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Tuesday’s analyst upgrades and downgrades

A man exits a Hudson's Bay department store in Toronto, Ontario, Canada June 6, 2016.

Chris Helgren/REUTERS

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

Canaccord Genuity updated its commodity price forecasts, and those changes resulted in multiple target price increases to Canadian junior and intermediate exploration and production stocks in its coverage universe.

"The recent run up in oil prices following OPEC's to curb production, has brought WTI prices for 2017 in line with our $55 forecast for the year," the firm said in a research note. "As such we have left our WTI forecast unchanged for 2017 and beyond. We have adjusted our numbers for the weakness in the Canadian dollar; which results in a bump to our cash flow estimates. On the oil side, the companies with the most significant increase in 2017E CFPS were ATH, PGF, and CJ.

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"Despite the recent pull back, we are increasing our 2017 natural gas price assumptions by 25 cents, while leaving our long-term price unchanged at $3.00 (U.S.) per thousand cubic feet. A cold December provided a welcome boost to natural gas prices, and … PNE, LXE and QEC gain the most from the increase to our natural gas price assumptions."

The target price changes are:

- Canadian Energy Services and Technology Corp. (CEU-T, buy) to $10 from $9.25. Consensus is $7.88, according to Thomson Reuters.

- Calfrac Well Services Ltd. (CFW-T, hold) to $5.25 from $4.25. Consensus is $4.53.

- Cardinal Energy Ltd. (CJ-T, buy) to $12.50 from $12. Consensus is $11.83.

- Ensign Energy Services Inc. (ESI-T, hold) to $10.50 from $10. Consensus is $9.48.

- Essential Energy Services Ltd. (ESN-T, hold) to 95 cents from 85 cents. Consensus is 99 cents.

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- Canyon Services Group Inc. (FRC-T, buy) to $9 from $8.50. Consensus is $7.53.

- Freehold Royalties Ltd. (FRU-T, hold) to $15.25 from $14.25. Consensus is $15.96.

- Gibson Energy Inc. (GEI-T, buy) to $21 from $19.50. Consensus is $19.13.

- Gear Energy Ltd. (GXE-T, spec. buy) to $1.50 from $1. Consensus is $1.23.

- Journey Energy Inc. (JOY-T, spec. buy) to $4 from $2.75. Consensus is $3.14.

- Mullen Group Ltd. (MTL-T, buy) to $23 from $22. Consensus is $21.15.

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- Precision Drilling Corp. (PD-T, hold) to $8.75 from $8.50. Consensus is $8.25.

- Peyto Exploration & Development Corp. (PEY-T, buy) to $40 from $42. Consensus is $42.33.

- Blackpearl Resources Inc. (PXX-T, buy) to $2.50 from $2.25. Consensus is $2.16.

- Questerre Energy Corp. (QEC-T, sell) to 60 cents from 40 cents. Consensus is 40 cents.

- RMP Energy Inc. (RMP-T, hold) to 90 cents from 80 cents. Consensus is $1.04.

- Secure Energy Services Inc. (SES-T, buy) to $14 from $13. Consensus is $12.02.

- Surge Energy Inc. (SGY-T, buy) to $4 from $3.50. Consensus is $3.59.

- Trican Well Service Ltd. (TCW-T, buy) to $6.50 from $5. Consensus is $4.91.

- Trinidad Drilling Ltd. (TDG-T, buy) to $4.50 from $4. Consensus is $3.53.

- Total Energy Services Inc. (TOT-T, buy) to $18 from $17. Consensus is $15.89.

- Vermilion Energy Inc. (VET-T, buy) to $65 from $60. Consensus is $59.70.

- Western Energy Services Corp. (WRG-T, hold) to $3.50 from $3. Consensus is $3.32.

"Thematically speaking, we remain biased to oilfield service providers that are best positioned to outperform in the early stages of a fundamental recovery, the firm said. "We favour SES and CEU in the large cap square, TCW and FRC amongst the pumpers and MTL and TOT elsewhere in our coverage universe. We also continue to believe TDG provides the most attractive risk/return amongst the drillers in our coverage universe.

"In our midstream coverage universe, we are also increasing our estimates and target price for GEI while reiterating our Buy recommendation. Our EBITDA outlook goes to $379.5-million from $371.2-million in 2017 and to $448.4-million from $441.9-million in 2018. Concurrently, our target goes to $21.00 (from $19.50) based on a sum-of-parts analysis that equates to a 9.7x EV/EBITDA multiple applied to our 2018 estimates."


TD Securities analyst Brian Morrison downgraded Hudson's Bay Co. (HBC-T) after the retailer cut its 2016 guidance following a weak holiday season.

On Monday, HBC announced it expects sales of $14.4-billion to $14.6-billion for the year, down from $14.5-billion to $14.9-billion in its previous guidance from November.

Mr. Morrison moved his rating to "hold" from "buy."

The analyst also cut his target price to $13 from $26. The analyst average price target is $18.13, according to Bloomberg.

Elsewhere, Scotia Capital analyst Patricia Baker downgraded the stock to "sector perform" from "sector outperform" and lowered her target to $14.50 from $18.


The uncertainty surrounding its contract renegotiation with Air Canada creates a significant overhang for Aimia Inc. (AIM-T), said CIBC World Markets analyst Stephanie Price.

She downgraded the Montreal-based marketing and loyalty analytics company to "underperformer" from "neutral."

"Aimia's current contract with Air Canada expires in 2020 and we believe that Air Canada is coming into the negotiation from a position of strength," said Ms. Price. "We believe that Air Canada is looking to extract improved economics from the Aimia relationship and that the airline will ultimately dictate the key terms of the new agreement. We believe that Air Canada's key negotiating points include the allocation of seats, the discount on 'Classic Fare' rewards, and Air Canada's inability to sell miles to other vendors.

"If Aimia agrees to meet Air Canada's terms, we expect that the contract will be renewed; if Aimia refuses the revised contract terms, we believe that Air Canada could look to bring the contract in-house. We view it as unlikely that the existing contract will be extended to 2025; we expect that Air Canada would not want five additional years under the existing economics and Aimia would not want to contend with five more years of market uncertainty around the final contract terms. In our view, the contract renegotiation is crucial to Aimia, given that 85-per-cent of adjusted EBITDA is being driven from Canada and the Aeroplan coalition. We expect the stock to remain volatile until the final terms of the contract negotiations are known."

Her target for the stock remains $8 per share. The average is $9.44.

"Aimia derives roughly 50-per-cent of gross billings from its financial card partnerships," said Ms. Price. "We see this market as becoming increasingly crowded, with financial institutions offering not just Aeroplan or Air Miles cards, but increasingly offering their own travel reward cards. For example, TD offers the TD Aeroplan Visa, but also offers the TD Travel Visa, which is not affiliated with one airline, but rather allows clients to redeem TD Travel points on any airline. Within this market, we believe that the Aeroplan program differentiates itself through Aimia's partnership with Air Canada, with Aeroplan able to get better pricing with Air Canada than other travel card offerings given the volume of seats purchased. We expect that this competitive differentiator could become less significant if Air Canada reduces the discount it offers to Aimia on Classic Fare flights as part of the contract renegotiation."


Raymond James analyst Andrew Bradford raised his target price for shares of Trican Well Service Ltd. (TCW-T) in reaction to the initial public offering launch by Keane Group Inc.

Trican acquired 10 per cent of the shares of the U.S.-based well completion services company in January of 2016 in a deal to sell its U.S. pressure pumping business to Keane.

"Keane filed amended Form S1 Initial Public Offering documents and outlined a contemplated offering price range between $17 (U.S.) and $19 per share, the midpoint of which implies a pre-money equity value of $1.57-billion," said Mr. Bradford. Given Trican's tranched equity participation in Keane, the $1.57-billion equity value implies $322-million net to Trican – $425-million (Canadian) or $2.22 per share.

"The Canadian rig count has persisted above 200 since early December – save for what we expect was a seasonal dip between Christmas and New Year's. It's widely understood that pricing in the pumping sector continues to ratchet higher, the degree of which will depend on customer mix, existing Master Service Agreements, and other strategic considerations. But taken together, we feel the path to recovery has been sufficiently de-risked that we are now assigning an undiscounted 7.5x EBITDA on estimated 2018 EBITDA."

Mr. Bradford maintained his "outperform" rating. His target rose to $6.15 from $4. Consensus is $4.91.

"Our $6.15 target price is based on 7.5 times 2018 estimated EBITDA and gives effect to a $425-million equity value for Trican's interest in the Keane Group," he said. "Trican has historically generated much higher multiples than this, though these multiples tend to compress in active years, such as we expect 2018 will be."


Brio Gold Inc. (BRIO-T) provides an "interesting combination of better-than-average quality and value," according to CIBC World Markets analyst David Haughton.

He initiated coverage of the company, a wholly-owned subsidiary of Yamana Gold Inc. (YRI-T, AUY-N), with a "neutral" rating. Brio commenced trading on the TSX on Dec. 28.

"Yamana owns 85 per cent of Brio shares (80 per cent on a fully diluted basis), while management has Restricted Share Units that equate to 5 per cent of the company when exercised by Dec. 9, 2017," said Mr. Haughton. "There is no escrow period for Yamana and the possibility of future efforts to reduce exposure to Brio may present an overhang for the stock."

Toronto-based Brio owns and operates three mines in Brazil.

"The company strategy has been to improve each of the operations with focused management and to redevelop C1 Santa Luz [a developing project], which is currently on care and maintenance, for start-up in 2018," he said. "The reserve mine life appears relatively short for each of the operations with three years at Pilar, five years at Fazenda, six years at RDM and 10 years at C1 Santa Luz. Full conversion of resources has the potential to materially extend the mine life for each operation (which is assumed by CIBC)."

He added: "The focus of the dedicated management team on the performance of the assets and the resolution of the C1 Santa Luz technical issues appears to have improved the delivery of guidance goals."

Mr. Haughton set a price target of $5.05 for the stock.

"Success in the delivery of C1 Santa Luz (start-up in 2018) and the ramp-up of RDM to the nameplate capacity with sufficient power and water are critical to the realization of value for Brio," the analyst said. "The development projects provide gold production growth for the next few years, while conversion of resources to reserves has the potential to meaningfully extend mine life."


Expedia Inc. (EXPE-Q) is an online travel agency (OTA) "juggernaut," but near-term risks should not be ignored, said Citi analyst Mark May.

He initiated coverage of the stock with a "sell" rating.

"Expedia is the most important online travel agency in the U.S. (approximately 26-per-cent share of the online travel market, including 68-per-cent share among the OTAs) and one of the largest globally (greater-than $70-billion in annual global bookings)," said Mr. May. "It has an opportunity to become an even greater player in markets outside the U.S., in the important hotel category, and in alternative accommodations (vacation rentals). We forecast a 3-year gross profit CAGR [compound annual growth rate] of 9 per cent. Margins are half that of [Priceline Group Inc.], but this may be largely structural. And, execution has been choppy. As Expedia comps recent acquisitions and other factors come into play (e.g., ramp in Trivago investments), growth could slow more (and margins could come under more pressure) than consensus currently estimates. With this backdrop (estimate risk), with sell-side sentiment at all-time highs, and with valuation multiples near recent highs (and at a premium to PCLN on a PEG basis), we see near-term risk to shares to the $100 level. As such, we are cautious on EXPE shares near-term and initiate with a Sell rating. We also recommend pairing PCLN against EXPE."

Mr. May set a price target of $105 (U.S.). Consensus is $142.33.

He initiated coverage of Priceline Group Inc. (PCLN-Q) with a target price of $1,800 (U.S.). Consensus is $1,720.

"Travelers spend nearly $100-billion a year globally booking hotel reservations via online agencies, and Priceline is the clear market leader with 60-per-cent share of that market," he said. "We expect this addressable market will grow at a 10-per-cent CAGR over the next three years and for Priceline's share to eventually exceed 70 per cent. The company's marketplace business model and its focused scale produces greater-than 30-per-cent FCF [free cash flow] margins, which seem defensible. Priceline is also developing strong positions in other complementary travel markets like vacation rentals and business travel. Management's history of consistent and disciplined execution combined with a reasonable valuation result in us initiating coverage with a Buy rating on this leader in the online travel/hotel sector."

TripAdvisor Inc. (TRIP-Q) was initiated with a "neutral" rating and $51 (U.S.) target. Consensus is $52.20.

"TripAdvisor is a premier online travel property with the largest audience and with valuable and unique ratings and review content that plays an important role in the travel planning and purchase process," said Mr. May. "While the company's execution track record is spotty, it does appear to be turning the corner on its latest (and arguably most important) initiative, Instant Booking (IB). And, while easing comps and fewer IB headwinds should result in meaningful revenue acceleration in 2017, increased marketing spend by TRIP and competitors could weigh on earnings, and TRIP continues to trade at a premium valuation. While we appear more optimistic about TRIP than the consensus and rank it #2 out of the 4 public U.S. OTAs (behind only PCLN in our rank order), we initiate with a Neutral rating and would look for either a better entry point (e.g., low $40s) and/or for signs that IB can generate sustained improvements before getting more constructive."

Mr. May gave Trivago NV (TRVG-Q) a "neutral" rating and $12 (U.S.) target. Consensus is $14.

"Trivago is a leading online metasearch operator in the hotel category, and its investment in brand marketing has made it the fastest growing public company in the online travel sector," he said. "That said, questions about the long-term role of metasearch in a consolidating online travel market, and the need for greater confidence in its ability to turn acquired users into loyal repeat users in order to deliver ad spend leverage and hit long-term target margins, need to be better addressed before we can get more constructive."


RBC Dominion Securities analyst Daniel Perlin raised his target for Global Payments Inc. (GPN-N) in reaction to its "strong" second-quarter financial results.

On Monday, the Atlanta-based provider of payment technology services reported adjusted cash earnings per share of 89 cents (U.S.), ahead of Mr. Perlin's projection (in line with the Street's estimate) of 84 cents. Total revenues of $817-million represented a 58-per-cent increase year over year, and the result topped the analyst's expectation by $23-million.

"Results continue to highlight that GPN remains a share gainer in most of its markets given its integrated focus with organic growth outpacing the industry and underlying economic growth, in our opinion, while the Heartland transaction buttresses the CY17 outlook despite FX headwinds," said Mr. Perlin.

In response to the "strong performance" as well as the company's guidance, Mr. Perlin did lower his full-year 2017 fiscal EPS estimate by 2 cents to $3.50. His 2018 projection remains $4.10.

He raised his target price for the stock by a dollar to $88 (U.S.), which is approximately 20 times his calendar year 2018 adjusted EPS estimate. Consensus is $84.92.

"The multiple is a premium to the historical average, which we think is appropriate given the solid performance, mix shift and ability to re-deploy capital such as the Heartland acquisition, and in line with comparable companies," he said.

He added: "Global Payments is in the middle of a multi-year mix shift to higher-margin, faster-growing revenues in the International market (through acquisitions and new partnerships), as well as toward direct channels (especially via acquisitions) and away from its legacy North American business, which is heavily ISO-centric. We believe continued solid fundamental performance, new partnerships (especially in Asia and Europe), pricing opportunities, and growth in the integrated and direct channels could act as catalysts for the shares to gain higher multiples, thus propelling the shares higher."


The post-election performance of U.S. banks "seems reasonable," according to Citi analyst Keith Horowitz.

However, in a research note on the sector, he said there is "no cushion for risk."

"Since the election, bank stocks have outperformed the market (the BKX is up 23 per cent vs 6 per cent for SPX), which reflects potential for a significantly better operating environment for the banks in terms of higher rates, lower corporate tax rates, a softer regulatory stance, and better economic growth," said Mr. Horowiz. "The bull case we are hearing on the banks is that they are broadly under-owned, they benefit from higher rates and better economic growth, and they are less risky now due to higher capital levels. While this is all true, we think this is mostly reflected in the recent performance of the group. We still see some more upside to the group if this scenario plays out, but we think there needs to be some risk premium for the uncertainty that the key drivers of the 'blue sky' scenario, such as corporate tax cuts, de-regulation, and infrastructure spend, either do not play out as consensus expects or take longer to achieve."

Mr. Horowitz downgraded both Goldman Sachs Group Inc. (GS-N) and Comerica Inc. (CMA-N) to "sell" from "neutral."

"We view the banks as trading stocks and following the recent run, we don't really see a compelling risk/reward for the group," he said. "While we do not think the group is significantly overvalued, we wanted to address investor questions about which stocks have overshot the most. Based on our work, we see near-term tactical opportunities to trim positions in CMA (4-per-cent downside) and GS (6-per-cent downside). We believe CMA is pricing in the benefits from higher rates, as well as a takeout premium, which should arguably be lower now given CMA's recent outperformance relative to peers. GS is currently trading at 1.4x TBV, which ... represents a 200 basis points gap on ROTE above where expectations are currently. To get to that level of returns, GS would need an additional $4-billion of revenue above current estimates, which is 18-per-cent revenue growth off the 2016 revenue base. While we expect GS will see improved trading revenues going forward, the path is relatively uncertain and the bar is relatively high."

His target for Goldman stock is $225. The analyst consensus is $232.56.

Mr. Horowitz's target for Comerica stock is $65. Consensus is $68.90.

On the sector, as a whole, he added: "If rates, growth, etc. play out as expected in the base case, the best relative values in the sector are WFC and BAC. On our favorite valuation metric, implied IRR (cost of equity), WFC now has one of the highest IRR's (10.6 per cent versus 9.8 per cent for peers) even though it has historically traded more like a high quality regional, on the impact from recent sales practice issues. We view these issues as more temporary than permanent, and expect the risk premium to come down over time as these issues fade into the rearview. We also remain Buy-rated on BAC. Although rate and tax benefits are mostly priced in, BAC remains the highest IRR in the group, with the risk sentiment around the stock reflecting more the legacy issues of the past than a company demonstrating solid fundamental trends with one of the cleanest balance sheets in our coverage (NPA inflows are only 20 bps), continued execution on cost saves, and opportunities for growth."


In other analyst actions:

Agrium Inc. (AGU-N, AGU-T) was raised to "overweight" from "neutral" by Atlantic Equities analyst Colin Isaac. His target jumped to $120 (U.S.) from $85. The analyst average is $101.10, according to Bloomberg.

Canopy Growth Corp. (CGC-T) was rated a new "outperform" by Cowen analyst Vivien Azer with a target of $13. The average is $13.35.

Canadian Imperial Bank of Commerce (CM-T) was downgraded to "underperform" from "neutral" at Macquarie by analyst Jason Bilodeau. His target remains $112, compared to the average of $113.89.

Mr. Bilodeau also downgraded Home Capital Group Inc. (HCG-T) to "underperform" from "neutral" with a target of $30 (unchanged). The average is $30.52.

Mr. Bilodeau lowered Genworth MI Canada Inc. (MIC-T) to "underperform" from "neutral" with a $32 target. The average is $34.07.

Teck Resources Ltd.(TECK.B-T) was raised to "sector outperform" from "sector perform" at Scotia by analyst Orest Wowkodaw with a target of $37, up from $35. The average is $37.30.

Tahoe Resources Inc. (THO-T) was downgraded to "neutral" from "overweight" at JPMorgan by equity analyst Mandeep Manihani with a target of $15, down from $16.50. The average is $19.75.

Spin Master Corp. (TOY-T) was rated a new "buy" at Canaccord Genuity by equity analyst Derek Dley with a target of $37. The average is $38.

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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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