Wednesday's analyst upgrades and downgrades

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

RBC Dominion Securities analyst Douglas Miehm believes Valeant Pharmaceuticals International Inc.'s (VRX-N, VRX-T) management may lower guidance "for some time" due largely to higher-than-expected expenses as it attempts to revive its business.

Also citing a slow recovery for its dermatology segment, Mr. Miehm projects the company will lower its 2016 revenue guidance to $9.7-$9.8-billion (U.S.) from $9.9-$10.1-billion, adjusted EBITDA to $4.5-$4.7-billion (from $4.8-$4.95-billion) and adjusted earnings per share to $6.25-$6.55 (from $6.60-$7).

Accordingly, he dropped his forecast for revenue to $9.84-billion, adjusted EBITDA to $4.61-billion and adjusted EPS to $6.26.

"Following the introduction of stricter co-pay assistance programs in late August, we anticipate that the negative average selling price (ASP) issues that plagued the dermatology segment through the first nine months of the year are close to being resolved," said Mr. Miehm. "While this will not be determinable until management provides an update, we note that Q3/16 saw one month (July) with unadjusted, negative co-pays in the dermatology portfolio. We believe that the dermatology segment is recovering more slowly than we initially expected but we think that the Street should view a resolution of the negative ASP issue positively."

When the company releases its third-quarter results, Mr. Miehm expects an update on potential divestitures.

"In August, management announced that it was evaluating potential non-core asset sales with a transaction value of up to $8-billion," he said. "Management noted that these assets generated more than $2B in revenue and we estimate $730-million in EBITDA based on the 11x EBITDA multiple that management provided. Since the August announcement, group EBITDA multiples have contracted slightly by 1–1.5x and we believe that these weaker multiples may be slightly negative for the process. Management also intends to announce the first of these divestitures over the next 3–6 months. We would view reiteration of the 4.0x revenue and 11.0x EBITDA multiples as well as the 3- to 6-month time frame positively. We continue to believe that VRX could divest certain geographies in order to reduce the complexity of the overall business."

Maintaining a "sector perform" rating for the stock, he lowered his price target by a dollar to $35. The analyst consensus price target is $43.63, according to Thomson Reuters.

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Suggesting a trade war is looming, CIBC World Markets analyst Hamir Patel said he is now on the sidelines for most Canadian lumber producers.

In a research note on the industry, he downgraded Interfor Corp. (IFP-T) and Western Forest Products Inc. (WEF-T) "sector perform" from "sector outperform."

"With the U.S. Lumber Coalition free to bring about a trade case against Canadian lumber mills as early as Oct. 13 (following expiry of the one-year standstill), we suspect the share prices of Canadian lumber companies (West Fraser, Canfor, Interfor, Resolute, Western FP and Conifex) may come under additional pressure in the days ahead as the market reacts to further potential negative developments on the trade file (which may include duties coming in earlier, and at higher levels than expected)," said Mr. Patel.

He added: "While we remain comfortable with our existing fundamental valuations for the lumber companies in our coverage universe, we believe the share prices for the group may be range bound for the next six months pending greater clarity on the likely level of preliminary duties, and the proportion of the duty cost that will be passed on to consumers in the form of higher lumber prices. We also see limited upside risks to lumber prices over the near-term. Lumber prices may get a boost from pre-buying before duties hit, and then remain sluggish when duties actually arrive as demand had been pulled forward and markets wait for the necessary capacity curtailments of higher-cost mills in Canada to come out before prices can move higher again. At the same time, consumption typically declines seasonally in Q4 and dealers work down inventories into year-end.

"That being said, given liquidity challenges with investing in lumber equities, we suspect further SLA-related share price weakness over the near-term may present an attractive entry-point for commodity lumber producers (such as West Fraser and Canfor)."

Mr. Patel did not change his target price for Interfor stock of $17. The analyst average is $17.68, according to Bloomberg.

"Interfor was our top pick when we launched coverage of the sector earlier this year; however, following substantial share price appreciation, we no longer see sufficient upside remaining to warrant a sector outperformer rating," the analyst said. "Although we still believe IFP is a net beneficiary from the trade dispute (as 64 per cent% of its lumber capacity is on the U.S. side of the border), with prospects building for retroactive duties (which is purely negative for anyone with a single Canadian sawmill) and increased uncertainty about how pricing for cedar (12 per cent of IFP's last 12 months lumber sales) will respond to duties, we are moving to the sidelines at this point."

Mr. Patel also maintained his target for Western Forest Products of $2.50. The average is $2.55.

"With growing risk of more onerous log export restrictions as early as H2/17 (if the NDP ends up winning the next B.C. provincial election) and increased uncertainty on how pricing for cedar (48 per cent of WEF's last 12 months lumber sales) will respond to duties, we prefer to be on the sidelines at this point," he said. "While there is always a possibility (a very small one in our view) that the U.S. Lumber Coalition's petition will specifically exclude high-value products in its allegations of injury, given that there is a small Cedar industry in the U.S., it is not clear why the U.S. would be inclined to do anything to help the B.C. coastal lumber industry."

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Ahead of the start of third-quarter earnings season in the energy sector, Raymond James analysts made "modest" changes to their forward price models.

Those changes included:

- For WTI crude, their 2016 estimate moved to $43.95 (U.S.) per barrel from $45.16. Their 2017 projection moved to $52.94 from $53.07. Their long-term assumption remains $70.

- For natural gas, their 2016 estimate is $2.50 (U.S.) per mcf (1,000 cubic feet) of NYMEX from $2.60. Their 2017 and long-term assumptions did not change from $3 and $2.50, respectively.

- For Canadian commodities, their Edmonton Par estimate for 2016 declined to $52.80 (Canadian) from $53.71. It rose to $62.93 for 2017 from $62.27. For AECO, their 2016 assumption moved to $2.15/mcf from $2.19, while their 2017 estimate remained $3.

With those changes, the firm's analysts made several target price adjustments to stocks in the sector, including:

- Crescent Point Energy Corp. (CPG-T/CPG-N, outperform) to $25 (Canadian) from $26. Consensus: $25.35.

- Kelt Exploration Ltd. (KEL-T, outperform) to $8 from $6.50. Consensus: $6.54.

- MEG Energy Corp. (MEG-T, outperform) to $9 from $10. Consensus: $8.04.

- AltaGas Ltd. (ALA-T, market perform) to $32 from $31. Consensus: $34.21.

- Inter Pipeline Ltd. (IPL-T, market perform) to $29 from $27.50. Consensus: $28.92.

- Cenovus Energy Inc. (CVE-T/CVE-N, market perform) to $21 from $19. Consensus: $21.50.

- Imperial Oil Ltd. (IMO-T/IMO-N, outperform) to $49 from $50. Consensus: $45.76.

- Suncor Energy Inc. (SU-T/SU-N, outperform) to $43 from $42. Consensus: $41.06.

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In a weekly research note on Canadian junior and intermediate exploration and production companies, Canaccord Genuity analysts also updated their commodity price forecasts, which resulted in several target-price changes.

"Less than two weeks ago, OPEC indicated they will look to cut production from member countries for the first time in eight years," the firm said. "While we are uncertain if this is a true change in strategy from OPEC, or an admission that many of its countries are already producing at near capacity, it nevertheless came as a welcome tailwind to the oil price. Augmenting this [Sunday] was Putin's indication that Russia will support the cut by freezing/cutting its domestic production. If these exporting countries follow through on stemming production, and considering the rapid decline in U.S. shale production, we could see a significant rally in oil prices, in our view."

Their changes included:

- Freehold Royalties Ltd. (FRU-T, hold) to $14.75 from $13. Consensus: $15.

- Journey Energy Inc. (JOY-T, speculative buy) to $2.75 from $2.50. Consensus: $2.59.

- Nuvista Energy Ltd. (NVA-T, buy) to $9 from $8. Consensus: $8.38.

- Blackpearl Resources Inc. (PXX-T, hold) to $1.75 from $1.50. Consensus: $1.32.

- Questerre Energy Corp. (QEC-T, hold) to 30 cents from 25 cents. Consensus: 25 cents.

- Valeura Energy Inc. (VLE-T, buy) to $1.40 from $1.50. Consensus: $1.76.

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GreenSpace Brands Inc. (JTR-X) is "hungry for growth," said Canaccord Genuity analyst Derek Dley.

He initiated coverage of the Toronto-based organic and natural food company with a "buy" rating, emphasizing it offers exposure to a North American industry which is forecasted to by 14 per cent annually.

"For fiscal 2017, we are expecting a 300 per cent to 400 per cent year-over-year sales increase for GreenSpace, assuming legacy brands continue to gain momentum and acquired brands win transformative distribution," said Mr. Dley. "We believe that GreenSpace will continue to pursue accretive acquisitions, although we have not forecast any into our estimates.

"We expect that Q1/F17's record gross sales of $9.2-million along with positive EBITDA, represent an inflection point as GreenSpace's more diversified brand portfolio should help to shelter the company from quarterly variability within any one brand or product offering. Meanwhile, the company's recently announced new distribution agreements with Loblaw's and Costco should help drive incremental sales growth from its legacy brands, while aiding in the acquisition of new brands to its platform."

Mr. Dley said the company has proven its ability to acquire brands at 1.0 times sales, "and meaningfully expand distribution to drive robust increases in sales." As it continues to consolidate the industry through adding smaller brands, he believes it could become an acquisition target going forward.

He pointed that possibility as a key investment driver as well as pointing to a robust M&A pipeline and "unique" exposure to a high-growth industry.

"Given GreenSpace's scale advantage in manufacturing, access to retailers, access to capital markets, and knowledge of online and digital marketing strategies, we regard the current valuation as an attractive entry point into what we believe is an early-stage growth company," he said.

Mr. Dley set a price target of $2.25 for GreenSpace shares. Consensus is $2.03.

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Victoria Gold Corp. (VIT-X) shareholders are well-positioned for gains as gold prices move higher, said Raymond James analyst Chris Thompson.

Viewing its Eagle Project in Yukon as an attractive acquisition target, Mr. Thompson initiated coverage of the stock with an "outperform" rating.

"We view Victoria as an attractively priced emerging gold developer capable of delivering a 200,000 ounces plus per year production profile at low quartile operating costs, from its 100-per-cent owned Eagle Gold Project, located in central Yukon," the analyst said. "We feel that Victoria is primed to transition from developer to producer (or be acquired), given the fully permitted and shovel ready status of the Eagle Project. Funding remains the next milestone on Eagle's development track, which is anticipated by mid-2017."

Mr. Thompson emphasized Eagle is one of the largest un-developed gold projects in the country, with proven and probable reserves of 2.7-million ounces.

"A Sept. 2016 feasibility study outlines a robust 170,000 ounces per year average production profile (front end weighted) over a 11-year mine with attractive economics," he said. "While we view upfront Capex as sizeable ($370-million), we feel funding is achievable given Eagle's economics, (estimated internal rate of return of 29 per cent), fully permitted status, North American address, and recent advancements made at cold weather mining operations (Kinross – Fort Knox – 11-per-cent shareholder in Victoria), despite the project's relatively low grade. We see these attributes also ranking Victoria as an attractive M&A candidate for a larger producer seeking a shovel ready North American development asset."

He set a price target of $1 for the stock. The analyst consensus is 99 cents.

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Citing a trio of catalysts for growth over the next 12 months, BMO Nesbitt Burns analyst Tim Long upgraded Motorola Solutions Inc. (MSI-N) to "outperform" from "market perform."

Mr. Long emphasized:

1. A return to organic revenue growth – “Over the past few years, there have been a number of headwinds, including the FCC’s 2013 narrowbanding mandate, the U.S. federal government shutdown, the rolloff of a large deal in Norway, and strong currency headwinds for Motorola Solutions' international business. With these factors largely behind us, we expect growth to return in 4Q16, particularly as public safety is becoming more important given global events and as the company rolls out new, innovative products. The early 2016 addition of AirWave is further complementing the growth. We model total revenue growth of 6 per cent for 2016 and 2 per cent for 2017, which could prove conservative.”
    
2. Expansion of smart public safety software – “Management sees an opportunity beyond traditional equipment sales and is investing in smart public safety software opportunities, such as computer-aided dispatch and records management. Motorola Solutions is buying a small firm to beef up its offering in this area, and management has been changing sales incentives to help with the transition from hardware sales.”
    
3. Public safety LTE catalysts – “Although Motorola Solutions' growth in public safety LTE was slowed by government regulation, we believe the pending FirstNet decision, expected in November, will open opportunities for growth. Even if the company doesn’t win the primary contract, we believe its investment in LTE-LMR interoperability will lead to sales opportunities for services and hardware.”

Mr. Long raised his target price for the stock to $84 (U.S.) from $72. Consensus is $75.08.

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In other analyst actions:

Canyon Services Group Inc. (FRC-T) was raised to "buy" from "hold" at Tudor Pickering & Co by analyst Taylor Zurcher. He did not specify a target price. The average target is $6.75.

Norfolk Southern Corp. (NSC-N) was cut to "market underperform" from "market perform" with a Street-low target of $64 (U.S.) by Avondale analyst Donald Broughton. The average is $96.57.

Alcoa Inc. (AA-N) was downgraded by Bank of America/Merrill Lynch analyst Timna Tanners to "neutral" from "buy" with a target of $30 (U.S.), down from $33. The average is $32.68.