Tuesday’s analyst upgrades and downgrades

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

2018 is an inflection year for Netflix Inc. (NFLX-Q), according to RBC Dominion Securities analyst Mark Mahaney, who called the media company's fourth-quarter financial results "very strong."

"We believe secular demand for Internet TV is ramping rapidly globally, and Netflix has positioned itself extremely well to benefit from this, with a compelling value proposition to consumers, based on price, selection & functionality," he said. "And pricing power helps. We would note that the company's guidance for Global Streaming Revenue of $3.59-billion in the first quarter of 2018 implies 43 per cent year-over-year growth… which would mark the company's fastest streaming revenue growth in 5 years… No law of large numbers here…"

On Monday after market close, Netflix reported quarterly revenue of $3.29-billion (U.S.), exceeding the projections of both Mr. Mahaney ($3.27-billion) and the Street ($3.28-billion). GAAP earnings per share of 41 cents, excluding one-time items, also met expectations and the company's guidance.

U.S. subscription additions of 1.98 million topped the Street's estimate by 53 per cent, while international additions of 6.36 million were 25 per cent higher than anticipated. Guidance for the first quarter exceeded expectations by 15 per cent and 31 per cent, respectively.

Mr. Mahaney reiterated his bullish stance on the company's stock, emphasizing six factors:

1. "A very large secular growth opportunity with streaming video." He expects streaming video to have years of premium growth ahead of it.

2. Netflix is a global leader in a business where scale matters. He noted it has almost 8 times more subscribers than its nearest competitor.

3. Proven profitability in the U.S. markets with increasing contributions from its international markets.

4. Its "proven" global appeal. He said it has achieved 10-per-cent household broadband penetration in all its international markets.

5. Its pricing power, which he believes could "translate into sustained growth rates."

6. He believes Netflix could have $13-$17 (U.S.) in EPS power and a $400 stock within five years, assuming a premium price-to-earnings valuation, which he believes fundamentals will support.

With the results, Mr. Mahaney raised his 2018 and 2019 EPS projections to $2.84 and $4.12, respectively, from $1.88 and $3.08.

He kept an "outperform" rating for the stock and hiked his target to $300 (U.S.) from $250. The analyst average on the Street is currently $255.69, according to Bloomberg data.

"We believe that Netflix has achieved a level of sustainable scale, growth, and profitability that isn't currently reflected in its stock price. This conclusion is based on our assessment of Netflix's 55 million U.S. subscriber and 63 million international subscriber bases, which makes Netflix one of the largest global Entertainment subscription businesses," he said.

"We also view Netflix as one of the best derivatives off the strong growth in online video viewing and in internet-connected devices (tablets, smartphones, Internet TVs), with our proprietary survey data tracking significantly improved customer satisfaction levels. Finally, we view the steady expansion in U.S. contribution margins as demonstrating the company's profitability, with its fixed-cost content nature and historically declining churn rates suggesting further margin expansions."

Elsewhere, touting its "impressive" subscriber momentum, Canaccord Genuity analyst Michael Graham raised his target to $280 from $225 with a "buy" rating (unchanged).

Mr. Graham said: "The subscriber growth validates management's ongoing content investment, and should contribute to comfort with 2018's increased $7.5-8.0-billion content spend and associated marketing to support the content slate and ever-growing library. We find ourselves in a familiar place with NFLX stock, having to stretch our forecast and valuation framework to justify a higher target price, while feeling very confident in the near and mid-term fundamental outlook."

Credit Suisse's Stephen Ju raised his target to $266 from $224 with a "neutral" rating.

"The debate for the balance of 2018 and beyond will be the subscriber net addition run rates on a go-forward basis as Netflix exits 2017 accelerating net subscriber add growth to 21.5 million paid subscribers versus 18.2 million of 2016," said Mr. Ju. "Our updated assumption for 2018 bakes in 26 million net adds, with 5.4 million from Domestic and 20.8 million for International (versus prior 20.4 million globally). The upside in subscriber growth is offset by an increased commitment on marketing spend for not only the traditional customer acquisition rationale but also apparently customer retention (to point existing and/or just-joined users deeper into the library of owned and operated content). Our price target resets higher to $266 (vs. prior $224) as the increase in revenue is partially offset by higher content expenses. We remain on the sidelines for now on balanced risk/reward and maintain our Neutral rating."

Conversely, Buckingham Research Group analyst Matthew Harrigan downgraded Netflix to "neutral" from "buy" with a target of $257, up from $251.

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Citing its current valuation and risks involved with the ramp-up of its Cobre Panama copper project, Credit Suisse analyst Anita Soni downgraded First Quantum Minerals Ltd. (FM-T) to "neutral" from "outperform."

"First Quantum's stock has returned 9 per cent since the beginning of the year, which has aided in closing the gap to our target price of $21.00," said Ms. Soni. "Given a minimal target return of 11 per cent in addition to its premium valuation on P/NAV [price to net asset value] and P/OpCFa [price to operating cash flow], the risk outweighs current estimated return to target price. Our target price is based on a 50/50 weighting of our NAVPS of $11.58 U.S., using a 1.20-times multiple and our FY18 OpCFa of 95 cents, using a 20.0-times multiple."

Ms. Soni said she's "cautious" ahead of the expected mid-February release of the company's 2018 guidance, which she views as a potentially negative catalyst, and outlook for Cobre Panama.

"FM had stated in its Q3/17 earnings call that phased commissioning would likely begin at the end of the Q1/18, with introduction of first ore in Q3/18," the analyst said. "At Cobre Panama, we are forecasting nominal non-commercial production in 2018 and 128,700 tons of copper in 2019. Overall, we are forecasting 627,000 tons (595,000 tons commercial) copper in 2018 (versus 621,000 tons consensus) and 728,000 tons copper in 2019 (below mean estimates of 797,000 tons)."

Ms. Soni maintained a $21 target for First Quantum shares. The average target on the Street is $20.69.

"FM [is] trading at a premium to peers given growth, but has now hit our target multiple: FM is currently sitting at P/NAV of 1.20 times (above peer average of 1.00 times) and in-line with our target multiple of 1.20 times," she said. "2018 P/OpCFa is currently at 15.8 times (above peer average of 11.6 times) and negative 2018 FCF yield of 1.2 per cent (below peer average of 0.1 per cent, excluding Turquoise Hill (TRQ))."

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CIBC World Markets analyst Jon Morrison upgraded Calfrac Well Services Ltd. (CFW-T) to "sector outperform" from "neutral" based on "the rising upside potential" of its U.S. platform and reduced leverage concerns associated with its operations south of the border.

"We are currently expecting EBITDA of $49.3-million in Q4 versus consensus of $60.6-million," said Mr. Morrison in a research report previewing 2018 in the oilfield services sector.

"Overall, we believe the largest differences in our estimates versus the street are three-fold: 1) we expect Canadian operations will be challenged by extreme cold weather and early YE shutdown due to E&P overspend throughout the year; 2) while the U.S. should hum in 2018, this will be a building quarter as the company ramps/builds its Southern U.S. business; and 3) as we mentioned earlier, we have adjusted some of our assumptions around elevated year-end corporate G&A and variable costs for a handful of companies due to 2017 outperformance possibly triggering increased variable costs and this is a platform where we may see some of that coming through given how well the company performed compared to expectations 12 months ago."

He raised his target of $9.50 from $6.75. The average is $7.43.

"While Calfrac still has above-average leverage ratios and investors shouldn't glaze over the balance sheet headwinds, we believe it would be a mistake to ignore the rate of change that is acting as strong tailwind to allow the company to materially outperform," he said.

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Probe Metals Inc. (PRB-X) is poised to be a leading performer in the junior mining space, said Canaccord Genuity analyst Tom Gallo.

"Probe has an enviable property package in a world class gold mining camp and is guided by a proven management team," said Mr. Gallo. "Their flagship project, Val d'Or East (VDE) is scalable, with a 2-kilometre mineralized trend identified through aggressive exploration. The company will look to materially add to its 2012 resource estimate in Q1/18 which we expect could act as a potential rerating catalyst."

Reiterating his constructive stance on gold, Mr. Gallo initiated coverage of the Toronto-based exploration company with a "speculative buy" rating.

The analyst pointed to a trio of main reasons for his rating:

- "A world class mining jurisdiction" in its Val d'Or East property. Calling Quebec "one of the best mining jurisdictions globally," he said Val d'Or is "a mecca for talented miners, drillers and technical staff giving Probe a distinct competitive advantage over other juniors."

- An exploration model "that works."

- A proven management team that helps make the company a prime M&A target. He said: "Our model outlines a scenario we think could be attractive to a senior producer in the Val d'Or camp. In our model, VDE generates a 32-per-cent IRR [internal rate of return]. Applying a take-out premium of nearly 50 per cent over the current stock price, in line with comparable industry transactions, the project still generates a 15-per-cent IRR."

Mr. Gallo set a target price of $1.90 for Probe shares. The average is $2.35.

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Laurentian Bank Securities analyst John Chu expects 2018 to bring "strong" growth for wine and craft beer makers.

"The wine industry in Canada has demonstrated very solid growth and market share gains for the past 10-plus years and based on recent trends, we expect wine market share gains to continue for the foreseeable future," said Mr. Chu in a research report previewing the Canadian alcohol sector released Tuesday.

"The Craft beer outlook also looks robust. … Recent growth trends reported by craft beer players suggest continued outperformance and market share gains, despite modestly declining growth rates for the beer industry as a whole."

Mr. Chu believes wine will continue to see a "strong" sales growth rate in 2017, especially in Ontario, a key market for Andrew Peller Ltd. (ADW.A-T).

"The LCBO is forecasting annual wine sales growth to accelerate to 4 per cent in the fiscal 2018 period (ending March) versus 3.4 per cent in 2017," he said. "Its growth forecast for F2019 is 2.4 per cent and expects it to accelerate to 4.3 per cent for F2020.

"The LCBO is projecting Ontario wines to grow at almost double the overall wine growth rate for F2018 and F2019, with premium VQA wines driving the majority of the growth. This follows a recent trend where domestic wine sales (volumes) have been outpacing imported wines. Grocery stores should also see very strong growth for F2019 to F2021."

Accordingly, he raised his target for Andrew Peller shares to $17.75 from $15.50, keeping a "buy" rating. The average on the Street is $17.23.

"We are increasing our TP for ADW …  to reflect sales growth more consistent with the LCBO's forecast, slightly higher margins to reflect a more favourable product mix (i.e. an accelerated sales growth rate for premium wines), and a higher multiple to reflect recent industry trends," he said.

Similarly, Mr. Chu increased his target for shares of Brick Brewing Co Ltd. (BRB-T) under the assumption craft beer companies will see continued outperformance and gains in market shares.

With a "buy" rating, his target for Brick is now $5, up 30 cents, versus a $4.86 consensus.

"[A] higher target multiple drove the majority of our TP increase and reflects higher and sustained industry valuations, our increased confidence of sustained craft beer market share momentum, our expectations that 2018 should have an easier year-over-year comp. period and BRB's canning line upgrade, which not only favours ongoing consumer trends but also should drive higher margins from a more favourable product mix," he said. "Our F2019 and F2020 forecast is up modestly to reflect the canning upgrade ($3.5-million capex and a 25 basis points improvement in margins starting late F2019 from the higher efficiency canning line/product mix)."

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Desjardins Securities analyst Keith Howlett raised his financial estimates for Alimentation Couche-Tard Inc. (ATD.B-T) following its first-ever Investor Day event in Toronto on Monday.

"Couche-Tard provided evidence of how it will profitably expand within existing markets and globally by showcasing the talents of a number of its key operating executives and providing a larger window into the company's culture," said Mr. Howlett. "It appears to us that the highly productive culture established by the four founders over 35 years ago permeates the organization, and continues to attract/retain managerial talent. We view it as positive that the company is accelerating its efforts to adopt digital technology for customer-facing activities, and to improve internal organizational efficiency and decision-making."

Mr. Howlett did note that the company has yet to discover a "home run product" in the high-margin food-service category. However, he added: "Continuous progress is, however, being made (ie some 'singles')."

He increased his earnings per share estimate for 2018 and 2019 to $2.89 (U.S.) and $3.40, respectively, from $2.80 and $3.07, in order to reflect inclusion of newly acquired HolidayStation stores, a lower tax rate and foreign exchange changes.

"We focused on the core operational activities that have driven EBITDA to well in excess of $3-billion (U.S.) with return on equity of greater-than 20 per cent, management is also building the internal capabilities to expand into additional global markets and to benefit from the shift to the digital economy," the analyst said. "The next five years will be as exciting as the last five, with entry into new markets and increasing density in existing ones."

Mr. Howlett kept a "buy" rating and $78 target for its shares, which is a loonie above the consensus.

"We remain positive on the near-term earnings profile of Couche-Tard, while being more confident that the company is assembling the human capital necessary to transition to a meaningful global brand," the analyst said.

Meanwhile, Canaccord Genuity analyst Derek Dley said the event reinforced the company's long-term growth profile, leading him to raised his target by a loonie to $75 with a "buy" rating (unchanged).

Mr. Dley said: "The event was well attended, and allowed the company to demonstrate the depth of its management team, provide an update to recent company and market trends, and address some longer-term concerns held by investors, such as the increased penetration of electric vehicles. We came away from the event with a clearer understanding of the company's longer-term organic, and innovation led growth profile."

"In our view, Couche-Tard offers investors an attractive combination of both organic and acquisitive growth, which coupled with management's track record, and opportunities abroad, will allow the company to capitalize on accretive growth opportunities."

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Calling it a "real candidate for consolidation by a mid-tier producer," Echelon Wealth Partners analyst Ryan Walker initiated coverage of Pure Gold Mining Inc. (PGM-X) with a "speculative buy" rating.

"An investment in PGM affords investors exposure to a high-grade gold development project bolstered by significant exploration potential, situated in the prolific Red Lake gold camp in northwestern Ontario," he said. "Indeed, PGM's flagship Madsen project represents one of the highest-grade undeveloped gold deposits in the world."

He set a target of $1.20 for Pure Gold shares, which is 12 cents above the consensus.

"We contend that Madsen's potentially robust economics, solid potential production profile for a modest capital expenditure, existing on-site and regional infrastructure, head-start on permitting, substantial remaining exploration potential, and growing scarcity value of the project's high-grade resources (especially situated in geopolitically stable Canada) position PGM as a real candidate for consolidation by a mid-tier producer," he said.

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In other analyst actions:

Scotia Capital analyst Ovais Habib downgraded Pretium Resources Inc. (PVG-T) to "sector perform" from "sector outperform" with a target of $17.75, down from $19. The average on the Street is $19.66.

Canaccord Genuity analyst Anthony Petrucci downgraded Bellatrix Exploration Ltd. (BXE-T, BXE-N) to "hold" from "buy" with a target of $2.25 (unchanged), which is also the current consensus.

Numis analyst Justin Chan initiated coverage of Golden Star Resources Ltd. (GSC-T) with a "buy" rating and $1.50 target. The average is $1.53.

William Blair & Co analyst Dylan Carden downgraded Nordstrom Inc. (JWN-N) to "market perform" from "outperform." Mr. Carden did not specify a target price, while the average target is $49.39. (U.S.).

Seaport Global Securities analyst Michael David Shlisky upgraded Caterpillar Inc. (CAT-N) to "buy" from "neutral." Mr. Shlisky raised his target price to $195 (U.S.) from $140. The average is $173.70.