Tuesday’s analyst upgrades and downgrades

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

Both macro and company-specific headwinds are likely to weigh on the financial performance of Exco Technologies Ltd. (XTC-T) until the benefits of new programs and recent capital investments begin to gain momentum through fiscal 2019, according to Industrial Alliance Securities analyst Nav Malik.

He lowered the firm's rating for the Markham, Ont.-based automotive parts manufacturer to "hold" from "buy" upon assuming coverage of the stock.

"We believe light vehicle production volumes have plateaued after several years of strong growth," said Mr. Malik. "On a macro basis, sales in both Exco's Automotive Solutions (AS) segment and Casting and Extrusion (C&E) segment are influenced by vehicle production volumes. Growth in vehicle production has been strong over the past few years but has likely plateaued, in our opinion."

"Exco has focused on increasing the content per vehicle (CPV) of its products to offset some of the cyclicality of auto production volumes. CPV in the AS segment has increased by a CAGR [compound annual growth rate] of 17.3 per cent (fiscal 2013-2017) on an organic basis. The acquisitions of Automotive Leather Company (ALC) and AFX have also increased overall CPV, but their contribution has been disappointing relative to initial expectations."

Mr. Malik said recent trends in the automotive industry will have a "mixed" impact on Exco, emphasizing a greater demand for aluminum parts and components and a focus on powertrain improvements to meet stricter emissions standards. He feels the company has the chance to add contracts due to these trends, however he expects new deals to be shorter in duration and possess lower margins than in the past.

"We expect Exco will post weaker year-over-year results for the next two quarters, before seeing modest growth later in F2018 and through F2019," he said. "Weak sales in the AS segment, pricing pressure, and a lower-margin contract mix will likely impact financial performance for the bulk of F2018 (full year F2018E sales down 3 per cent year over year, EBITDA down 12 per cent). In F2019, we are forecasting modest growth (sales up 3 per cent, EBITDA up 5 per cent."

Mr. Malik lowered his target for the stock to $10 from $13. The average on the Street is $11.67, according to Bloomberg data.

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A recent pullback in Osisko Mining Inc. (OSK-T) has placed its share back into "attractive territory," said Beacon Securities analyst Michael Curran.

"We downgraded our rating of OSK shares last April when shares were approaching $5," he said. "With the 50-per-cent pullback in H2/18, coupled with the potential for positive catalysts this year (resource updates, expanding mineralized zones through drilling, and underground bulk sampling), we now consider OSK shares to be at attractive levels for investment."

That led him to raise his rating for the Toronto-based company to "buy" from "hold."

Mr. Curran said he sees Osisko possessing "above average" potential to move from an explorer to a producer of over 200,000 ounces per year through its Windfall Lake gold project in Quebec.

"We also consider the Marben deposit to have good potential to become an attractive satellite feed deposit for Agnico/Yamana's CDN Malartic mine," he said. "We view Garrison as interesting, but the least advanced of the three main projects. The company maintains a strong balance sheet with cash and a portfolio of investments in other explorers.  

He lowered his target for the stock to $4.50 from $5. The average on the Street is $5.91.

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The upside scenario for UrtheCast Corp. (UR-T) faces significant challenges, according to Canaccord Genuity analyst Doug Taylor, who urged investors to "be cautious here despite the sell-off."

On Friday, the Vancouver-based satellite imaging company announced co-founder Wade Larson departed his position as chief executive office and boardroom director in a senior management shakeup. It also revealed it has secured debt financing of US$140-million for its UrtheDaily Constellation project, but a shortfall remains to reach the US$185-million to US$190-million required to fund the project, which Mr. Taylor called a "valuable concept with still significant risks."

"After several material negative developments were announced … and our conversations with management/directors since, our view of the long-term prospects of the company has changed significantly," said Mr. Taylor.

Believing its existing operations will continue to struggle to break even, he downgraded his rating for the stock to "hold" from "speculative buy."

" Consider the departure of the CEO and founder, the hiring of consultants aimed at delivering immediate performance improvement, and the financial performance of the company to date including substantial additional cash burn for the company between Sept. 30, 2017 and today (cash reduced from $25-million to $12-million by end of February)," he said. "The company will report full results on March 19 but has already told us enough to know the trajectory hasn't improved substantially."

"Given our view that there is little visible value in the existing operations beyond serving as a platform for UrthDaily, our new target is based entirely on our updated UrtheDaily DCF value at 50 cents per share. This assumes the remaining funding shortfall is filled with equity. Our prior model assumed $1.49 in value for the existing operations, including a SAR-XL build, and $0.21 in value for the OptiSAR constellation. We highlight the risks related to uncertain financing/dilution, the inherent risks in having the value of the company tied to a single space-based project, and UrtheCast's poor track record of selling imagery data for its existing asset."

Mr. Taylor dropped his target for UretheCast shares to 50 cents from $2. The average target is $1.20.

"Our new valuation is based on the assumption of very little value being ascribed to the existing earth observation and engineering operations," he said. "There is upside to this should the company demonstrate that it can drive consistent positive cash flow through either cost cutting or by monetizing its SAR technology. We will look for more detail on SAR XL when the company reports next week. Our valuation is based solely on the UrtheDaily program which appears to be the focus of the company going forward – our updated DCF on this project generates 50 cents per share in value (we round to our target). This valuation is based on the assumption that the company successfully finances the project which still requires significant equity investment/dilution. In practice, we find it difficult to recommend the shares until the terms of that financing are known and hence our HOLD rating. We recommend caution and that investors looking for exposure to the earth observation market look to Maxar Technologies (MAXR-T, "buy", US$70 target)."

Elsewhere, Clarus Securities analyst Noel Atkinson downgraded the stock to "speculative buy" from "buy" with a $2 target, falling from $4.

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Raymond James' Daryl Swetlishoff removed Canfor Corp. (CFP-T) from the firm's "Canadian Analyst Current Favourites" list.

"Lumber prices tend to peak in March before seasonally weakening into the summer months," he said. "With improving weather easing transportation constraints we expect lumber prices could follow the typical seasonal pattern this Spring. While we maintain our longer term bullish view of building material fundamentals, we highlight that near term price weakness could lead to Canfor shares pulling back from multi year highs."

Mr. Swetlishoff has an "outperform" rating and $36 target for Canfor shares. The average target on the Street is $31.64.

He kept Norbord Inc. (OSB-T) on the list, maintaining a "strong buy" rating and $65 target (versus a $50.43 average).

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The Softlines Retail & Global Brands sector enjoyed the "strongest" holiday retail trends in years, according to Credit Suisse analyst Michael Binetti, who expects "solid" momentum to continue in the first quarter.

In a research report released late Monday, Mr. Binetti initiated coverage of 26 companies in the sector, emphasizing benefits stemming from U.S. tax reforms are likely to bring "accelerated reinvestment, increased M&A activity, and/or boost cash returns to shareholders."

He did, however, emphasize that "stock selection still matters" given the "seismic" changes facing the retail sector. He does not expect bricks and mortar traffic to rebound in the near term.

Mr. Binetti singled out five top picks for the sector (in order of preference): PVH Corp. (PVH-N); Michael Kors Holdings Ltd. (KORS-N); Burlington Stores Inc. (BURL-N); Estee Lauder Companies Inc. (EL-N) and Ferrari N.V. (RACE-N).

All received "outperform" ratings.

Here's a selection of the other companies he initiated coverage of:

- Canada Goose Holdings Inc. (GOOS-T, GOOS-N) with an "outperform" rating and $52 (Canadian) target. The average target is $36.37.

"[There are] multiple sources of near-term revenue upside for this 'Golden Goose' of luxury," said Mr. Binetti.

- Lululemon Athletica Inc. (LULU-Q) with an "outperform" rating and US$96 target. The average is US$83.93.

"[A] rare example of brand protecting its price integrity by avoiding reliance on promos/outlet/off-price for growth," he said.

- Roots Corp. (ROOT-T) with a "neutral" rating and $12 (Canadian) target. The average is $13.92.

"[There are] solid near-term path for this eager beaver, but current valuation balances risk/reward," he said.

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Pollard Banknote Ltd. (PBL-T) had another "strong" year in 2017 with "significant" annual improvement, said Acumen Capital analyst Brian Pow.

On Monday, Pollard, a Winnipeg-based supplier of instant lottery tickets, reported revenue for the fourth-quarter fiscal 2017 of $79.6-million, exceeded Mr. Pow's projection of $75.7-million and up 21.1 per cent year over year. Adjusted EBITDA of $13-million beat his expectation by $1-million and represented a 42.2-per-cent jump.

"Production volumes from Instant Tickets improved significantly driven by the Company's Tresu press," the analyst said. "We note that PBL recommissioned its original press in Ypsilanti during Q1/18 to provide additional capacity and while we likely won't witness the same year-over-year sales growth exhibited in 2017, we expect the focus will be on manufacturing efficiencies and cost reduction efforts going-forward. Additional upside in 2018 could partially be driven by new contract additions as PBL noted a number of large instant ticket lottery contracts are coming up for bid in the U.S.. Further upside potential might be driven by M&A like we witnessed in 2017."

Mr. Pow did lowered his 2018 revenue assumption based on an expectation of lower volume growth from instant tickets. His earnings per share estimate fell by 10.2 per cent to 85 cents (from 95 cents). His 2019 expectation is $1.09 (from $1.07).

Maintaining a "buy" rating for the stock, Mr. Pow increased his target by a loonie to $23.50, which is 17 cents less than the average among analysts covering the stock

"PBL continues to be favorably positioned in both the instant ticket and charitable gaming markets," he said. "The inclusion of the International Gamco acquisition during Q1/18 effectively doubles the Charitable Gaming segment over 2017 figures, and 2018 will be a full year of INNOVA contribution as well."

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Cantor Fitzgerald analyst Matthew O'Keefe initiated coverage of Ascendant Resources Inc. (ASND-T) with a "buy" rating and $2 target, which sits above the average of $1.67.

"The Company is well down the path of restoring the El Mochito zinc-lead-silver mine in Honduras to profitability and is now looking to growth and optimization," said Mr. O'Keefe. "Against a backdrop of strong zinc prices and limited investment opportunities in the zinc space, we highlight Ascendant Resources as a new, pure-play zinc producer that is attractively valued and overlooked by the market."

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Raging River Exploration Inc. (RRX-T) possesses "among the best fundamentals in the industry," however it trades at a discount to its peers, according to Laurentian Bank Securities analyst Todd Kepler.

"At a recent price of $5.60, RRX is valued at 2018 and 2019 estimate enterprise value-to-EBITDA multiples of 4.6 times and 3.9 times, respectively, versus the peer group at 5.5 times and 4.8 times," he said. "Its current year and forward year market multiples are at the lowest levels since inception, despite the strong fundamentals and positioning for highnetback light oil growth. We believe the stock represents a tremendous buying opportunity at the current level."

Mr. Kepler initiated coverage of the stock with a "buy" rating and $10 target, which is 5 cents less than the average.

"Raging River has transitioned into a light-oil growth mid-cap producer with two core areas: the mature Viking and the emerging East Shale Basin Duvernay," he said. "With over ten years of drilling inventory at current annual well rates, we believe that Raging River can generate 4 – 6% annual production growth in the Viking by underspending cash flow. In turn, the Company is expected to invest that free cash flow into development of the Duvernay, and therefore generate sustainable corporate production growth in the 8 – 10% range annually, while maintaining a strong balance sheet around 1.0 times debt-to-cash flow.

"In light of the announcement in early March, 2018 that the Company will explore strategic alternatives to enhance shareholder value, we provide three viable scenarios that could be pursued .... In our opinion, Raging River is not likely pursuing the going concern route, and is also unlikely to attract a third party buyer for the Viking. Therefore we believe that operating at two separate companies is the most viable option. While our valuation summaries indicate a relatively low valuation for scenario 3, the range of valuations around our midpoint prices as discussed on pp. 19-22 support materially higher valuations versus our midpoint. Even if no restructuring occurs from this process, maintaining status quo provides significant upside potential to the current valuation."