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Wednesday’s analyst upgrades and downgrades

A sign stands in front of Rogers Communications Inc. building on the day of their annual general meeting for shareholders in Toronto, April 21, 2015.

Mark Blinch/Reuters

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

Rogers Communications Inc. (RCI.B-T) is "still a great long-term story," according to CIBC World Markets analyst Robert Bek.

However, he downgraded the stock to "neutral" from "outperformer," which he said was a move "solely due to valuation."

"With Rogers outperforming both peers and the TSX at large so far in 2017, shares continue to push up against our valuation parameters, with the 5.8-per-cent total return to our new target of $61 (up from $59 as we increase our target cable multiple to reflect strengthening global cable comps) arguing for a more conservative near-term stance on Rogers," said Mr. Bek. "That said, this is not an outright call to sell, given our long-term bias towards the name remains positive, and given that we still see Rogers as a solid defensive stock to hold; however, trimming overweight positions and locking in some profits at current levels would seem prudent."

Mr. Bek said Rogers' valuation "(both relative and absolute) looks full in the near-term."

"Given the outperformance of Rogers [year to date], shares have started to push up against our valuation parameters," he said. "As of the close on April 4, 2017, Rogers is trading at 8.7 times our 2017 estimated EBITDA versus BCE at 8.25 times, and TELUS at 7.8 times. Our new price target at $61 implies a target multiple of 8.9 times 2017 EBITDA on Rogers, which compares to target multiples closer to 8.25x for both BCE and TELUS."

His target is now $61, versus the consensus of $57.29.

"Although we see a Rogers premium as fair and warranted (given momentum remains in Rogers favour, and given our bias for cable assets as part of our Broadband Arms Race thesis), there simply isn't any room to stretch this premium," he said. "In fact, over the last 10 years, Rogers has commanded the same 0.7x EBITDA premium to BCE/TELUS, that is implied by our current rankings. However, there are now stronger relative returns elsewhere in our coverage, which argues for a more conservative near-term stance on Rogers, and a Neutral rating."


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Meanwhile, Mr. Bek upgraded Telus Corp. (T-T) based on "valuation catch-up potential."

"Simply put, TELUS now trades at what we believe is too steep a discount to peers and we see room for this discount to narrow over the next 12-18 months," said Mr. Bek. "If TELUS were to close this discount and move towards our $47 price target, it would imply a 12-per-cent total return from current levels, which is the best return potential amongst the Big Three, and argues for an Outperformer rating."

Moving the stock to "outperformer" from "neutral," Mr. Bek emphasized the potential for multiple expansion.

"On an EV/EBITDA basis, TELUS currently trades at 7.8 times our 2017 estimated EBITDA versus BCE at 8.3 times, and Rogers at 8.7 times," he said. "Historically, TELUS has tended to trade in tandem with BCE over the last 10 years, and a 0.7-times discount to Rogers. Suffice it to say, the current discount is ahead of historical norms, making TELUS a prime candidate for some multiple catch-up over the next 12-18 months as investors get comfortable with TELUS' use of its balance sheet."

Mr. Bek raised his target to $47 from $45. Consensus is $46.11.

"To get our new price target of $47, we increased our target wireless multiple 0.25 times to 8.5 times to align TELUS with peers BCE and Rogers – given similar and strong wireless results across the Big Three, and the backdrop of a healthy Canadian wireless industry, a TELUS wireless discount is no longer appropriate," he said. "Our $47 price target implies a blended target multiple of 8.25 times for TELUS, which is the same 8.25 times we use for our BCE target, and a 0.7-times discount to the 8.9 times we use for Rogers. Essentially, our price targets for the Big Three imply a return to historical trading relationships, which works in TELUS's favour as it suggests the most upside potential amongst the group."


Canaccord Genuity analysts added Amaya Inc. (AYA-T), Keyera Corp. (KEY-T) and Suncor Energy Inc. (SU-T) to their focus list of top Canadian fundamental stock picks.

The firm removed Pembina Pipeline Corp. (PPL-T) and Tio Networks Corp. (TNC-X).

Saying "reflation is alive and well" globally, the firm said it's underweight on stocks.

"Investor psychology has shifted from not fighting the Fed to fighting it; to worrying about a flattening of the bond-yield yield curve to forgetting about it; to fearing Republicans' gridlock to brushing it off," they said. "Has the stock market become an à la carte menu where investors selectively focus on stories backing bullish positioning? The minor deterioration in market breadth in March suggests to us that equities have not fully discounted the risks associated with the Fed tightening cycle. We remind investors that over the last three tightening cycles, the third Fed hike occurred while U.S. nominal GDP growth averaged 6.4 per cent versus 3.5 per cent currently. Also, trailing S&P 500 EPS growth averaged 16 per cent versus 3 per cent. Another risk factor is the Bank of China also pursuing a tightening policy. The last US-China synchronized tightening episode was in 2006. Interestingly, like today, 2006 featured the last late-cycle growth synchronization between DMs and EMs. Despite improved growth visibility, the S&P 500 and the S&P/TSX incurred corrections of 7.7 per cent and 12.7 per cent, respectively, through summer 2006. This episode should remind investors of increased correction risk when markets become earnings-driven rather than P/E-driven."

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Analyst Kevin Wright currently has a "buy" rating for Amaya stock with a $29 target. The analyst average is $25.71.

"The stock has had a strong start to the year (up 18 per cent year to date), as the company is showing that the roll-out of its online casino and, to a lesser degree, its sports book is gaining traction while poker is starting to show evidence of improvement," said Mr. Wright. "The first two months of the year and guidance support our investment thesis that growth in casino/sports is expected to more than offset any weakness in poker and, in fact, management is forecasting flattish performance in poker for the year, which we would consider an encouraging trend. In our view, management continues to position the business for long-term success with a number of potential catalysts poised to materialize."

For Keyera, analyst David Galison has a "buy" rating and $46 target. The average is $45.58.

"Keyera is our top pick in the Canadian midstream sector as we believe the share price pullback and significant valuation discount to peers is unwarranted, providing good opportunity to get in a high-quality name," he said.

"Keyera is currently executing its growth capital program of which $1.5-billion in capital remains to be spent. The 2017 estimated capital budget is expected to be $600-700-million with $712-million of capital projects expected to enter service in 2017 and $655-million in 2018. Incremental cash flow generation from these assets should open up many opportunities for the company through potential acquisitions, additional project expansions, as well as a step up in the annual dividend. Additionally, Keyera has recently announced agreements for a Montney area condensate gathering and processing complex with an expected in-service date of mid-2019, subject to the sanctioning decision."

Analyst Dennis Fong has a "buy" rating for Suncor and a target price of $52 per share, versus an average of $49.

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"Our BUY rating on Suncor Energy, and its place on the CG Focus List, reflect our view that it is a compelling way for investors to gain exposure to oil and gas," said Mr. Fong. "We believe the company shows the highest organic production growth of the integrateds while providing a significant free cash flow profile, complemented by a history of returning value to shareholders while remaining defensive with its integrated business structure.

"Based on our estimates, Suncor will show the highest organic production growth profile of its integrated peers at a CAGR [compound annual growth rate] of 7 per cent over the next five years. In addition, we estimate (in a flat commodity price environment) cash flow CAGR will be 16 per cent over the next five years on the back of improved operating uptime and increased operating efficiency."


Staples Inc.'s (SPLS-Q) valuation "seems irrationally compressed," according to Citi analyst Kate McShane.

Amid reports the U.S. retailer is exploring a possible sale, Ms. McShane raised her rating for the stock to "buy" from "neutral."

On Tuesday, Staples shares jumped 9.8 per cent after it was revealed the company, which is the largest U.S. office-supplies seller, has been in talks with private equity firms about a potential sale.

"In our view, this makes sense as SPLS has a compressed multiple due to having a challenged retail business that is pressuring the overall firm valuation," said Ms. McShane. "By our estimate, SPLS should be trading at closer to 6.2-times EBITDA versus the 4.3-times valuation prior to the Wall Street Journal article. We have considered SPLS an interesting acquisition following the [Office Depot Inc.] deal termination and highlighted them as a likely candidate within Broadlines/Hardlines back in October. In addition, we also initially highlighted a rough sum of the parts framework, which we have slightly modified for this report, following our meeting with them at our conference in Chicago."

Ms. McShane said the company's problem remains how it is perceived, suggesting its delivery business should take precedence.

"Since the termination of the pursuit of the ODP merger, the market has been looking for a major catalyst for SPLS as the lack of a significant cost savings driver led to a dearth of interest in the name," she said. "SPLS had been trading at a high of 18.8-times price-to-earnings in late 2014 to down to where it currently (April 3 close) sits at 11 times (9.9 times prior to the Wall Street Journals' article on the potential sale). Recently, during the Q4 conference call and at our Citi Retail Madness conference in March, it appeared to us that SPLS was distancing itself from the NAR segment through both reorganizing the reported segments for Q4 to remove from the brick and mortar business and the emphasis on managing NAR for profitability rather than growth. SPLS will no longer look to relocating struggling stores to more cost efficient locations and will exit retail areas where the stores are no longer profitable.

"We believe that SPLS messaging and reorganization of segments is important as the valuation seems irrationally compressed. Clearly, SPLS does not operate in an exciting industry but does the company really deserve a multiple that buckets it in with retailers even worse off than BBY [Best Buy] and BBBY [Bed Bath & Beyond] and more in line with a BKS [Barnes & Noble] or ANF [Abercrombie & Fitch]? In our view, no, as SPLS generates 60 per cent of its sales from delivery (68 per cent of North American EBITDA). We think the market needs to see SPLS as a delivery/distribution type business with a retail business that will be shrunken, spun off, or sold. By our estimates, SPLS is even undervalued today even if you value its brick and mortar business at zero. In our view, it should trade at a premium to its closest comparable, Essendant (ESND), given the growth trajectory, margins, and customer loyalty given where SPLS falls in the chain."

Ms. McShane raised her target price for the stock to $12 (U.S.) from $9.50. The analyst consensus price target is $9.55, according to Thomson Reuters.

"All in, by our conservative [enterprise value-to-EBITDA] valuation calculations, SPLS' should be worth closer to $7.9-billion versus the current market valuation of $5.6-billion and implies 30-per-cent upside to the stock. We are upgrading shares to $12 based our [discounted cash flow] and sum of the parts analyses. We are adjusting EPS estimates for calendar 2017 to 2019 on slower comp trends for NAR [North American retail] but slightly better NAD [North American Delivery]."


Credit Suisse's Investment Policy Committee added U.S. Foods Holding Corp. (USFD-N) to the firm's U.S. focus list, considering the stock one of its top investment ideas.

"We are positive on the food service industry and see particularly attractive value in USFD given its strong growth outlook," the firm said. "USFD has revived earnings momentum following its disruptive merger attempt with SYY, and looks poised for further progress as internal initiatives drive growth. M&A supplements this outlook, as the company sees opportunity to foster industry consolidation and expand its 9-per-cent market share."

The firm said the move was made in the wake of the company's fourth-quarter update, which indicated the company's fundamentals "remain strong."

"The company reported independent case growth of 6.1 per cent (excluding the extra week) and guided to 7-10-per-cent EBITDA growth in 2017," they said. "We also expect the industry overall to attract increasing attention as other segments within retail are negatively impacted by accelerating price investments and the rising e-commerce penetration. By contrast, the food service industry is characterized by independents taking share from larger chains at 3-4-times the margin contribution, large distributors capturing share of wallet, a rational pricing environment, and numerous efficiency opportunities."

The stock currently has an "outperform" rating and $32 (U.S.) target price. The analyst consensus target is $29.73.

"Of the 'big three' [which includes Sysco Corp., SYY-N and Performance Food Group Co., PFGC-N], we believe USFD offers the most near-term upside given its sizeable valuation discount to largest peer SYY (2-3 turns on next 12 months enterprise value-to-EBITDA)," they said.

At the same time, Whole Foods Market Inc. (WFM-Q) was removed from the list.

The firm has an "outperform" rating and $36 (U.S.) for the stock. Consensus is $28.38.


Desjardins Securities analyst Jamie Kubik raised his target price for stock of Leucrotta Exploration Inc. (LXE-X), noting the continuation of its delineation "success" and calling expansion of its Montney oil window "intriguing."

On Tuesday, the Calgary-based company announced the completion of its infrastructure project to tie-in four previously drilled delineation wells and the drilling of 3 additional wells to further extend the boundaries of its Lower Montney turbidite light oil resource play. Leucrotta said the tie-in of the four wells has increased production to over 3,000 barrels of oil equivalent per day.|

The announcement came a day after it released its 2016 year-end reserves.

"LXE's resource update featured intriguing new data from its Montney prospect at Mica/ Doe, which appears to be more oil-weighted than originally contemplated," said Mr. Kubik. "Although still early days, LXE's step-out program successfully confirmed an extension of the light oil window, with positive test data from three new wells. The 8-4 well in particular tested at an impressive 1,060 boe/d (54 per cent oil and liquids), which is LXE's strongest oil test to date."

He added: "We see the additional oil exposure in LXE being favourable for NAV [net asset value] and egress. Although the company's Montney light oil wells have a lower net present value and internal rate of return than its liquids-rich gas wells (on GLJ pricing), the development density of up to 8 w/s for oil vs 4 w/s for gas could drive a higher per-section NPV, which is ultimately accretive to NAV. We have amended our NAV for the increased oil locations (up to 640) and reduced the potential liquids-rich gas locations in the Lower Montney (100 per management estimates), which drives an increase to our estimated risked NAV to $3 per share. Based on our recent Montneyball publication, we see LXE being favourably positioned from an egress perspective with multiple takeaway systems within close proximity for its gas production; however, the additional light oil exposure further solidifies this view given better mobility options for liquids versus gas."

Mr. Kubik maintained a "buy" rating for the stock and increased his target to $3 from $2.75. Consensus is $2.89.

"We have increased our target price … on the back of this update, which is based on a 95-per-cent weighting of 1 times our risked NAV and a 5-per-cent weighting of 12 times our estimated CFPS [cash flow per share] for 2018. We believe the premium multiple on estimated 2018 cash flow is warranted, given LXE's valuation is currently more NAV-based than cash flow– based compared with its peers."

"We continue to see LXE as an attractive junior Montney producer with compelling resource potential for its size and a prudent team."

Elsewhere, Raymond James analyst Kurt Molnar raised his target to $3 from $2.85 with an "outperform" rating (unchanged).

"The company has done a great job of retaining financial capacity at the same time they have increased the size of their oil/condensate biased inventory, all the while retaining leverage to more layers in the Montney," said Mr. Molnar. "We note that we also see their access to the Alliance system for the gas as an important positive too."


Timmins Gold Corp.'s (TMM-T) San Francisco mine in Mexico is "shining brightly," said BMO Nesbitt Burns analyst Brian Quast.

On Tuesday, the Vancouver-based company reported better-than-expected first-quarter production results. Production of 26,000 ounces of gold exceeded Mr. Quast's projection of 19,100 ounces.

"The large increase in production was due to improvements in the crushing and leaching circuit which lead to increased recovery," he said. "A project was also started to recover 1,500 ounces gold from a previously closed leach pad. Residual leaching from this pad is expected to continue into next quarter, to offset an anticipated production decline with the pre-stripping of the Phase 5 pit. TMM anticipates it will achieve the high end of its 70-75,000 ounces 2017 production guidance."

Along with the increase in production, Mr. Quast also noted the company's cash balance is "strengthening," which he said should prove beneficial for the development of its Ana Paula in the Guerrero Gold Belt of Mexico.

"TMM ended the quarter with $39-million in cash," he said. "The bulk of the cash flow from operations is being invested into the Ana Paula Project. Now that infill drilling and preliminary metallurgical testing is complete, a Pre-Feasibility Study is expected to be published in the second quarter of 2017. We expect that the pre-feasibility has potential to show optimizations versus the PEA [preliminary economic assessment]; preliminary metallurgical test work is showing total recoveries of 80-85 per cent versus the PEA, which assumes 75 per cent."

Mr. Quast raised his target for the stock to 60 cents from 55 cents. Consensus is 65 cents.

"Our Underperform (Speculative) rating is maintained as we await the results of the updated San Francisco LOM plan and the Ana Paula pre-feasibility study," he said.

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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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