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Wednesday’s analyst upgrades and downgrades

CIBC signl outside of the bank's building at King and Bay St., Toronto.

Fernando Morales/The Globe and Mail

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

Valeant Pharmaceuticals International Inc. (VRX-N, VRX-T) remains "challenged for growth," said Canaccord Genuity analyst Neil Maruoka in a third-quarter review.

"Valeant reported third quarter results that were in line with our estimates on revenue, but missed on the bottom line," said Mr. Maruoka. "In and of itself, we did not feel that the quarter was terrible; however, the company updated its 2016 financial guidance to a level well below consensus expectations. What's more, on the conference call, management indicated that 2017 revenue and EBITDA should be lower on a sequential basis. While the 2016 guidance revision was widely expected, both the magnitude and spill-over into next year was not, and we believe investors are now fleeing the stock as the path to growth has grown murkier. With this kitchen sink quarter, the company has pressed the reset button on financial performance expectations; however, we continue to see too many risks on the road to recovery to allow us to recommend investors buy the stock."

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On Tuesday, the pharmaceutical company reported third-quarter revenue of $2.48-billion (U.S.), in line with the analyst's projection and slightly lower than the Street ($2.52-billion). Adjusted earnings per share of $1.55 was lower than Mr. Maruoka's expectation ($1.72) and the Street ($1.77).

"As expected, Valeant lowered its full-year guidance," he said. "As was not expected, Valeant lowered its full-year guidance well below the consensus range. The company noted a number of challenges within B&L (inventory reduction in Poland, a customer recall for PeroxiClear, and currency headwinds) and also in the Branded Rx business (backorder of a dental product, lack of seasonality for dermatology in Q3). Further, generic competition for products like Ziana, Zegerid, and ofloxacin are likely to drag on 2016 results. These revenue headwinds are likely to be compounded by higher SG&A expenses associated with product launches and R&D spending to drive medium to long-term growth."

He added: "Perhaps the biggest surprise from the call was when management set expectations for lower revenue and EBITDA for next year relative to 2017. The impact of generic competition and higher R&D spending to generate longer-term growth are likely to be the primary drivers; however, we believe that the market was likely shocked to see hopes for a faster recovery and organic growth evaporate. We note that the consensus adjusted EBITDA estimate for next year is $5.0-billion; this should come down substantially as adjusted EBITDA is now expected to be below $4.3-billion in 2017."

Mr. Maruoka said Valeant needs to sell assets to deal with its debt load. However he said he's hesitant to assess the company's claim that it has identified about $8-billion (U.S.) in non-core assets that could be potential sold until he sees a "representative" transaction.

``While management believes the company will remain in compliance with its covenants, it has expressed somewhat less comfort with its senior debt leverage ratio," he said. "Including cash on hand, we estimate that Valeant is just below the 2.50 times senior debt covenant threshold; however, we expect the company can gain additional cushion by divesting assets. Valeant has confirmed that it has had discussions around divesting Salix. As we had previously stated, we believe that such a transaction could see the loss of one of Valeant's key growth drivers (Xifaxan) and would put the Salix valuation on the low end of our expected range (based on media reports). Nonetheless, we would view such a sale to be positive, given Valeant's urgent need to de-lever."

The analyst lowered his full-year 2016 and 2017 earnings per share estimates to $5.38 (U.S.) and $6.12, respectively, from $6.37 and $10.15.

He kept a "hold" rating for the stock and lowered his target price to $17 (U.S.) from $33. The analyst average is $32.18, according to Bloomberg.

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"Valeant currently trades at an 8.2 times enterprise value/EBITDA based on our revised 2016 estimate; our updated target of $17.00 represents an 8.4x multiple, compared to peers at 9.2x," said Mr. Maruoka "Given Valeant's elevated leverage, lower growth, and higher risk profile, we believe that a discount to the specialty pharma peer group is warranted."

Elsewhere, RBC Dominion Securities analyst Doug Miehm lowered his target to $29 from $35 with a "sector perform" rating (unchanged).

"While Q3/16 results were a bit below consensus and Valeant lowered its 2016 guidance as anticipated, conference call commentary on the initial 2017 outlook was well below expectations," said Mr. Miehm. "The 2017 view may prove conservative, but we prefer to remain on the sidelines until we have an improved understanding of the headwinds."

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Toromont Industries Ltd. (TIH-T) continues to execute in a challenging environment, said BMO Nesbitt Burns analyst Bert Powell.

However, Mr. Powell said he does not see the presence of any near-term catalysts for the stock.

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"The past focus on building out deeper market penetration on the parts side of the Equipment business is paying off," he said. "In an environment where foreign exchange has driven equipment prices up, repair and rebuild options for used equipment can be compelling. With CAT having some of the highest proprietary content in the industry, dealers can capture a larger portion of the aftermarket business if they have the right value proposition. We believe that TIH is fairly sophisticated in its approach. The parts & service business is insulating TIH from the competitive issues on the sale of capital goods and rental, but not completely. Even with the mix shift to higher margin parts & service, the improvement in gross margin is being absorbed by other costs, with the net effect being that operating margins as a percentage of sales stayed flat on a 6-per-cent overall decline in revenue."

On Tuesday, the Concord, Ont.-based company reported third-quarter adjusted earnings per share of 57 cents, missing both Mr. Powell's projection (62 cents) and the consensus (59 cents) due largely to "weak" new equipment sales. Revenue fell 1 per cent year over year to $498-million, also lower than the analyst's estimate ($551-million). Adjusted earnings before interest and taxes (EBIT) margin of 12.3 per cent was flat from the previous year and in line with expectations.

"The quarter could have been worse, but true to form TIH delivered," said Mr. Powell. "Past efforts to bolster the more annuity like parts & service, along with adapting to changing market conditions, i.e., focusing on used equipment when new became challenged, served to deliver a solid outcome

He added: "TIH's outlook remained unchanged . We expect the competitive market environment, weaker Canadian dollar, and excess inventory levels across Canada to continue to pressure new equipment operating margins. There is no evidence that the infrastructure spending program would translate to materially increased activity in the near term."

Mr. Powell lowered his 2016 and 2017 full-year EPS estimates to $2 and $2.08, respectively, from $2.02 and $2.25 in reaction to the results. His cash flow per share and revenue projections also declined.

However, he did raise his target price for the stock to $40.50 from $38.50 with a "market perform" rating. Consensus is $40.69.

"The market remains competitive, but TIH appears to be managing through," said Mr. Powell. "Not really a surprise. The past focus on the relatively higher margin parts & service business is paying dividends, and TIH is reaping the benefits as this part of the business continues to grow. The refocus in the CIMCO business is also making a positive contribution. Near-term it does not appear that any of the demand or competitive issues will abate. We expect continued execution by TIH, but do not see any near-term catalyst beyond M&A."

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BMO Nesbitt Burns analyst Andrew Breichmanas removed his "speculative" designation on Centerra Gold Inc. (CG-T) stock following the closing of its $1.1-billion acquisition of Thompson Creek Metals Co., as its production is no longer entire sourced from its Kumtor in Kyrgzystan.

"However, the risk profile remains high, especially as cash flow from Kumtor is currently restricted, funding for growth projects is uncertain, and targets for Mount Milligan remain unclear until the company completes its integration of the assets," he said.

On Monday, the Toronto-based company reported third-quarter 2016 adjusted earnings per share of 22 cents, a penny higher than the analyst's projection and 8 cents better than the consensus. Mr. Breichmanas said the earnings were in line with his expectations despite better operational results due to higher depreciation and revenue-based taxes.

He called the quarterly results from Kumtor "strong" with production of 166,030 ounces and sales of 164,847 ounces both exceeded his projections (143,000 ounces for both). Adjusted operating costs ($303 per ounce) and all-in sustaining costs ($555 per ounce) also topped his estimates ($362 and $771, respectively).

Centerra raised its full-year production guidance for the facility for a second consecutive quarter, while all-in sustaining costs also improved.

"Despite generating $106-million in Q3, in the absence of access to cash held by the Kyrgyz subsidiary, management has decided to defer the consideration of declaring a quarterly dividend until December," he said. "Management believes it has sufficient funds for operating requirements through to the end of 2017, but absent the cash held by KGC, funding of construction and development activities may require CG to raise financing."

Mr. Breichmanas raised his target for the stock to $8.75 from $8.50. Consensus is $8.86.

His rating for the stock is "market perform."

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Desjardins Securities analyst Michael Parkin raised his target price for shares of Franco-Nevada Corp. (FNV-T, FNV-N) following a "strong" third quarter.

On Monday, the company reported quarterly revenue of $172-million (U.S.), topping the consensus projection of $162.8-million. Adjusted earnings per share of 30 cents beat the Street's estimate of25 cents. It also reported record attributable gold production of 123,100 GEO (gold equivalent ounces), which was 4 per cent above the consensus (118,000 GEO).

"On the back of the strong results, particularly from Antamina, the company increased its annual guidance on attributable gold-equivalent production to 445–455,000 GEO from 425–445,000 GEO, up 3 per cent based on the mid-point," said Mr. Parkin. "We were previously forecasting production of 455,000 GEO and have increased our estimate to 482,600 GEO. We now include the strong 3Q result, which brought the year-to-date total attributable gold-equivalent production to 342,500 GEO, and expect a similarly strong 4Q from Antamina, where we model $26.5-million (U.S.) of revenue (15 per cent of 4Q total revenue). We included a $69-million writedown in 4Q after the company announced that the Cooke 4 mine had ceased production. The company carried the asset at $69-million, which we exclude from our EBITDA estimate. We also pulled in our updated estimates for the Detour Lake mine, which included weaker 2017 guidance than indicated in the life-of-mine plan."

Mr. Parkin's financial model was also updated following the release of details on the company's new oil and gas royalty portfolio in Oklahoma, acquired following the quarter for $100-million. He said the acquisition has resulted in a more bullish outlook for both the fourth quarter and 2017.

"Management indicated that due to weak oil and gas prices, it is seeing better opportunities to add to the royalty asset base in this sector vs precious metals, but also noted good potential in base metals and bulks," he said. "The company noted that it wants to maintain exposure to precious metals at [approximately] 80 per cent of revenue."

While his 2016 and 2017 revenue and EBITDA projections rose, Mr. Parkin's cash flow per share estimate for 2016 fell to $2.46 from $2.54. However, his 2017 projection increased to $2.68 from $2.46.

With a "buy" rating for the stock, he raised his target to $115 (Canadian) from $110. Consensus is $102.55.

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Canadian Apartment Properties Real Estate Investment Trust (CAR.UN-T) is a "well-oiled multi-family machine" that offers investors "an intriguing combination of stability and growth," said Desjardins Securities analyst Michael Markidis.

On Tuesday, the Toronto-based REIT reported third-quarter net funds from operations per unit that met expectations and rose 7 per cent year over year. Operating results exceeded projections.

"Ontario and BC should continue to drive organic growth," said Mr. Markidis. "Same-property NOI [net operating income] increased 3.6 per cent(1.8-per-cent revenue increase and 1.2-per-cent decline inopex), bringing the year-to-date growth rate to 2.5 per cent (+1.8 per cent revenues, +0.8 per cent opex) ... A substantial proportion of CAR's organic growth was generated from its apartment properties in Ontario and B.C., which represented 56 per cent and 10 per cent of same-property NOI in 3Q, respectively."

"Rapid housing price appreciation in the Greater Vancouver Regional District (GVRD) and the Greater Toronto Area (GTA) has triggered a regulatory response over the past several months. In July, the B.C. government passed legislation that resulted in the introduction of a 15-per-cent tax of purchases by foreigners of residential property in the GVRD. Tweaks to the mortgage insurance framework introduced by the federal government in October have, at the margin, increased underwriting stringency. According to an article published in The Globe and Mail on Nov.  8, the Ontario government will outline its plans to address housing affordability in its upcoming fall economic statement. All of these initiatives have the potential to suppress housing price growth. On the flip side, they do not necessarily improve housing price affordability. Land-use restrictions are one of several impediments to the introduction of new housing supply.  International immigration is running at a healthy clip, and support for higher immigration targets over the next five years seems to be growing. In our view, these factors will likely keep apartment vacancy rates in the GTA  and GVRD at very low levels and should provide support to underlying apartment fundamentals."

Mr. Markidis called the REIT's external growth initiatives "a key part of the program," noting:  "CAR has invested $317-million year-to-date, adding 1,981 suites/sites in various markets across Canada. Deal flow is healthy and we would not be surprised if another acquisition announcement surfaced before year-end. Management continues to evaluate opportunities in other countries. Western Europe appears to be the focus; however, our sense is that another international venture is not imminent."

Though his 2016 and 2017 FFO per unit projections declined (to $1.75 and $1.80, respectively, from $1.76 and $1.83), he raised his target for the stock to $33.50 per unit from $33. Consensus is $33.13.

His rating remains "hold" on a valuation call

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In other analyst actions:

Canadian Imperial Bank of Commerce (CM-T) was raised to "top pick" at Cormark by analyst Meny Grauman with a target of $119 (Canadian), up from $111. The analyst average is $107.22

Computer Modelling Group Ltd. (CMG-T) was downgraded to "hold" from "buy" at Industrial Alliance by analyst Elias Foscolos. He lowered his 12-month target price to $9.50 from $10.75 per share. The average is $8.93.

Stella-Jones Inc. (SJ-T) was downgraded to "hold" from "buy" at TD Securities by analyst Michael Tupholme. His target price fell to $50 from $56. The average is $53.31.

HudBay Minerals Inc. (HBM-T) was lowered to "hold" from "buy" by Haywood analyst Stefan Ioannou. His target of $7.25 did not change. The average is $7.47.

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About the Author
Globe Investor Content Editor

David Leeder is a content editor in the Report on Business. He was previously Deputy Sports Editor and Weekend Digital Editor at The Globe.  He holds an undergraduate degree from McMaster University and a graduate degree from Ryerson University. More

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