern for most of the year as any further advancement of the company's copper production growth profile will be dictated by market conditions."

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Black Diamond Group Ltd. (BDI-T) continues to struggle with a weak operating environment for its workforce accommodation segment, said Acumen Capital analyst Brian Pow.

On Monday, Black Diamond, a Calgary-based company, released revised fourth-quarter guidance. Its earnings before interest, taxes, depreciation and amortization expectation for the quarter is $8-million to $12-million, below Mr. Pow's projection ($12.8-million) and in line with the consensus ($9.1-million). It is significantly higher than the third-quarter result of $5.5-million.

"Management indicated that the quarter-over-quarter improvement in EBITDA is the result of rental revenue growth in BOXX Modular platform, increased non-rental revenue across all platforms, and a modest seasonality impact," said Mr. Pow.

He added: "With the inclusion of Q416 guidance, we see downward revisions for 2016 as well as 2017. The progress with the BOXX Modular platform continues to be hurt by the drop in demand for BDI's Workforce accommodation business."

Mr. Pow kept his "buy" rating for the stock, but he lowered his target to $4.85 from $5.40 due to changes in his financial estimates. Consensus is $5.78.

"The company is aggressively taking acquisitive steps to make BOXX a bigger contributor to the business with reasonable success," the analyst said. "Unfortunately, we expect the delays in LNG and the recent weakness in oil prices to delay a recovery in demand for camps that we were expecting."

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The fourth-quarter earnings miss by Tyson Foods Inc. (TSN-N) "raises more questions than answers about [its] chicken controversy," said Credit Suisse analyst Robert Moskow.

On Monday, the Arkansas-based company reported a year-over-year decline in sales of 12.8 per cent. Volume declined 1.1 per cent, which Mr. Moskow blamed on a reduction in commodity chicken sales and a price decline (due largely to beef).

"While we find the huge pullback in the stock today rather tempting, the issues swirling around the Chicken division raise too many yellow flags: 1) the Chicken division's operating margins suddenly dropped to 7 per cent in the quarter compared to a two-year run-rate of 12 per cent," said Mr. Moskow. "Management attributed the shortfall to its decision to cut production in response to weak demand in July and August, but this is hard to reconcile with the highly bullish assessment provided on the August conference call regarding chicken demand and its 4Q margins; 2) an anti-trust lawsuit against the chicken industry and the opaque nature of the Georgia Dock chicken pricing index have been gaining unwanted attention; 3) while one could view CEO Donnie Smith's retirement announcement [Monday] as a normal transition, we find it really strange that he would leave the company at a time when it is under such a high degree of scrutiny. He deferred most of the questions about the Georgia Dock controversy to incoming CEO Tom Hayes even though he played the biggest role in developing the company's chicken pricing strategy; and 4) the rising probability of disruption in international trade poses a threat to the beef and pork business."

Mr. Moskow maintained a "neutral" rating, but he lowered his target price to $65 from $70. The analyst average is $73.56, according to Bloomberg.

"It's quite possible that the market has sufficiently 'de-risked' the stock and that we are making a mountain out of a molehill about the issues facing it," he said. "For example, with only 4 per cent of Tyson's chicken customers using the Georgia Dock index for their contracts and all of them probably paying prices below the index anyway, it is hard to see how the demise of the index would hurt Tyson's pricing power."

Elsewhere, RBC Dominion Securities analyst David Palmer lowered his target to $68 from $75 with a "sector perform" rating.

Mr. Palmer said: "We are lowering our estimates and price target following yesterday's disappointing fiscal 4Q16 results. We believe that certain onetime issues will partially reverse next quarter. That said, the impact of soy meal price volatility on Chicken profitability and EPS was a reminder of heightened commodity risk after 2-3 years of extended deflation tailwinds. We will be watching commodity inputs closely over the coming months, as well as retail volume trends given plans to increase investment spending."

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The synergies from the merger between Ace Ltd. and The Chubb Corp. will help will help the company "weather the current soft market better than any of its competitors," said Citi analyst James Naklicki.

Calling it the most compelling reason to own Chubb Ltd. (CB-N) stock, he initiated coverage with a "buy" rating.

"The synergies Chubb Limited will earn from the ACE/CB deal are an earnings growth driver that its competitors don't have, and we estimate the deal will add about 3-4 per cent to the company's earnings growth rate, on average, through 2018," said Mr. Naklicki. "Chubb expects to earn $800-million in run rate expense related synergies after year 3. In 2016, accretion from the deal favorable impact operating EPS by about 43 cents per share, since Chubb will include realized savings, but not the merger related expenses in operating EPS. In 2017, we expect the incremental benefit of integration related expenses will add 38 cents per share, or 3-4 per cent of our full year estimate. In 2018, we expect the incremental benefit to be about $0.28 per share, or 3 per cent of our EPS projection. All in, through 2018, we expect the deal to add about $1.10 in operating EPS, and about 11 per cent to the company's growth rate. However, while merger related expenses are being excluded from operating EPS, they are included in book value growth. On that basis, the savings and expenses related to the deal will be dilutive to book value from 2015-2018.

"One other major positive from the deal, in our view, is that personal lines earnings at Chubb Limited are roughly double what they were for legacy ACE. We expect pricing in personal lines to hold up better than commercial over the next few years, which should help Chubb Limited navigate a softening market better than it did in the past."

He set a target price of $147 (U.S.). Consensus is $137.87.

"Historically the first half of a soft market, where pricing is down and pricing trend is decelerating, which is the environment which we are in now, is a good time to own Chubb Limited, in our view," he said. "We have U.S. commercial pricing data going back to 1999, and the last pricing environment which was similar to today, where pricing was down and going lower was lasted nearly 4 years, from 3Q04-1Q08. During that period, Chubb Limited's stock rose by 39 per cent, outperforming the S&P 500, the brokers and its underwriter peer group. In the current 1H soft market, Chubb Limited's stock is up 24 per cent, again outperforming the S&P 500, the brokers and its underwriter peer group."

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In other analyst actions:

Hydro One Ltd. (H-T) was rated a new "market perform" by Wells Fargo analyst Neil Kalton. He did not specify a target price. The analyst average target is $25.86.

Canadian Solar Inc. (CSIQ-Q) was downgraded to "market perform" from "outperform" by FBD analyst Carter Driscoll with a target of $12 (U.S.), down from $23. The average is $17.11.

OrganiGram Holdings Inc. (OGI-X) was rated new "buy" by M Partners analyst Mason Brown with a target of $3.70 (Canadian). The average is $2.89.

First Shanghai Securities Ltd analyst Chuck Li upgraded Facebook Inc. (FB-Q) to "buy" from "hold." He raised his target by $1 (U.S.) to $135. The average is $155.10.

B Riley & Co analyst Sameet Sinha upgraded GoDaddy Inc. (GDDY-N) to "buy" from "neutral" with a target of $45 (U.S.), up from $33.50. The average is $40.64.