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Wednesday’s analyst upgrades and downgrades

Yamana’s operations in northern Brazil are seen in this file photo.

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

Citing the continued challenges in the retail sector and its heightened leverage ratio, RBC Dominion Securities analyst Sabahat Khan downgraded his rating for Hudson's Bay Co. (HBC-T).

On Monday after markets closed, the retailer lowered its full-year 2016 guidance, including its holiday same-stores sales expectations, which were "mixed" versus Mr. Khan's projections. It also dropped its full-year sales and adjusted earnings before interest, taxes, depreciation and amortization estimates.

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In reaction to the news, HBC shares fell 12.86 per cent on Tuesday.

"HBC management has noted its intent to IPO the HBS Global Properties JV, which could serve as a potential catalyst for the share price," said Mr. Khan. "We note, however, that HBC would likely need to diversify the underlying credit in the JV (i.e., adding 'non-HBC' properties) to increase the appeal of such an IPO to potential investors. Also, an IPO of the JV could become increasingly difficult to execute if the operating environment for department stores becomes increasingly difficult over time, in our view."

"Looking ahead, improvements in the overall retail backdrop and stronger performance at HBC's U.S. banners would improve our outlook on HBC's shares. We will also be looking for improved leverage through and beyond our forecast horizon. One potential opportunity is for HBC to reduce capex through 2017E and 2018, which we had previously anticipated would remain in line with 2016E levels. We currently expect [approximately] $600-million of capex in 2017 and 2018 (versus guidance of $660-$710-million for 2016, net of landlord incentives)."

Mr. Khan moved his rating for the stock to "sector perform" from "outperform" and his target price to $12 from $18. The analyst consensus price target is $16.56, according to Thomson Reuters.

"We value HBC using a sum of the parts (SOTP) approach: applying a 2.0-times multiple (4.0 times previously) to our 2018 estimated rent-adjusted EBITDA from retail operations and reflecting our estimated value for the owned real estate," Mr. Khan said. "Our price target revision reflects a lower 2018 estimated adjusted EBITDA ($690-million versus $857-million previously), and the lower multiple reflects a weakening retail operating environment facing HBC and ongoing margin deterioration."

"Based on net debt as of Q3/16 and our revised 2016 estimated adjusted EBITDA forecast of $620-million, we estimate leverage of 6.5-7.0 times. This leverage ratio does not reflect the debt associated with the company's two JV's, which are not consolidated for financial reporting purposes. This compares to the U.S. department store sector peer average of 2.3 times (average reflects a majority in the 1.3 times to 2.4-times range and J.C. Penney at 4.9x)."

The stock was also downgraded by TD Securities analyst Brian Morrison to "hold" from "buy." He cut his target price to $13 from $26.

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Scotia Capital analyst Patricia Baker lowered the stock to "sector perform" from "sector outperform" and dropped her target to $14.50 from $18.

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Canaccord Genuity's equity research team made several revisions to its Canadian focus list in a research report released on Tuesday.

The group added the following stocks to its top stock pick list:

- Kinaxis Inc. (KXS-T, "buy" rating) with a target price of $74. Consensus is $77.33.

Analyst Robert Young said: "While we remain confident in the potential for Sandvine shares to appreciate from current undervalued levels, we believe that Kinaxis shares offer a better balance of risk and reward in the near term. We continue to believe that Kinaxis is at the foothills of a large opportunity, and in the near and medium term can sustain predictable 25-per-cent top-line growth for several years with mid-20-per-cent EBITDA margins."

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- TIO Networks Corp. (TNC-X, "buy" rating) with a $3.25 target. Consensus is $3.38.

Analyst Kevin Wright said: "The stock was a strong performer in 2016, up 26 per cent for the year as it integrated its largest acquisition to date and realized better than expected synergies. We believe the company is on a stable organic growth trajectory with upside potential from further M&A in 2017. We like the stock on continued execution evident in revenue growth and margin expansion; we believe that investors could be rewarded should the company announce an accretive acquisition."

- Yamana Gold Inc. (YRI-T, "buy" rating) with a $7.25 target. Consensus is $6.57.

Analyst Tony Lesiak said: "Yamana is one of the best-positioned senior producers to take advantage of a rising gold price environment. A 10-per-cent increase in the price of gold (relative to our current forward curve-based price deck) increases our NAV [net asset value] by 24 per cent."

- Wi-Lan Inc. (WIN-T, "buy" rating) with a target of $3.50. Consensus is $4.22.

Analyst Doug Taylor said: "WIN shares have appreciated 26 per cent over the past two months following the announcement of Q3/16 results (Nov. 4). Despite the strong run, the stock remains cheap, in our opinion, and still presents a compelling risk/return profile for investors."

It removed the following stocks:

BSM Technologies Inc. (GPS-T)

Canaccord: "While we continue to favour BSM Technologies and maintain a BUY rating, given the strong appreciation in the shares we are removing it from the list in favour of Wi-LAN."

Sandvine Corp. (SVC-T)

Canaccord: "While we remain confident in the potential for Sandvine shares to appreciate from current undervalued levels, we believe that Kinaxis shares offer a better balance of risk and reward in the near term."

Tahoe Resources Inc. (THO-T)

Canaccord: "While we remain constructive on Tahoe Resources with a BUY rating, we have removed the name from our Focus List in favour of Yamana Gold given the relative implied return to target and depth of potential upcoming catalysts for Yamana."

Yellow Pages Ltd. (Y-T)

Canaccord: "We are taking a more cautious stance because of slower-than-expected digital growth we have been seeing in recent quarters."

Agnico Eagle Mines Ltd. (AEM-T)

Canaccord: "While we have removed Agnico Eagle (BUY) from our Focus List on share price performance, we note that AEM still represents a high-quality alternative to holding bullion."

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With the announcement of its plan to sell its Dendreon cancer treatment business and three skincare brands for $2.1-billion, Valeant Pharmaceuticals International Inc. (VRX-N, VRX-T) has taken the first "significant steps" toward de-levering its balance sheet, according to Canaccord Genuity analyst Neil Maruoka.

He raised his target price for the troubled pharmaceutical company following Tuesday's news, however he said divesting of these assets for "attractive valuation could be challenging."

"Valeant claims to have identified $8-billion worth of non-core assets that it could potentially sell to reduce its debt load," said Mr. Maruoka. "Although we estimate the sale of the dermatology brands have fetched a [approximately] 13-times multiple, our estimated average multiple (including Dendreon) was closer to 9.7 times."

He added: "On balance, we view the divestitures to be positive as Valeant's total debt burden, now sitting at $28.3-billion or 6.9 times net-debt to adjusted EBITDA, remains the most pressing issue weighing on the company's share price. Nonetheless, we believe that Valeant still needs to achieve larger asset sales (at good valuations) to really move the needle on its balance sheet."

Emphasizing the asset sales are a "good first step but challenges [are] ahead," Mr. Maruoka noted the company's search for organic growth does remain promising.

"Valeant also announced positive results from a Phase III pivotal trial of psoriasis drug IDP-118," he said. "This follows positive data from the first pivotal study reported last month. We have not yet seen the safety data from these trials and we do not expect an approval for IDP-118 until 2018; as a result, we have not yet included upside from this product in our model. Nonetheless, this product does highlight the growth potential from the company's R&D pipeline, which could help Valeant grow into its leverage in the longer term. Valeant also announced expanded parameters for its Bausch + Lomb ULTRA presbyopia contact lenses. The expansion extends the range available to +4.50D to - 10.00D (increased from +2 D to -7D), which we believe has the potential to solidify the position of Valeant's product in this market."

With a "hold" rating for the stock, he raised his target price to $19 (U.S.) from $17. Consensus is $23.97.

"While we view these moves to be positive, we nonetheless believe that the announcements underscore the potential challenges ahead for the company within this process," said Mr. Maruoka. "The ability to achieve higher valuations probably will require giving up higher-growth products (in this case, CereVe, which has demonstrated greater-than 20-per-cent growth over the past two years); also, potential buyers may not be able to achieve the same synergies identified by Valeant when the assets were acquired. … While the announced asset sales are the largest to date, we note that the valuations achieved are only marginally accretive to Valeant's leverage ratio. Valeant currently trades at 8.4 times enterprise value/ adjusted EBITDA based on our 2017 forecast, compared to peers at 8.9 times; our revised target price of $19 represents a 8.6-times multiple. Given Valeant's elevated leverage, lower growth, and higher risk profile, we believe that a discount to the specialty pharma peer group is warranted."

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CIBC World Markets analysts project gold prices to "chart a similar course" in 2017 as 2016 with "seasonal influences counter balanced by monetary policy decisions in the U.S."

"Broader markets appear to be anticipating that a Trump presidency may bring a wealth of domestic fruit," they said in a research note. "If Trump's policy outcomes begin to match campaign rhetoric, there is potential for higher inflation leading to static real rates in the coming years, although these forces are unlikely to take hold in 2017. Hawkish consensus appears to anticipate the U.S. Fed raising headline interest rates three times during 2017. However, with the first hike being signaled for June (or even as early as March), there is potential for seasonality to play out with a gold price rally through January/February and gold equities once again outperforming the metal over this period."

The analysts suggest investors add to core positions early in the year to take advantage of an expected rally in both gold and silver prices in January and February. They also pointed to U.S. rates as the "main control mechanism" for prices through the calendar year.

"CIBC sees potential rate hike deferrals as a major catalyst for gold/silver and related equities. CIBC suggests layering on higher leveraged stocks in such a case," they said.

"Fiscal discipline is expected to remain a focus for producers as investors hunt stocks with FCF [free cash flow] generation but CIBC sees growth as increasingly relevant with peak production possibly in sight; FCF with a robust development pipeline preferred."

In the note, they lowered their 2017 gold and silver price estimates to $1,250 per ounce and $17.50 per ounce, respectively, from $1,300 and $18.50. Their long-term estimates for gold and silver are unchanged at $1,300 and $18.50.

With those changes, the group made several target price adjustments to stocks in the sector.

As well, analyst Jeff Killen upgraded his rating for OceanaGold Corp. (OGC-T) to "outperformer" from  "neutral" with a target price of $5.50 (unchanged). Consensus is $5.45.

"CIBC analysis suggests that investors should be looking at the early part of the year as an opportunity to gain/increase exposure in 'high-quality' names that should make up a core portfolio," CIBC said. "Preferred gold stocks for 2017 include AEM, NEM and ABX amongst seniors, AGI, KL and BTO amongst the mid-tiers and PG, PVG and TMR amongst the juniors. CIBC is also positively bias towards the royalty space relative to producers with FNV and SLW as the preferred names for the coming year."

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BMO Nesbitt Burns analyst Philip Jungwirth said it is "hard to propose" owning U.S. exploration and production companies, citing "above-NYMEX strip prices the group is discounting or the still-elevated multiples at which the shares trade."

In a research note previewing both fourth-quarter 2016 financial results as well as 2017, he said: "Adding to the challenge is the range-bound oil price that BMO forecasts. As the commodity goes, so go the equities is generally the way. With that as the backdrop it's necessary, in our view, to focus on producers that can drive excess returns above and beyond a call on the commodity, either through superior asset quality or more capital efficient operations, or both, rather than simply lean on the beta-rich names."

He upgraded his rating for Noble Energy Inc. (NBL-N) to "outperform" from "market perform" and his target price for the stock to $50 (U.S.) from $45. Consensus is $45.56.

"In 2016, Noble navigated the downturn better than most and demonstrated top-tier execution, yet the shares lagged almost every large-cap E&P," said Mr. Jungwirth. "At the time, we viewed this multiple de-rating as justified with Noble shares at a premium despite benefiting from low multiple, one-time items such as hedge gains and Gulf of Mexico start-ups. That said, we think valuation has swung too far in the opposite direction with the shares now trading at a 2.4x/1.8x discount to large-cap peers on our 2017/18 EV/EBITDAX estimates. Also, Noble is one of the few large-cap E&Ps that trade at a discount to our NAV, and is significantly cheaper on this metric than peers with large international, offshore assets. The pushback on Noble is lack of near-term growth, but we still view 2017-18 debt-adjusted production growth to be in line with peers, and this follows 19-per-cent debt-adjusted growth in 2016 (versus down 7 per cent for peers). Also, consistent with its 2016 track record, we view 2017 guidance as conservative with the potential to beat and raise throughout the year. U.S. onshore inventory depth has also been an overhang, but with an attractive F&D (16:1) below $15-billion, and we'd expect positive resource revisions over the course of 2017. Further, Noble has achieved significant year-over-year productivity improvements across its Delaware, DJ, and Eagle Ford positions. Bottom line, we view Noble as having a competitive near-term debt-adjusted growth, discounted valuation, ability to beat and raise, improving U.S. onshore asset base with sufficient inventory depth, and built-in high-margin Israel production growth toward the end of the decade."

Mr. Jungwirth downgraded EQT Corp. (EQT-N) to "market perform" from "outperform" with a target of $73 (U.S.), down from $75. Consensus is $83.52.

"Following the company's official 2017 and preliminary 2018 guidance, we forecast 2017-18 debt-adjusted production growth and multiple compression that lags the peer group," he said. "As a result, EQT shares trade at a premium to Marcellus/Utica peers on 2017-18 EV/EBITDAX, which persists in later periods. This is reflected in our net asset value, which shows EQT trading at NAV, compared with Outperform-rated Rice and Cabot. While we've historically viewed EQT as having attractive sum-of-the-parts upside due to its sizeable midstream business, the value discovery thesis has played out and we think is properly reflected in the share price. Finally, given BMO's recently lowered natural gas price forecast, we're reducing exposure among natural gas levered equities."

The analyst also lowered his rating for Occidental Petroleum Corp. (OXY-N) to "market perform" from "outperform" with an unchanged target of $70 (U.S.). The analyst consensus is $76.74.

"We view OXY shares shares as being among the most defensive in the sector, but given our outlook of a range-bound to moderately increasing oil price ($54-billion in 2017 and $570-billion in 2018), we view OXY's expected total return as being below that of higher growth E&Ps that we rate outperform," he said. "While OXY is expected to grow production at a mid-single-digit rate over the 2017-19 period, combined with a 4.3-per-cent dividend yield, we view this all-in high-single-digit return as less compelling than the 15-20-per-cent debt-adjusted production growth we forecast for most of our Outperform-rated E&Ps. OXY shares are now valued in line with the sector EV/EBITDAX multiple, consistent with its historical average, but expensive on net asset value, which we attribute to the dividend. While OXY has some sweet spots in the Delaware and Midland Basin, we don't view core unconventional resource potential as significant enough to drive NAV upside. We think this premium is supported by a track-record of high ROCE, strong balance sheet, and returning cash to shareholders via dividends and buybacks. While 2017 will likely show a notable improvement in FCF across Oil and Gas, Midstream, and Chemicals segments, we still view $60-billion WTI as the price required to fully fund the dividend from operating cash flow. While dividend sustainability isn't a question, we think it limits OXY's ability to differentiate on growth. With valuation in line, and unlikely to trade at a premium, we don't see a path to relative share price outperformance absent a bear market in oil prices, whereas we expect a gradual recovery."

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In his 2017 outlook report, Citi analyst David Driscoll said he's bullish on the U.S. packaging food sector.

"We see strong earnings growth throughout the group driven once again by solid margin expansion, as the sector continues along its path of cost restructurings," said Mr. Driscoll. "Importantly, cost reduction efforts in large cap packaged foods are being buoyed by a benign input cost environment and are expected to drive 8-per-cent EPS growth across our group on average, predicated largely on the 150 basis points improvement in average operating margins we forecast for the sector (excluding Kraft Heinz), which is a step up from the 90 basis points  of margin expansion garnered in 2016. This comes as a strengthening US dollar will create FX translation headwinds in 2017, although with the exception of just a few companies in the sector with large international exposures (Mead Johnson, Mondelez, and McCormick), margin upside across the remainder of the sector is likely to mitigate any FX related pressures on EPS.

"We therefore have a high level of conviction in our large cap packaged food earnings forecasts, which do not rely on meaningful volume growth and as such are largely de-risked from a weak US food at home volume environment (we are modeling 1-per-cent sales growth across our group in 2017 predicated on flattish volumes and 1pp from price). Importantly, in addition to margin driven earnings growth from strong cost cutting programs and low inflation, we believe there are two potentially transformational elements, which are not captured in our forecasts but could add significant upside to earnings and stock performance across the group in 2017."

Mr. Driscoll raised his rating for Conagra Brands Inc. (CAG-N) to "buy" from "neutral" and raised his target to $45 (U.S.) from $38. Consensus is $40.75.

"We see the firm's portfolio transformation driving strong margin and earnings growth over the coming years, and as such are increasing our EPS estimates and price target," he said. "Our 12 month price target on ConAgra goes to $45 (up $7), with our fiscal 2018-2020 EPS estimates increasing by 5 cents in each year to $1.90, $2.05, and $2.20. We are 3 cents above consensus in both F18 and F19, and 6 cents above consensus in F20. Further, while our analysis of ConAgra's gross margin structure suggests that ConAgra should be in store for solid EPS growth, with the potential for significant upside versus our estimates, we believe there are a number of other potential catalysts which can move the stock higher, including the opportunity for accretive M&A and the EPS benefits from US corporate tax rate cuts from potential U.S. tax reform legislation."

The analyst also upgraded Kraft Heinz Co. (KHC-Q) to "neutral" from "sell" with a target of $88 (U.S.), up from $81. Consensus is $97.53.

"While we continue to believe that consensus 2017 estimates for the firm are too aggressive, and remain 26 cents below current consensus of $3.91 per share (Citi at $3.65/sh), we are moving to the sidelines given our view that there is the strong likelihood that Kraft Heinz will undertake a large accretive transaction in 2017," he said.

"We are big fans of KHC's cost savings methods, and more importantly, the discipline it has brought back to the sector. However, from stock perspective, expectations remain high. From a risk/reward perspective, we see much better value elsewhere in U.S. Food, with companies which still have substantial margin opportunity ahead, that are far lower hanging than additional margin gains at Kraft Heinz."

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In other analyst actions:

Detour Gold Corp. (DGC-T) was downgraded to "buy" from "top pick" by Cormark Securities analyst Richard Gray. His target remains $34, while the analyst average target price is $28.26, according to Bloomberg.

Enercare Inc. (ECI-T) was rated a new "buy" at Laurentian Bank by analyst Marc Charbin with a target of $22. The average is $21.17.

Exxon Mobil Corp. (XOM- N) was downgraded to "market perform" from "outperform" at Wells Fargo by equity analyst Roger Read. He did not specify a target price. The average is $89.63 (U.S.).

Deutsche Bank analyst Matthew Niknam downgraded AT&T Inc. (T-N) to "hold" from "buy," saying it faces headwinds in wireless and linear video competition. His target fell by a dollar to $43 (U.S.). The average is $42.42.

Aflac Inc. (AFL-N) was raised to "hold" from "sell" at Evercore ISI by analyst Thomas Gallagher. His target jumped to $73 (U.S.) per share from $67. The average is $72.

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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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