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Tuesday’s analyst upgrades and downgrades

Emma Stone and Ryan Gosling dance around the tricky matter of love and ambition in La La Land.

Dale Robinette/Lionsgate/AP

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

Lions Gate Entertainment Corp. (LGF.B-N) brings an "attractive" opportunity for investors to gain exposure to evolving trends in global media, according to Canaccord Genuity analyst Sharath Toopran.

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

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"Lions Gate Entertainment Corp. (Lionsgate) is a Canadian-domiciled, NYSE-listed media company," he said. "We believe its strong business fundamentals are in the midst of secular tailwinds in a very dynamic media environment. The media environment is experiencing swift changes, including a rising demand for video content, proliferation of new digital platforms and a premium television market that should benefit from channel unbundling and the increasing prominence of VMVPDs (Virtual Multichannel Video Programming Distributors). In our view, Lionsgate is well-positioned to exploit and gain traction from the above trends."

Mr. Toopran believes the company's studio should prove to be a "key beneficiary" of the increasing demand for "high-quality" television content. He said its production of successful series, like Orange is the New Black (Netflix) and Mad Men (AMC), highlight its strength in meeting both industry demands and delivering acclaimed content.

"Original television programming is increasingly being viewed as a key subscriber-acquisition tool (and in turn a means of revenue generation) for distributors (television networks and [Streaming or Subscription Video on Demand] SVOD operators), and growth in demand for content is showing no signs of deceleration," he said. "Television Production is complemented by a Theatrical segment, which features a unique de-risked film model and offers meaningful upside potential and significant downside protection. The theatrical segment boasts an impressive track record including titles such as The Hunger Games, Twilight, and La La Land, among several others.

"From Starz's perspective, basic cable television networks are undergoing a period of channel unbundling. Consequently, the 'buy-through' price for premium TV networks (such as Starz) should be lowered as the requirement to subscribe to a large bundle ceases. We believe that these trends are notable tailwinds for Starz to maintain its subscriber progression."

Mr. Toopran called the company's recent $4.4-billion (U.S.) acquisition of Starz, which closed in December, "transformative" and turned it from "a pure-play content studio into a content-studio that is now supported by a premium TV network."

"The transaction is in keeping with the trend toward 'vertical' transactions that has emerged in the Media landscape in recent times, i.e., AT&T/Time Warner (pending), Comcast/DreamWorks and Fox/Sky (pending)," he said. "From Lionsgsate's perspective, the key rationale for the merger was to benefit from a steadier affiliate-fee-based revenue stream, to offset the peaks and troughs associated with a movie studio's ability to produce hits. Starz's lack of exposure to linear advertising and the ability to access the markets created by 'cord-cutters' and 'cord-nevers' (largely through the rising prominence of VMVPDs) are key positive features. For Starz, we believe Lionsgate's scale and content should help to negotiate more favourable deals with distributors."

Mr. Toopran also believes the company's Television Production segment will maintain its momentum, relying heavily on its reach, credentials and "strong" portfolio of assets. He's forecasting an earnings before interest, taxes, depreciation and amortization (EBITDA) compound annual growth rate of at least 16 per cent for the operation from fiscal 2017 through 2019.

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He did express concern, however, about the company's high leverage and lack of a dividend, noting: "Lionsgate's current leverage stands at 5.9-times pro forma net debt/last 12 month adjusted EBITDA, and we expect it to ease to 3.9 times by fiscal 2018 year-end. Deleveraging is a key area of focus for management, and, notwithstanding high free cash flow generation, we believe a dividend is unlikely in the near term."

He set a target price of $30 (U.S.) for the stock. The analyst average price target is $29.22, according to Bloomberg.

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Pembina Pipeline Corp.(PPL-T, PBA-N) is "uniquely positioned" among midstream service providers within the Western Canadian Sedimentary Basin to continue driving growth, said Desjardins Securities analyst Justin Bouchard.

He raised his target price for the Calgary-based company's stock in response to its announcement on Monday of a dividend increase, $325-million pipeline expansion and updated 2018 outlook.

"When Pembina sanctioned the Phase III Peace Pipeline Expansion, there was a level of uncertainty with respect to the take-up from customers — and the range in EBITDA guidance reflected that fact," said Mr. Bouchard. "[Monday], Pembina increased its 2018 EBITDA guidance slightly to a midpoint of $1.85-billion (from $1.75-billion previously), reflecting increased utilization on both its conventional pipeline system and ancillary midstream infrastructure (including storage, handling, fractionation, etc).

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"The obvious implication of increasing its EBITDA guidance to the high end of the previous range is that the Phase III pipeline expansion is nearing capacity; as a result, it is no surprise that Pembina announced the sanctioning of its Phase IV and Phase V expansions concurrently with an updated 2018 outlook. The two expansion projects have an expected cost of $325-million, with an expected in-service date of late 2018."

Pembina also increased its monthly dividend by a penny to 17 cents, meeting Mr. Bouchard's projection and representing the sixth consecutive annual hike.

Mr. Bouchard maintained a "buy" rating for Pembina stock with a $49 target, up from $47. The analyst consensus price target is $47.61, according to Thomson Reuters.

"Pembina has created a liquids pipeline infrastructure network in NW AB and NE BC that is the de facto standard — at this point, it appears that producers within these geographies have limited alternatives outside of signing up with PPL for liquids transportation to the extent they continue to grow the liquids side of their business (which also provides the company with a comparative advantage in providing ancillary services)," he said.

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With "not much left to play for," Citi analyst Keith Horowitz downgraded Bank of America Corp. (BAC-N) to "neutral" from "buy" based on valuation.

"Based on our implied cost of equity metric, BAC was the cheapest bank stock as of the day of the election and traded at a very wide discount to JPMorgan Chase & Co. (JPM-N)," said Mr. Horowitz. "Since the election, BAC has outperformed and has substantially closed that gap with JPM due to: 1) market now pricing in reflation versus 'lower for longer' which benefits BAC due to outsized asset sensitivity off the lows on rates, 2) increased confidence that BAC can hit its $53-billion expense target – which we would point out is more due to proactive investments made on the tech infrastructure as opposed to a 'slash and burn,' and 3) increased flows from top down managers looking to get exposure to the group. With a lot of the positives baked in, we now see BAC trading at a similar valuation versus JPM on our implied cost of equity metric so the relative valuation argument is tougher. And we continue to believe the group is fully valued. So, we do not see a lot left to play for."

Mr. Horowitz maintained his 2017 earnings per share projection of $1.70 (U.S.). He lowered his 2018 and 2019 estimates to $1.95 and $2.25, respectively, from $2 and $2.40.

"In our view, a material improvement in the economic backdrop would be needed for the stock to materially outperform from here," he said.

His target price fell by a dollar to $25, noting his forecast "now embeds the assumed dilution from the warrants to purchase 700 million shares at a $7.14 strike price related to the $5-billion of preferred issued to [Warren] Buffett." Consensus is $25.16.

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The emergence of Amazon.com Inc.'s (AMZN-Q) advertising business could place pressure on the advertising growth rates for Alphabet Inc. (GOOGL-Q), said BMO Nesbitt Burns analyst Daniel Salmon.

Calling it the "biggest competitive headwind" since Facebook, Mr. Salmon downgraded his rating for Alphabet to "market perform" from "outperform."

"According to big data firm BloomReach, as of September, 2016, 55 per cent of consumers in the United States began their product searches on Amazon, up from 44 per cent the year before," said Mr. Salmon. "We expect this trend to continue and believe it highlights the massive opportunity that is available for Amazon Sponsored Products, especially considering our belief that product searches are some of the most easily monetized searches. We do find it important to point out that Google processes billions of search queries per day, and a majority of these likely relate to different types of searches, so Amazon isn't attacking all verticals that Google services."

He added: "We believe Google can continue to grow revenue at 15-20 per cent over the mid- and long term and could see upside to near-term revenue estimates still; but we see lower potential magnitude and likelihood of beats as Amazon rises. We still prefer GOOGL to FB as Alphabet offers some key new ad load growth (4th mobile search unit, Promoted Places on Maps) and improved targeting on YouTube e (including inclusion of search data), which is a factor we believe most investors still significantly under-appreciate."

The company's YouTube unit has recently been hit by advertising protests following reports ads have appeared beside inappropriate and sometimes extremist content. Mr. Salmon said he expects the recent YouTube advertising protests to begin ending in the next several weeks with the direct impact ending up "in the low hundred millions."

He said: "With that said, there are two, cross-currents that this figure does not include: 1) Some contacts have noted that some advertisers have used the depression in the YouTube market to increase spending. In fact, we heard of one brand that was cited for cutting spending in one region increasing spending in another region (where a different vendor handles the execution for the brand in question). Moreover, several executives noted they are seeing brands that are competing against some of the more prominent protesting brands step into the market in order grow share of voice. 2) This figure does not include the immeasurable amount of lost negotiating leverage in the Upfront season. We continue to hear strong support for the view that a great deal of recent moves and public comments are largely public positioning for upfront negotiations, which is something that is about as old as the Upfronts themselves."

Dropping his advertising revenue expectations, Mr. Salmon's earnings before interest, taxes, depreciation and amortization projections for 2017 and 2018 fell to $42.663-billion (U.S.) and $49.450-billion, respectively, from $42.929-billion and $49.875-billion. His earnings per share estimates fell to $33.28 and $39.22 from $33.60 and $39.72.

His target price for Alphabet stock decreased to $880 from $1,005, based on "on lower estimates and a lower multiple, which we believe is justified due to competitive threats from the emergence of Amazon's advertising business." Consensus is $982.50.

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In reaction to the release of a pre-feasibility study on the development of Terronera project in Mexico, BMO Nesbitt Burns analyst Andrew Kaip raised his rating for Endeavour Silver Corp. (EDR-T).

On Monday, Endeavour, based in Vancouver, announced the mineral resources and reserves for the project, located 40 kilometres northeast of Puerto Vallarta, have "increased significantly" since the Preliminary Economic Assessment in 2015, as outlined below.

The company expects annual production of 3.2 million ounces of silver and 26,400 ounces of gold over a seven-year mine life at a by-product all-in sustained cost [AISC] of $4.76 (U.S.) per ounce.

"We see Terronera as a cornerstone to rebuild EDR, adding 50 per cent silver equivalent growth at lower costs and reasonable capex," said Mr. Kaip.

"We estimate a Terronera NPV [net present value] 5 per cent of $90.8-million which has increased our EDR corporate NPV by 86 per cent to $1.77 per share. Incorporating Terronera, EDR is now trading at 1.8 times NPV 5 per cent (previously 3.3 times), more in line with intermediate precious metal producers under coverage."

He upgraded the stock to "market perform" from "underperform" based on "the value lift Terronera represents." His target price rose to $5 from $3.50, compared to the consensus of $4.49.

"EDR is a 'transition story,' with plans to increase production by 50 per cent by 2019 through the development of Terronera," he said. "AISC are expected to decline 30 per cent over the same timeframe."

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Expressing concern over its store count, Citi analyst Paul Lejuez downgraded L Brands Inc. (LB-N) to "neutral" from "buy."

"We wrote on several occasions in 2016, the many strategic changes, the large number of stores at [Victoria's Secret] and [Bath & Body Works], combined with peak productivity and margins were a risk to the LB story we did not believe the market appreciated," said Mr. Lejuez. "When we upgraded the stock in November, we thought many of the concerns and risks were understood. In hindsight, we believe we were too early (a.k.a. wrong) to assume all the potential bad news was priced in. And a difficult Holiday and start to F17 has offered few silver linings. Sometimes it just comes down to one simple thing. And in this case, it's too many stores (compounded by negative traffic trends that only seem to be getting worse). Given our view that those retailers with large store bases are in a tough spot (a view we have held for a long time), we are losing sleep (figuratively speaking) with a Buy rating on LB. Despite its attractive long-term international prospects, we are downgrading the stock to neutral to reflect the risks we see over the coming months/years for a company with still extremely high levels of sales productivity and EBIT margins operating stores in many weakening malls."

Citing lower sales expectations, Mr. Lejuez dropped his 2017 earnings per share projection to $3.16 (U.S.) from $3.46. His 2018 estimate moved to $3.23 from $3.89.

"LB's February results threw a big unexpected curveball into the mix," he said. "And based on commentary from [Lululemon Athletica Inc., LULU-Q] and [Urban Outfitters Inc., URBN-Q] regarding quarter-to-date (QTD) results, March doesn't seem to have gotten any better. Although many suffered from weak February sales, LULU and URBN's comments that March fell short of plan (taking into account the negative impact from the Easter shift) is a clue into what others are likely experiencing. And LULU and URBN are two retailers we would describe as well-positioned in the current retail landscape with a right-sized store base. With their real estate in mostly top locations, it makes us more cautious on those with broad exposure to weaker malls, such as LB. LULU was also a reminder that it is hard to swim against the tide forever. While LULU has been facing traffic pressure for a year, they were able to make up for it through better conversion and AUR [average unit retail]. LB has been doing this for four years.

"Despite LB's 'as broad as you can get' mall exposure acting as a traffic headwind for many years, their ability to swim against the tide is remarkable. As there are signs pointing to a stepdown in traffic, swimming against the tide for both VS and BBW will be more challenging."

His target price for the stock plummeted to $49 (U.S.) from $70. Consensus is $53.80.

"The 2017 LB stock story may come down to how they perform in 2H17," he said. "If business stabilizes, we will look back on the past 12 months and be impressed with how well they managed through all the challenges they faced (both external and self-inflicted). If sales and/or GM pressure continues, we will question if there is any stabilization in sight (given still high sales/sq ft and EBIT margins). Given the aforementioned industry dynamics (with pressure from store closures), we no longer believe stabilization is more likely, which means a more balanced risk/reward in our view, which does not warrant a Buy rating."

At the same time, Mr. Lejuez also downgraded Urban Outfitters Inc. (URBN-Q) to "neutral" from "buy" and lowered his target to $23 from $32. Consensus is $28.04.

"With URBN's small store base of [approximately] 200 stores at UO and Anthro (and 125 at Free People), their real estate is largely top street locations and 'A malls,'" said the analyst. "They have a favourable product mix with 25-per-cent non-apparel and their e-commerce penetration is over 30 per cent, a standout in retail. All sounds good in theory for a winning formula in the current retail environment. Still, weak store traffic has taken a further step down (beyond what we expected accounting for the Easter shift) and Ecom now has also slowed. They reported QTD comps are down mid-single digits (we estimate down 6 per cent). Since 2010, URBN has grown its sales by 56 per cent, but net income is down 17 per cent over that same period. Now with sales flattening out in F17, in practice, net income pressure is likely to get even more intense."

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The fourth quarter in the oilfield services sector was "far from a blowout," according to CIBC World Markets analyst Jon Morrison, who said momentum is "moving in the right direction."

"Positively, we continued to see four of the six core indicators of an improving oilfield services market, including: 1) further E&P capex creep; 2) improvements in spot market pricing across a number of service lines; 3) a rising level of producer appetite to procure oilfield services capacity under longer-term contractual arrangements; and, 4) continued indications of a tightening in the available and qualified oilfield labour market," said Mr. Morrison in a research note. "And while crude prices have been soft over the past few weeks as the market digests a number of headwinds, we remain constructive on the macro environment holding up and for H2/17 to continue to show positive trends as we have seen in recent quarters."

Mr. Morrison downgraded Canyon Services Group Inc. (FRC-T) to "neutral" from "outperformer" to reflect its proposed sale to Trican Well Service Ltd. (TCW-T). His target is $6.90, while the consensus is $9.01.

"Our target multiples are above the average for the company's historical trading range over recent years and warranted given the earnings leverage in its business and long-term leverage Canyon has to unconventional resource development in the WCSB," he said.


He also lowered Savanna Energy Services Corp. (SVY-T) to "neutral" from "outperformer" given "given that Total has taken majority ownership in the entity and we believe the entity will be acquired by the company at some point in the coming quarter."  His target is $1.95, versus the consensus is $2.85.

On the sector, as a whole, Mr. Morrison said: "Although there are endless reasons to have caution about the macro environment and ongoing volatility in crude prices, we remain constructive on the oilfield services sector. Specifically, we continued to see four of the six core indicators of an improving oilfield services market, including: 1) further E&P capex creep; 2) improvements in spot market pricing across a number of service lines; 3) a rising level of producer appetite to procure oilfield services capacity under longer-term contractual arrangements; and, 4) continued indications of a tightening in the available and qualified oilfield labour market. As such, we remain constructive on the macro environment holding up and for H2/17 to continue to show positive trends as we have seen in recent quarters. In addition, as we have long said, great investments in the oilfield services sector are rarely made by initiating new positions mid-cycle following a bullish run in stocks and while the outlook is still glowing. In order to make adequate risk-adjusted returns within the sector, investors need to be positioned near the bottom of the cycle when the outlook is terrible (or worse), proceed to hold the names through the market malaise, and then be prepared to sell equities and reduce sector weightings once the health of the industry is widely accepted and forward upside potential is compelling. As it stands, we feel like we are still in the early part of that three-stage cycle. While there are lots of reasons as to why high-quality names could slide further and provide incremental negative short-term beta, we believe now is the time for investors to have exposure."

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Beacon Securities analyst Michael Curran downgraded Osisko Mining Inc. (OSK-T) to "buy" from "hold" based on share price appreciation.

"We consider Osisko Mining to have above average potential to successfully transition from explorer to 100,00 ounces plus per year producer over the next few years at Windfall Lake," said Mr. Curran. "We also consider the Marben deposit to have good potential to become an attractive satellite feed deposit for Agnico/Yamana's CDN Malartic mine. We view Garrison as interesting, but the least advanced of the three main projects."

"We are expecting Osisko to report an updated resource estimate for Windfall Lake in Q2/17, including 115-150 kilometres of drilling completed from Oct. 2015 to Dec. 2016. In our view, total gold resources are likely to increase into the range of 2-3 million ounces."

He raised his target price for the stock to $5 from $4.65. Consensus is $5.16.

"Despite our revised higher target price, the strong move in OSK shares so far this year (up 100 per cent year to date) leaves limited upside to our new target," he said.

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In other analyst actions:

Mosaic Capital Corp. (M-X) was downgraded to "hold" from "buy" by Canaccord Genuity analyst Raveel Afzaal with a target of $10, down from $11.75. The average is $11.

Premium Brands Holdings Corp. (PBH-T) was downgraded to "hold" from "action list buy" at TD Securities by analyst Derek Lessard, who maintained a $90 target. The average is $83.22.

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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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