Wednesday's analyst upgrades and downgrades

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

Silver Wheaton Corp. (SLW-T, SLW-N) had a "strong" finish to 2016, according to Canaccord Genuity analyst Tony Lesiak.

On Tuesday, the Vancouver-based mining company reported fourth-quarter adjusted earnings per share of 19 cents, exceeding the projections of Mr. Lesiak (14 cents) and the Street (17 cents). He pointed to higher-than-expected silver sales as the primary reason for the beat.

"SLW posted another strong year, with FY16 attributable production a record of 56.2 million ounces of silver (AgEq) (55 million ounce guidance), ahead of the 48.7 million ounces of AgEq achieved in 2015," said Mr. Lesiak. "The five-year outlook (including 2017) was revised modestly (2.4 per cent) lower to 29 million ounces Ag and 340,000 ounces of gold (Au) mainly to reflect a revised weaker outlook at San Dimas. While Primero has yet to provide 2017 guidance due to the ongoing strike at San Dimas, SLW has provided guidance of 4 million ounces (assumes 3-month shutdown). On a silver equivalent basis, we remain approximately 7 per cent and 5 per cent higher than guidance in 2019 and 2020, respectively; we see SLW as being overly conservative on future production from San Dimas and Penasquito (we follow guidance provided at the Goldcorp investor day)."

Looking ahead, Mr. Lesiak pointed to the company's Canadian Revenue Agency Tax Court appeal process as a "key catalyst" in 2017. It has been fighting a CRA demand for more than $200-million (U.S.) in back taxes.

He expects the discovery phase of the process to wrap up by the middle of the year, adding cases against both Suncor Energy and Silver Standard were settled prior to reaching court.

"If unsuccessful, a trial date is expected mid-2018 and a court-rendered decision in 2019," said Mr. Lesiak. "Our estimates continue to assume a worst-case outcome which impacts our NAV [net asset value] by $6 per share. We view the potential for settlement as a free option with a negative outcome in trial already fully priced into SLW's shares.

"The company ended 2016 with $124-million U.S. in cash and $1.2-billion drawn on the $2-billion credit facility. Based on our 2017 FCF [free cash flow] estimate of $505-million we see total available liquidity approaching $1.4-billion by year-end 2017. Silver Wheaton had indicated the potential for up to two mid-sized (up to $0.5-billion each) streaming transactions over the next 18 months. While larger deals may be possible, we believe management will exercise some prudence with the balance sheet over the medium term until the CRA situation has more visibility (CRA penalty reserve). Net debt to EBITDA at the end of 2016 was 1.8 times; however, we forecast this to decline to 1.3 times by the end of 2017. We continue to believe leverage takes away from investor appeal for a royalty company."

In reaction to the results and guidance, Mr. Lesiak lowered his target price for Silver Wheaton stock by a loonie to $37. The analyst consensus price target is $27.18, according to Thomson Reuters.

Meanwhile, BMO Nesbitt Burns analyst Andrew Kaip did not change his "outperform" rating and $24 target.

"A positive outlook for shares of SLW is predicated on the view that silver will continue to outperform gold, and that investors are already imputing a CRA discount to SLW," he said. "As a lower-risk investment opportunity, we expect SLW will become increasingly attractive to generalists re-entering the sector and looking for exposure to silver."

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Stantec Inc.'s (STN-T, STN-N) $270-million (U.S.) sale of its software business, Innovyze, "makes sense" strategically, said Canaccord Genuity analyst Yuri Lynk.

On Tuesday, Stantec announced the deal with EQT Mid Market US fund to divest the water infrastructure software analytics business, which was acquired through its 2016 acquisition of MWH Global Inc. Innovyze generated net revenue of $32-million in 2016 with an EBITDA margin of 53 per cent.

"Reflecting this attractive margin profile, Stantec is selling Innovyze for $270-million or 16 times 2016 EBITDA of $17-million," said Mr. Lynk. "This is a much higher valuation than Stantec receives in the market, reflecting Innovyze's higher recurring revenue and margin profile. Net proceeds from the sale, which management expects to close in Q2/2017, are expected be in the $140-million to $160=million range, abnormally low in our experience, and used to reduce indebtedness."

Mr. Lynk said the sale is neutral to his 2017 and 2018 earnings per share projections as well as his target price for the company's stock.

"We believe the divestiture of Innovyze makes good strategic sense," he said. "Keep in mind that approximately 60 per cent of Innovyze's clients are competitors of Stantec. This was not likely an issue at MWH before Stantec acquired it as MWH at the time was a relatively small, niche player. As part of one of the largest professional services firms in North America, however, we believe Innovyze's clients would be more hesitant giving business to a competitor. Lastly, we note there are no synergies between the software business and the engineering business and spending time trying to address this could be a distraction for management."

With the sale, Mr. Lynk lowered his 2017 and 2018 EPS estimates to $2.04 and $2.26, respectively, from $2.05 and $2.30.

"In short, the lost revenue and EBITDA is almost completely offset by $6-million in annualized interest expense savings as well as lower Innovyze-related goodwill and intangible amortization," he said.

"Stantec remains well positioned to continue to consolidate the global professional services market. Pro forma the after tax Innovyze proceeds, Stantec's Q4/2016 net debt falls to $608-million ($810-million previously) or 1.5 times EBITDA (1.9 times previously). We believe management would be comfortable leveraging up to 2.5-3.0 times EBITDA to complete an acquisition and note the global professional services market remains quite fragmented.:

With a "hold" rating, he maintained a price target of $34 for the stock. Consensus is $37.65.

Elsewhere, Desjardins Securities analyst Benoit Poirier kept a $38 target and "hold" rating.

Mr. Poirier said: "Following this transaction, STN's balance sheet will no longer be at disadvantage versus its peers, and will provide room for cash deployment opportunities (M&A, share buybacks). However, we maintain our neutral stance in light of the unattractive risk/reward ratio and our lack of confidence in implied organic growth and margin expansion amid uncertainty related to the U.S. infrastructure plan. As such, we would wait for a better entry point or more clarity on the outlook before revising our recommendation."

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Believing the potential takeout premium embedded into Kate Spade & Co. (KATE-N) stock has created a "more balanced risk/return setup," Citi analyst Kate McShane downgraded the New York-based fashion company to "neutral" from "buy."

"We understand why suitors would be interested: 1) double-digit top-line growth with runway for margin expansion from operational leverage, licensing and supply chain initiatives; 2) valuable brand with 75 per cent of sales DTC; 3) disciplined distribution (with limited exposure to M); and 4) international and licensing potential," said Ms. McShane. "What is more difficult for us to assess is the likelihood of a deal. KATE was trading at a 3-yearr low in late December when reports first surfaced that the company would solicit bids. While management confirmed in mid-February that the company is reviewing strategic alternatives (and posted better than expected Q4 results), we still don't know what management and the board would consider the 'right' price. After the stock's significant rally (trading at 9.5 times fiscal 2017 EBITDA esimates), we think the return potential is more fairly balanced."

Citing a lack of near-term visibility with the absence 2017 fiscal guidance, Ms. McShane lowered his 2017 earnings per share projection by a penny to 88 cents (U.S.). Her 2018 estimate fell to $1.01 from $1.11, while her 2019 expectation was introduced at $1.15.

Her target price for the stock rose to $24 (U.S.) from $18. Consensus is $23.50.

"We've seen transaction multiples in retail, apparel/footwear average 9 times EBITDA with stronger companies commanding double-digits," the analyst said. "We think 10-11 times fiscal 2017 EBITDA ($24-26) would be a reasonable price. Policy uncertainty in Washington (and the cloud of a potential border adjustment tax) could restrain some types of buyers (e.g. P.E.) until there is more clarity but strategic buyers with existing non-U.S. sourcing may be less concerned by this aspect of KATE. If news broke that a deal would not take place, we see the potential for KATE to ultimately re-rate to $20 (12-per-cent downside and trading at a FY17 EV/EBITDA multiple in-line with its 6 month fwd avg ahead of Dec. press reports). We think there could be support at this level with investor confidence on a better footing after KATE succeeded in hitting FY16's reset targets)."

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Ivanhoe Mines Ltd.'s (IVN-T) announcement of the discovery of a new step-out hole at its Kamoe-Kakula copper project "highlights potential for significant resource growth" at the facility in the Democratic Republic of the Congo, said Canaccord Genuity analyst Tony Lesiak.

On Tuesday, Ivanhoe, based in Vancouver, said the new hole was drilled 5.4 kilometres west of the present boundary of Kakula's current inferred resources. It intersected a 16.3-metre zone of chalcocite-rich copper mineralization "similar to holes drilled in the centre of the high-grade Kakula Deposit on the company's Tier One Kamoa-Kakula Copper Project."

"Given the similarities, typical bottom-loading features and siltstone correlation and 'moderate to strong' visual grade confirmation, we believe the pending (in two weeks) assays have a high probability of returning favourable results," said Mr. Lesiak. "The discovery hole indicates the potential to extend the mineralized strike length of Kakula to over 10 kilometres compared to the 4.1 kilometres comprising the initial resource area and compared to the 6.3km drill confirmed trend. We also note an additional 3.8 kilometres of untested potential to the edge of the mining licence increasing the potential Kakula trend to 14 kilometres. While it is still early days, the stratiform mineralization at Kamoa-Kakula has shown impressive continuity, indicating a potential higher relative degree of in-fill drilling success. Up to five drill rigs are being mobilized at the Kakula West discovery to fast track drilling efforts. A 150-per-cent increase in the resource could extend the potential mine life to 30 years at an 8 million tons per annual (Mtpa) scenario and increase attributable NAV [net asset value] $400-million at $3 per pound Cu LT ($600-million at $3.50/lb Cu LT). The increased resource may also promote selective mining of the growing high grade resource, thereby boosting initial mine grades."

He added: "The other important observation is the shallower depth of the mineralization which has positive development implications. The new Kakula West area could represent an additional target area for ramp access to provide additional mining flexibility and capital cost reductions compared to mining at 1 kilometre-plus depths. We see the development of another mining front at Kakula West as supportive of further incremental expansion scenarios to 12 Mtpa. An increase in the throughput rate from our current modelled 8 Mtpa rate to 12 Mtpa rate (plus 4Mtpa from Kamoa) could increase attributable NAV $400-million at $3/lb copper LT and still result in a 20-plus year mine life."

With a "speculative buy" rating, Mr. Lesiak's target rose by 50 cents to $6.50. Consensus is $5.54.

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The market may shrug of FedEx Corp.'s (FDX-N) third-quarter earnings miss, said Credit Suisse analyst Allison Landry.

She believes the company's "line of sign" to "significant" long-term growth from its Express segment may overshadow short-term disappointment. She raised her volume, yields and operating ratio estimates for Express' coming quarter.

"Additionally, contrary to UPS, capex should trend down as a percent of revenue over the next few years – which should lend itself to improved FCF [free cash flow," said Ms. Landry. "However, in our view, the risk is that eCommerce growth has led to a structural increase in the capital intensity of the Ground business.

On Tuesday, FedEx reported third-quarter adjusted earnings per share of $2.35 (U.S.), missing Ms. Landry's $2.66 estimate and the consensus of $2.62. She attributed the miss to higher interest expenses, other expenses, and a higher share count hurt. Revenues were 1 per cent higher than her expectation.

"FedEx lowered its fiscal year 2017 capex budget to $5.3-billion (from $5.6-billion)," she said. "The company does not believe that capex will vary significantly over the next few years, which it anticipates will lead to an increase in FCF. The biggest requirement for capital is re-fleeting aircraft. After 2018, capex as a percentage of revenue is expected to decline, although FDX would accelerate capex if 33-foot trailers were approved or if U.S. tax reform included immediate expensing of capex."

Ms. Landry maintained her 2017 EPS projection of $11.90. She increased her 2018 and 2019 estimates to $13.32 and $15.05, from $13.30 and $14.98, respectively.

She raised her target for the stock to $219 from $209. Consensus is $211.14.

"We maintain our Outperform rating as we see greater relative upside in FDX shares compared to the balance of our coverage universe," she said.

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In other analyst actions:

Berenberg analyst Fawzi Hanano upgraded Teck Resources Ltd. (TECK.B-T) to "buy" from "hold" with a target of $36, up from $34.50. The analyst average target price is $37.17, according to Bloomberg.

Hanano also upgraded First Quantum Minerals Ltd. to "hold" from "sell" with a target of $12.80 (from $11). The average is $17.84.