Tuesday’s analyst upgrades and downgrades

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

In the wake of the U.S. Department of Commerce's announcement that it is planning to impose tariffs averaging 20 per cent against softwood imports, lumber stocks now represent solid value, according to Raymond James analyst Daryl Swetlishoff.

"At a 20-per-cent average, the preliminary Countervailing Duty (CVD) rates and the Critical Circumstances determinations are in-line with our expectations and materially below some Street forecasts," he said. "Given this, plus uncertainty removal, we expect lumber stocks to trade up on the news. Regardless, of the final duty rates we continue to expect strong North American and offshore fundamentals to facilitate a material pass through of export duties to U.S. lumber consumers. Assuming a 30-per-cent preliminary total (CVD + Anti-Dumping) duty rate we forecast an average 40-per-cent upside to target prices and recommend investors add to positions."

Citing its lower relative preliminary CVD rate as well as pressures from recent downgrades, Mr. Swetlishoff raised his rating for Canfor Corp. (CFP-T) to "strong buy" from "outperform." He said he expects the company's shares "to stage one of the stronger relief rallies."

His target price for Canfor shares remains $24. The analyst consensus price target is $20.50, according to Thomson Reuters.

"While subject to retroactive duties we highlight Strong Buy rated Interfor Corp.'s geographic distribution and minimal overall duty exposure," the analyst said. "Outperform rated West Fraser receives the highest relative CVD, however, we expect this could be offset by a relatively low company specific ADD in late June. Outperform rated Western also receives retroactive duties but we see strong cedar price inflation as an offset. Lastly we highlight Outperform rated Conifex's enhanced liquidity and U.S. South expansion plans."

He did not change his target prices for the following stocks:

Interfor (IFP-T) at $24. Consensus is $21.

West Fraser Timber Co. Ltd. (WFT-T) at $67. Consensus is $61.04.

Western Forest Products Inc. (WEF-T) at $2.75. Consensus is$2.39.

Conifex Timber Inc. (CFF-T) at 6. Consensus is $4.69.

"Asuming 30-per-cent combined CVD and AD duties we estimate lumber stocks are currently discounting $350–$370 (U.S.) per thousand board feet (mfbm) benchmark SPF [spruces, pines and firs] lumber pricing," said Mr. Swetlishoff. "Given our $400 per mfbm 2018 forecast (in-line with CME Futures and a discount to last week's $410 cash price) we see an average 40-per-cent upside to our lumber company price targets. We note with shares recently under downgrade pressure Canfor is trading at nearly a 1 times EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization] discount to West Fraser which backstops our upgrade to Strong Buy from Outperform. Lastly, we highlight that share prices currently do not price in any upside from a negotiated settlement – in our view a non-zero probability event in time."

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Expecting volume momentum to continue in the near term, RBC Dominion Securities analyst Walter Spracklin thinks shares of Canadian National Railway Co. (CNR-T, CNI-N) will continue to outperform.

On Monday, the Montreal-based company reported in-line first-quarter 2017 financial results. Adjusted earnings per share of $1.15 met the consensus projection and represented a rise of 14 per cent year over year, while falling 3 cents below Mr. Spracklin's estimate.

Revenues grew 8.2 per cent from the same period in fiscal 2016 to $3.2-billion, meeting the analyst's $3.3-billion. He attributed the increase to "impressive" volume growth of 14 per cent year over year, which was a group-best result for a second consecutive quarter.

"Though Q1/17 results were in line, we do not downplay that it was a strong quarter, particularly in the volume category, and well ahead of peers," said Mr. Spracklin.

The company also revised its guidance "meaningfully higher" in the analyst's opinion.

"CNR's volume growth reached into the double-digits in 12 of 13 weeks for Q1 and outpaced peers in every week," he said. "Management is now guiding for 2017 volume growth of 10 per cent year over year, from 3 to 4 per cent previously. As such, we have updated our estimate in-line with new guidance."

CN's full-year EPS expectation rose to a range of $4.95 to $5.10, versus the consensus projection of $5.05. That would represent a year-over-year increase of 8 to 11 per cent.

"We highlighted last quarter that the guidance provided was likely conservative and this was confirmed with the guide-higher now coming only 3 months later," said Mr. Spracklin. "Nevertheless, we continue to see this guidance as conservative given the much higher volume growth rate we had been assuming and we expect estimates to be revised higher as the street goes through the top end of the guidance range."

Mr. Spracklin's EPS projections for 2017 and 2018 rose to $5.15 and $5.62, respectively, from $5.13 and $5.55.

He maintained an "outperform" rating for the stock and raised his target to $110 from $102. The analyst average price target is $102.88, according to Bloomberg.

"CNR delivered on another solid quarter, executing on volume growth well in excess of industry peers, while maintaining an industry leading margin," he said. "The key risk to the CNR story here is on valuation; however we see CNR as continuing to benefit from easy comps in the near-term and a sustainable competitive advantage in the long term. Accordingly, we are taking up our valuation multiple to 19.5 times (from 18.4 times) to reflect the above average trends relative to peers (group average at 17.3 times)."

Elsewhere, Credit Suisse analyst Allison Landry also believes the company's EPS guidance "may be conservative" and raised her target for the U.S. issue of the stock to $77 (U.S.) from $76 with a "neutral" rating.

"CNI's upward '17 EPS guidance revision, just one quarter in, signals to us that management has a high degree of confidence in its business outlook for the remainder of the year," she said. "That said, we believe that buy-side expectations were elevated heading into the quarter, and even after accounting for likely headwinds from fuel and FX, investors may have trouble reconciling the gap between the significant upward revision in full-year RTM [revenue ton mile] growth (up 10 per cent year over year versus previous 3-4 per cent) and positive price above inflation with the new EPS guidance range - which even at the high end only implies 11-per-cent EPS growth. Although the range likely still embeds a modest degree of conservatism, we think there is a risk that the stock trades down on Tuesday."

Desjardins Securities analyst Benoit Poirier increased his target to $105 from $99 with a "hold" rating.

"We believe CN remains a quality stock that should continue to outperform peers in terms of volume growth and operating performance in 2017," said Mr. Poirier. "That said, we believe these positives are already reflected in the current share price, as we foresee only a 4-per-cent return to our new target (based on our FY3 estimates). In addition, we see potential for only modest operational improvement in the coming years given CN's best-in-class performance."

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Capital Power Corp.'s (CPX-T) improved business risk profile warrants valuation expansion, said BMO Nesbitt Burns analyst Ben Pham.

Accordingly, he upgraded his rating for the Edmonton-based power producer to "outperform" from "market perform."

On Monday, Capital Power announced the completion of its previously announced public offering of 7,375,000 subscription receipts on a bought deal basis, at an issue price of $24.75 per subscription receipt, for total gross proceeds of $183-million. Those proceeds will be used to partially finance the $441-million (U.S.) acquisition of Decatur Power Holdings LLC, which owns the Decatur Energy Center, a 795 megawatt (MW) natural gas-fired combined cycle power generation plant in Alabama.

Mr. Pham said he views the deal "positively" and cited "expected accretion and an improved business risk profile."

"Upfront accretion is a good starting point for any acquisition, but sustaining cash flows at the existing level for power assets with shorter-dated contracts is not a sure thing," he said. "Recent precedents for power asset recontracting have been unfavorable and North American power markets have been in oversupply for years while demand stagnates. Having said that, we see it positive that TVA has shown a willingness to re-contract with Decatur in the past. Further, TVA's [the Tennessee Valley Authority, which is the facility's contractor] latest IRP [integrated resource plan] points to modest demand growth, 3.4 gigawatts coal retirements through 2033, and strong need for nat gas power. Alternatively, the facility could also sell into PJM [a regional transmission organization] upon contract expiry. PJM forward curves suggest a hypothetical $38-million EBITDA for Decatur or 37-per-cent decline post-contract; the project IRR may not be as robust under that 'downside' scenario, but it should still remain attractive (15-20 per cent)."

Mr. Pham raised his target price for the stock to $28 from $26. Consensus is $27.50.

"Equally important to the expected accretion is the reduction in exposure to the Alberta power market and improved contracted cash flow profile," he said. "When including the recent acquisition from VSN, CPX's EBITDA exposure to Alberta will decline to 55 per cent from 75 per cent and contracted position improving to 80 per cent from 66 per cent. These positive trends should ultimately surface value: the stock currently trades at 15.5-per-cent FCF [free cash flow] yield (one of cheapest names in our coverage) versus group at 8 per cent."

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Canaccord Genuity analyst Tony Lesiak lowered his target for Barrick Gold Corp. (ABX-T, ABX-N), suggesting 2017 will be "back-end loaded."

On Monday, Barrick announced first-quarter results that failed to meet his expectations, due largely to lower-than-expected gold and copper production.

It reported adjusted earnings per share for the quarter of 17 cents, below Mr. Lesiak's 19-cent projection and the 20-cent consensus. Its gold production came in at 1.31 million ounces, versus the analyst's estimate of 1.37 million, and cash costs of $545 per ounce also exceeded his expectation ($522).

"Gold production in the quarter was impacted by autoclave maintenance at Pueblo Viejo and heavier than expected rains in Peru affecting operations at Lagunas Norte; both assets have returned to normal operating rates," said Mr. Lesiak. "Copper production in the quarter was lower than expected as Lumwana processed lower grade ore (11 per cent lower sequentially) with grades expected to improve into the back half of the year. Gold production in 2Q16 is expected to be impacted by the continued restriction on cyanide use at Veladero (potentially rectified in June) and a concentrate export ban in Tanzania likely impacting some timing of sales from ABX's 63.9-per-cent stake in Acacia. In 2016, gold/copper concentrate accounted for 30 per cent of Acacia's revenues.

"Overall, 2016 production and cost guidance has not been materially revised except to account for the announced sale of Veladero and the ongoing cyanide ban at that asset. While company-wide operating results are expected to improve into 2H17, a further near-term overhang is the continuing negotiations with the government of the Dominican Republic on the Special Lease Agreement (alternative minimum tax negotiation) at PV. There is a strong likelihood that a new agreement will look similar to the previous. We have assumed another three years of higher taxation at PV. If we were to assume the more onerous tax structure LOM [life of mine], our NAV [net asset value] would decline 33 cents per share."

Maintaining a "hold" rating for the stock, his target fell to $34.50 from $35. The analyst average is $28.72.

"ABX has outperformed its peers by 10 per cent year to date and is currently trading at a 21-per-cent premium on a P/NAV [price to net asset value] basis," he said. "While our favorable view remains intact, the weak Q1 operating results and PV tax overhang are likely to weigh on shares in the near term."

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CIBC World Markets analyst Cosmos Chiu downgraded Semafo Inc. (SMF-T) based on both a slight first-quarter production and cost miss as well as a "more concerning" geological interpretation concern at its Siou pit in Burkina Faso.

"Of concern, the geological interpretation of the upper portion of Zone 9 (mineralized zone in the south-west sector of the Siou pit) had an adverse impact on mined grade included in the 2017 mine plan," said Mr. Chiu. "Specifically, there is an area of complex geometry in the upper portion of Zone 9 at a junction with Zones 55 an 56. On a conference call, management indicated that it expects to continue mining in this "complex zone" until May, at which point mining will advance deeper where the geometry becomes simpler, and returns to more 'normal' mining parameters.

"Longer term, management expressed confidence in its reserves at Siou. That said, we believe investors will look towards Q3/17 operating results, and subsequent quarters, to find reassurance that there are no longer-term implications of geological interpretations at Siou."

The company reported quarter production of 55,400 ounces of gold at an all-in sustain cost of $892 per ounce, both missing Mr. Chiu's estimate of 57,000 ounces at AISC of $800.

His rating fell to "neutral" from "outperformer" and his target declined to $4.50 from $6. Consensus is $4.30.

Elsewhere, Raymond James analyst Chris Thompson dropped his target to $4.80 from $5.50 with an "outperform" rating (unchanged).

"We are reducing our target …  following adjustments to our modelled operating plan for Mana, prompted by recently released 1Q17 operating results and revised 2017 production, cost guidance (below expectations)," said Mr. Thompson. "Whilst 1Q17 operating performance and underlying geological complexities of near-surface ore at Siou reflect potential for uncertain operational performance this year (exacerbated by a mine plan that includes the ramping up of lower grade production (Wona Kona) and the bedding down of Siou's (high strip) production potential, we remind investors of SMF's rock solid balance sheet  and production growth/exploration potential offered by Natougou, both reflective of our outperform rating."

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In other analyst actions:

Amazon.com Inc. (AMZN-Q) was downgraded to "Market Perform" from "Outperform" at Raymond James by equity analyst Aaron Kessler.

AcuityAds Holding Inc. (AT-X) was rated new "buy" at Eight Capital by analyst Suthan Sukumar with a $6 target. The consensus is $6.05.

Enercare Inc. (ECI-T) was raised to "outperform" from "sector perform" at RBC Dominion Securities by analyst Nelson Ng. His target jumped to $26 from $21, versus the average of $23.83.

JPMorgan Chase & Co. (JPM-N) was raised to "buy" from "neutral" at Guggenheim Securities by analyst Eric Wasserstrom with a target of $96 (U.S.). The average is $91.88.

Raging River Exploration Inc. (RRX-T) was downgraded to "neutral" from "outperform" at Macquarie by analyst Brian Kristjansen with a target price of $12.50. The average is $12.28.

Trilogy International Partners Inc. (TRL-T) was rated new "outperform" at Macquarie by analyst Greg Macdonald with a target price of $12. Consensus is $11.50.

Wells Fargo & Co. (WFC-N) was raised to "neutral" from "sell" by Guggenheim Securities analyst Eric Wasserstrom without a specified target. The average is $58.36 (U.S.).

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