Tuesday’s analyst upgrades and downgrades

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

TD Securities analyst Aaron MacNeil said he's seeing signs of "restraint" by North American exploration and production companies, and expects drilling activity to plateau or "modestly retrench" from current levels.

"Notably, improvements to well design have changed the landscape for NAM [North American] Oilfield Service (OFS) providers, with demand becoming increasingly weighted toward D&C [drilling and completions] equipment that can deliver high IP rate, low-cost shale wells," said Mr. MacNeil. "While broad overcapacity persists, we believe that growing market bifurcation supports a strong activity/pricing outlook for equipment that can demonstrate cost leadership and generate efficiencies."

In a research note released Monday in conjunction with his initiation of coverage of seven D&C companies, Mr. MacNeil said he's taking an "overweight" stance on the OFS sector.

"We believe that investors view both current NAm activity levels and its implied growth in crude oil production as unsustainable, as global supply/demand appears to remain unbalanced," the analyst said. "This logic presumes that NAm activity levels will eventually move meaningfully lower, and supports what we believe is pervasive sentiment weakness in OFS valuations. TD's price deck forecasts $55 (U.S.) per barrel WTI for 2018, which requires a degree of rebalancing. We believe that a step-change in NAm D&C efficiencies has significantly improved NAm shale's ranking among the global portfolio of potential projects. Furthermore, relative to larger scale projects (offshore, oil sands) with large upfront costs, capital deployed toward shale development can be recouped with shorter cycle-times, reducing its relative risk. As such, we believe that the efficiencies generated in NAm shale support current activity levels, despite continued evidence of global oversupply, and even more so as international activity wanes. Finally, while commodity price uncertainty persists, we note that hedging programs added meaningful stability to NAm producer realized pricing and activity levels in 2017, and we believe that current strip prices will facilitate continued hedging activity for NAm E&Ps into 2018."

Mr. MacNeil initiated coverage of Precision Drilling Corp. (PD-T) with an "action list buy" rating, calling it his top pick for the sector. His target price for the stock is $6, while the analyst consensus price target is currently $5.85, according to Thomson Reuters data.

"We believe that Precision should be a core holding in all energy portfolios, based on our view of its compelling valuation, quality assets, experienced management team, potential for free-cash-flow generation, scale advantage, broad NAm exposure, leading-edge technology initiatives, size and liquidity," he said. "Furthermore, as the largest, most liquid OFS company on the TSX, we believe that very weak sector sentiment has disproportionately impacted PD's shares. As such, Precision's implied return to target price is the highest in our coverage universe."

Mr. MacNeil also began coverage of the following companies:

- Calfrac Well Services Ltd. (CFW-T) with a "buy" rating and $5 target. Consensus is $4.79.

Mr. MacNeil: "Calfrac continues to build momentum as 2017 progresses, due to increasing NAm drilling activity and trends toward larger proppant loading at higher pressures, resulting in robust near-term demand despite the recent pullback in crude oil pricing."

- Ensign Energy Services Inc. (ESI-T) with a "buy" rating and $7.50 target. Consensus is $8.06.

Mr. MacNeil: "Over the long-term, Ensign has been an incredibly thoughtful allocator of capital. It has, albeit slowly, upgraded and built new rigs, executed well-timed acquisitions, paid a growing dividend, and maintained low leverage, all without meaningful external financing."

- STEP Energy Services Ltd. (STEP-T) with a "buy" rating and $12 target. Consensus is $14.25.

Mr. MacNeil: "STEP was formed to address the market need for a technically focused, high-specification coiled tubing provider, earning it a blue-chip customer base. Throughout the downturn, ARC Financial utilized STEP as a vehicle to consolidate financially challenged pressure pumping assets, and we credit STEP's pre-existing customer relationships with its successful transition to this new service offering, noting that 88 per cent of its 2016 revenue was generated by integrated pumping/coil customers, including ARC Resources, Canbriam, CNRL, and Shell."

- Trican Well Services Ltd. (TCW-T) with a "buy" rating and $4.75 target. Consensus is $5.25.

Mr. MacNeil: "With its acquisition of Canyon, Trican operates 30 per cent of the WCSB's total hydraulic horsepower ("HHP"), making it Canada's market leader. Pro forma, Trican has several advantages relative to its previous footprint, and we note that the previously decentralized ownership of HHP created a pricing environment featuring a significant lack of discipline. Trican's size and broad customer base should allow it to lead pricing (up or down), while maintaining market share. Additionally, it has initiated a process of negotiating favourable supply agreements, potentially resulting in an advantageous cost structure. G&A cost synergies should also occur and training program throughput capacity will be considerable, allowing it to scale quickly. Finally, increased market capitalization and liquidity make it a more investable idea."

- Trinidad Drilling Ltd. (TDG-T) with a "buy" rating and $2.25 target. Consensus is $2.97.

Mr. MacNeil: "In our opinion, Trinidad is faced with a decision to which there is no popular course of action: Risk potential market share concessions or allocate scarce capital at potentially unacceptable returns to maintain market share. Specifically, we believe that Trinidad's 2017 capital program limits potential free-cash-flow generation in the near-term, including a rig upgrade program supported by half-cycle ~2.5-year paybacks and the acquisition of a rig technology company in the early commercialization stages of a directional guidance system. We believe that Trinidad is playing catch-up to some of its larger peers, and that this is contributing to a perceived lack of capital discipline, thereby negatively affecting its valuation."

- Western Energy Services Corp. (WRG-T) with a "hold" rating and $1.50 target. Consensus is $2.23.

Mr. MacNeil: "We believe that pricing and utilization strength currently favour the U.S. over Canada and AC Triples (U.S. and Canada) and, to a lesser degree, Ultra-Heavy Doubles (Canada) over shallower rigs. In this context, we note that Western's below-peer margin performance is likely a function of its predominant weighting to both Canada and Heavy and Mechanical Double rigs. However, Western's year-to-date Canadian utilization performance is the highest in our coverage universe, and … it is punching above its weight in several challenging asset classes. Its North Dakota utilization has also been strong, despite the market being incredibly competitive."

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Oracle Corp.'s (ORCL-N) new order momentum remains "solid" across its technology and applications, according to RBC Dominion Securities analyst Ross MacMillan.

He said he remains positive on the Redwood City, Calif.-based company in the near-term, expecting its first-quarter 2018 financial results, scheduled to be released Thursday, to meet or exceed the Street's expectations.

"We believe Oracle's new signings momentum remains solid although it is difficult to understand allocation between cloud and on-premise revenue (especially given some deals allow for flexibility on deployment)," said Mr. MacMillan. "Our call on better license revenue is based on our assumptions around larger ULA type transactions related to Oracle's technology stack as well as the 12cR2 product cycle for on-premise deployment. We think the recent banner win with AT&T is helping discussions with other Oracle install base customers about how they can migrate their technology stack to an Oracle managed service/ cloud over time. On the applications business, we highlight mid-market success in ERP/ ERM and CX. We continue to think the large company adoption of cloud ERP remains slow (across all vendors) but believe Oracle's competitive position with cloud ERP/ Netsuite remains good."

Mr. MacMillan highlighted three potential areas for surprise in its quarterly report: "License revenue, given the 12cR2 product cycle, larger technology ULAs [unlimited license agreements] and diminishing application on-premise drag in the mix; higher cloud revenue, where we note guidance implies 7 per cent quarter-over-quarter sequential growth versus 12-per-cent quarter over quarter in F4Q17; operating expense given the comparison and ongoing cost alignment in hardware and related areas."

The analyst maintained an "outperform" rating for the stock and raised his price target to $56 (U.S.) from $53 "based on the stock trading on 18 times our FY19 EPS estimate at the end of FY18." Consensus is $55.21.

"We note that we do not (nor Street) model double digit EPS growth in FY18, to which management remains committed," said Mr. MacMillan.

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Citing both valuation and competitive risks in the U.S. apparel industry, Bernstein analyst Jamie Merriman expressed a preference for Nike Inc. (NKE-N) over both Under Amour Inc. (UAA-N) and Lululemon Athletica Inc. (LULU-Q).

In a research note, Ms. Merriman initiated coverage of Nike with an "outperform" rating and $69 target. The analyst average target is $61.20, according to Bloomberg data.

She gave Lululemon a "market perform" rating and $66 target, compared to a consensus of $64.10.

Her rating for Under Armour is a "underperform" with a $14 target. The average target is $18.59.

Ms. Merriman initiated coverage of seven other companies. They are:

- L Brands Inc. (LB-N) with an "outperform" rating and $57 (U.S.) target. Consensus: $45.67.

- Coach Inc. (COH-N) with an "outperform" rating and $51 (U.S.) target. Consensus: $49.56.

- VF Corp. (VFC-N) with a "market perform" rating and $67 (U.S.) target. Consensus : $64.89.

- TJX Companies Inc. (TJX-N) with an "outperform" rating and $88 (U.S.) target. Consensus: $82.73.

- Ross Stores Inc. (ROST-N) with an "outperform" rating and $74 (U.S.) target. Consensus: $70.95.

- PVH Corp. (PVH-N) with a "market perform" rating and $142 (U.S.) target. Consensus:

- Michael Kors Holdings Ltd. (KORS-N) with an "underperform" rating and $37 (U.S.) target. Consensus: $45.29.

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The long-anticipated announcement from Gibson Energy Inc. (GEI-T) of the construction of 1.1 million barrels of new tankage at its Hardisty Terminal is an "important de-risk" event, according to CIBC World Markets analyst Robert Catellier.

On Monday after market close, the Calgary-based company said two 300,000 barrel tanks and a 500,000 barrel tank are scheduled to be in service in the third quarter of 2019. They will increase the total capacity of the terminal to 10 million barrels. 

Mr. Catellier said the expansion "highlights [the] competitive position" at its Hardisty facility.

"The civil works to support up to four tanks had been started, so this announcement is hardly a surprise," he said. "We had $225-million of spec capital in our 2018 forecast, and we estimate these tanks will consume about $125-million of capex. In this light, we see this announcement as primarily a risk-reduction event. The increase to our price target reflects the company investing in its higher-value infrastructure segment, as opposed to generic spec capital. It should be noted this announcement is on strategy for the company, as it continues to seek to invest in infrastructure-based businesses. It is also pruning activity-based businesses that don't have a direct link to the infrastructure business. Over time, this should improve its valuation multiple and reduce the discount to its peer group. It also highlights the company's competitive position on Hardisty and is a nice first announcement for recently appointed CEO, Steve Spaulding."

Keeping a "neutral" rating for the stock, he hiked his target by a loonie to $19. Consensus is $19.55.

Elsewhere, Industrial Alliance Securities analyst Elias Foscolos maintained a "strong buy" rating and target of $21.50.

"With GEI's management providing clear transparency on this project, we already incorporated additional capex into our 2018 DCF model," said Mr. Foscolos. "Overall, the announcement was expected, therefore, we categorize it as neutral."

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Credit Suisse analyst Anita Soni upgraded her rating for Tahoe Resources Inc. (THO-T)  after the Guatemalan Supreme Court issued a decision that reinstates its Escobal mining license at its Guatemalan subsidiary, Minera San Rafael (MSR).

 "THO noted that an illegal roadblock remains in place, preventing an immediate re-start," said Ms. Soni. "Once the roadblock is resolved, THO expects to resume operations within a week. This is the first positive catalyst since the issue became known. Many factors remain unknown, particularly the impact of a potential appeal. We believe the stock will begin to re-rate with this turning point, thus we are upgrading on valuation with 63 per cent upside to our target price."

Moving the stock to "outperform" from "neutral," her target price for the stock remains $9.25. Consensus is $9.29.

Meanwhile,  BMO Nesbitt Burns analyst Andrew Kaip raised his rating to "outperform" from "market perform" with a target of $10, up from $7.

Mr. Kaip said: "If events play out in a reasonable time frame, we are of the view that THO will resume operations towards the end of 2017, in line with our current estimate. Assuming this outcome, we believe it is reasonable to apply an 8 times estimated 2018 price/cash flow and a 1 times NPV 5% per share (we typically use an equal weight of 10x P/CF and 1.5x PNV 5%per share) to derive  a risk-adjusted $10 target price that supports an Outperform (Speculative) rating."

CIBC World Markets analyst Cosmos Chiu bumped his target to $8 from $7 with a "neutral" rating.

"While positive, there remain a number of uncertainties including a continuing road blockage, the potential for appeals and the need for indigenous consultations," said Mr. Chiu. "We maintain our Neutral rating at this time."

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In a research report on U.S. real estate released Monday, BMO Nesbitt Burns analyst R. Jeremy Metz initiated coverage of 16 companies from the retail, industrial and self-storage REIT sectors.

"2017 has been a great divide with Retail and Industrial REITs on opposite ends of the spectrum, and until recently Storage as well," said Mr. Metz. "Industrial has been the second-best performing REIT sector year-to-date, up 18 per cent, while Shopping Centers and Regional Mall sectors hold the bottom spots at down 14.9 per cent, and down 15.1 per cent YTD, respectively. After a strong recent rally, Storage is now essentially flat for the year. Based on our fundamental and capital market views, we see the performance deltas as likely to persist in the near term."

Mr. Metz said he's "positive" on the industrial real estate sector, calling it a key beneficiary of recent retail struggles. He remains "cautious" on retail heading into the key holiday season, suggesting "the potential for further negative news flow remains a risk to the stocks making up significant ground into year-end." The analyst said he's "underweight" on self-storage, citing a "historical lag between increasing supply and softening revenue likely to dampen earnings into 2019."

"Both the Retail and Storage sectors are past peak, in our view, as moderating demand impacts pricing power and supply picks up (from closings in retail, vs. actual new construction in storage)," he said. "Outside of M&A (particularly in retail where there has been a dearth of price discovery), we could see ourselves being more constructive if supply risks for either pull back and/or the leasing environment improves. Until then, we see the potential for earnings expectations to continue to readjust lower."

Mr. Metz gave "outperform" ratings to the following stocks:

• Prologis Inc. (PLD-N) with a $69 (U.S.) target. Consensus: $63.94.
  
  He said: “Our thesis is simple: we believe PLD remains in prime position to capitalize on the strong secular industry trends given its scale, geographic footprint, and diverse business model. We see a path for sector-leading earnings and NAV growth through 2019 pushing the stock higher as the market gains visibility into PLD's 2018 (and beyond) growth prospects.”
  
  
• Simon Property Group Inc. (SPG-N) with a $175 target. Consensus: $190.30.
  
  He said: “We favor SPG’s high-quality income stream, balance sheet strength, and above-average earnings/dividend growth potential. Retail is facing headwinds, so this isn't to say the road won't have bumps. However, we think the best real estate will win over time, with the current environment serving to differentiate better platforms and management teams, like SPG, in their ability to create and exploit opportunities.”
  
  
• Federal Realty Investment Trust (FRT-N) with a $145 target. Consensus: $141.57.
  
  He said: “Similar to mall giant SPG, we like FRT’s long-proven track record for earnings and dividend growth, balance sheet strength, and high-quality income stream in a choppy retail environment. Federal is never “cheap.” However, trading at a less-than 10-per-cent discount to NAV, we think this is an attractive entry point for a blue chip stock that rarely has them.”

Mr. Metz gave "market perform" ratings to the following:

• Brixmor Property Group Inc. (BRX-N) with a $20 target. Consensus: $22.32.
• CubeSmart (CUBE-N) with a $27 target. Consensus: $27.18.
• DCT Industrial Trust Inc. (DCT-N) with a $61 target. Consensus: $59.42.
• Duke Realty Corp. (DRE-N) with a $30 target. Consensus: $29.77.
• Extra Space Storage Inc. (EXR-N) with a $78 target. Consensus: $81.27.
• GGP Inc. (GGP-N) with a $22 target. Consensus: $25.46.
• Kimco Realty Corp. (KIM-N) with a $21 target. Consensus: $22.89.
• Macerich Co. (MAC-N) with a $55 target. Consensus: $63.
• Monmouth Real Estate Investment Corp. (MNR-N) with a $16.50 target. Consensus: $17.20.
• Regency Centers Corp. (REG-N) with a $65 target. Consensus: $72.08.

The analyst gave "underperform" ratings to these stocks:

• Life Storage Inc. (LSI-N) with a $73 target. Consensus: $73.58.
• Public Storage (PSA-N) with a $193 target. Consensus: $207.20.
• Taubman Centers Inc. (TCO-N) with a $48 target. Consensus: $63.09.

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In other analyst actions:

JPMorgan analyst Sean Meakim downgraded Precision Drilling Corp. (PD-T) to "neutral" from "overweight" without a specified target. Consensus is $5.85.

Cormark Securities Inc. analyst Richard Gray downgraded Richmont Mines Inc. (RIC-T) to "tender" from "market perform" and raised his target by a loonie to $12. The average is $13.32.

Mr. Gray upgraded Centerra Gold Inc. (CG-T) to "buy" from "market perform" with a $12 target, up from $9.85. The average is $9.70.

Macquarie analyst Michael Siperco downgraded Eldorado Gold Corp. (ELD-T) to "neutral" from "outperform" with a target of $3, down from $5. The average is $3.91.

Cormark Securities Inc. analyst Hubert Mak downgraded AcuityAds Holding Inc. (AT-X) to "speculative buy" from "buy" with a target of $4.50, down from $6. The average is $4.15.

Hilliard Lyons analyst Kurt Kemper downgraded Bristol-Myers Squibb Co. (BMY-N) to "neutral" from "long-term buy" without a specified target.  The consensus target is $59.72 (U.S.).

Citic Securities Co. analyst Yingbo Xu initiated coverage of Apple Inc. (AAPL-Q) with " buy" rating and $200 (U.S.) target. The consensus is $176.18.

After Deutsche Bank raised his aluminum-chain commodity estimates, analyst Jorge Beristain upgraded Alcoa Corp. (AA-N) to "buy" from "hold" with a target of $60 (U.S.), up from $44. The average target is $45.87.