Wednesday's analyst upgrades and downgrades

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

A "window of opportunity" has opened up for investors with Russel Metals Inc. (RUS-T), according to Raymond James analyst Frederic Bastien.

"We've been reluctant to chase Russel Metals as Trump's plans to make America build again lit a fire under steel stocks," he said. "But with RUS' valuation returning to more reasonable levels and the prospects of much improved earnings still intact, we can now recommend the common shares with a greater margin of safety."

Accordingly, Mr. Bastien upgraded his rating for the Mississauga-based metals distribution and processing company to "outperform" from "market perform."

Mr. Bastien emphasized a rise in volumes on both sides of the border, noting March data from the Metals Service Center Institute (MSCI) showed Canadian and U.S. steel shipments increased 7 per cent and 10 per cent year over year, respectively.

"The monthly data effected 1Q17 growth rates of 2 per cent domestically and 6 per cent in the United States (the first quarterly gain in two years)," he said. "Since these industry figures are stronger than the flattish growth we previously expected from Russel's Metals Service Centers (MSC), we adjusted our estimates for the quarter higher. It is also worth stressing inventories remain at multi-year lows, suggesting potential further tightening (and continued pricing power) across the steel supply chain."

He also believes a changing in rhetoric toward China by the Trump government is "unlikely to soften" the U.S. steel sector's stance on imports.

"Since the market bottomed in early November, both plate and sheet prices are up some 30–35 per cent while scrap has jumped more than 45 per cent," said Mr. Bastien. "There is anecdotal evidence the industry is not only reacting more quickly to pricing pressures brought about by imports, but also hitting major offenders harder than at any other time in recent memory. We believe this will help keep steel imports low and domestic prices elevated for some time to come. That's good news for Russel's MSC division, which is poised to record significant pricing and margin gains in 1Q17."

Also pointing to rising momentum in the demand for products for the energy industry and the company's rising market share in value-added processing activities, he raised his earnings per share projections for 2017 and 2018 to $1.55 and $2, respectively, from $1.50 and $1.80.

"Our forecasts assume that for every dollar of revenue growth, Russel will deploy 25–30 cents into working capital," he said. "We estimate this will push the firm's net debt-to-EBITDA ratio from 1.2 times at the end of 2016 to 1.4 times at the end of 2018, but still leave it with plenty of flexibility to advance potential shareholder value-creating opportunities. We see the acquisition of metals service centers continuing to play a key role in the corporate strategy, however feel it is futile to try and predict when Russel will strike next. What we are pretty certain about is that the firm won't be hunting for elephants anytime soon given the sector's rich valuations. Where management could surprise us — as it did in 2012 with Apex — is in the pursuit of other verticals that augment (and diversify) Russel's service offering. Whatever the path chosen, we expect management to traverse it patiently and conservatively."

"Based on the above observations, we now expect EPS of 35 cents for quarter, up from our previous forecast of 30 cents and slightly better than the prevailing consensus forecast of $0.33. Our estimate implies a big improvement over the 13 cents per share earned on an adjusted basis in 1Q16. We see Russel's service centers acting as the quarter's primary growth engine, but also expect Energy Products to show growth for the first time since 4Q14. Our projections have the two businesses growing their operating profits to $23-million and $12-million, respectively, from $10-million and $7-million in in the prior year quarter."

Mr. Bastien raised his target price to $30 per share from $25. The analyst consensus price target is $28.95, according to Thomson Reuters.

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In a research note previewing the first-quarter earnings seasons for the precious metals sector, Desjardins Securities analyst Michael Parkin upgraded his rating for Mandalay Resources Corp. (MND-T) based on its current valuation.

Raising his rating to "buy" from "hold," Mr. Parkin said: "On April 12, Mandalay announced 1Q17 production results of 32,500 ounces of gold equivalent (GEO_, which missed our previous estimate of 37,700 GEO. The company did not report a cash cost figure and with the production results included in our estimates, we forecast total cash costs of $806 (U.S.) per GEO in 1Q17 … The 1Q production result represents 22 per cent of the mid-point of the company's annual guidance of 138–163,000 GEO; however, we expect higher production results in subsequent quarters this year, as does management. We estimate that the company will achieve its guidance with our estimate of 150,400 GEO at total cash costs of $757 (U.S.) per GEO (our cash cost estimate is significantly lower due to our by-product assumptions, which are significantly closer to spot prices than what guidance is based on)."

Mr. Parkin lowered his target price for the stock to 85 cents from 95 cents. Consensus is 83 cents.

"We also updated our model for the 1Q17 production results and made some operational tweaks, primarily at Cerro Bayo, where we are now more in line with the revised operating costs of the LOM plan," he said. "Our NAV [net asset value] fell 17 per cent on the back of the weaker outlook at Cerro Bayo as well as a lower valuation for the non-producing assets Challacollo and La Quebrada. With the combination of a lower NAV, higher NTM [next 12 months] EBITDA estimate and lower EBITDA multiple, our target price fell 11 per cent … but with a potential return of 44 per cent, we are upgrading our recommendation."

In the note, Mr. Parkin raised his near-term gold price assumption to $1,255 (U.S.) per ounce from $1,215. His long-term gold price increased to $1,300 from $1,275.

With that change, he updated his first-quarter estimates for companies in his coverage universe, calling the changes "generally positive" with the realized gold price 2.1 per cent above his estimate. With those changes, his target prices for the sector's stocks were also tweaked, with nine of 15 rising, three staying flat and three falling.

His increases were:

- Agnico Eagle Mines Ltd. (AEM-T, buy) to $79 from $71. Consensus: $66.21
- Alamos Gold Inc. (AGI-T, buy) to $14 from $13.50. Consensus: $10.05.
- Detour Gold Corp. (DGC-T, buy) to $21 from $20.50. Consensus: $17.32.
- First Majestic Silver Corp. (FR-T, buy) to $16.50 from $15. Consensus: $15.34.
- Mag Silver Corp. (MAG-T, buy) to $26.50 from $26. Consensus: $19.01.
- New Gold Inc. (NGD-T, buy) to $5.25 from $4.75. Consensus: $3.85.
- Osisko Gold Royalties Inc. (OR-T, buy) to $21 from $20. Consensus: $18.24.
- Richmont Mines Inc. (RIC-T, buy) to $16 from $14. Consensus: $14.13.
- Tahoe Resources Inc. (THO-T, buy) to $14.75 from $14. Consensus: $11.43.

These stocks fell:

- Goldcorp Inc. (G-T, buy) to $26.50 from $27. Consensus: $20.54.
- Primero Mining Corp. (P-T, hold) to 75 cents from $1.10. Consensus: $1.09.

These stocks did not change:

- Argonaut Gold Inc. (AR-T, buy) at $3.75. Consensus: $2.93.
- Franco Nevada Corp. (FNV-T, buy) at $110. Consensus: $76.10.
- Stornoway Diamond Corp. (SWY-T, buy) at $1.25. Consensus: $1.19.

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Canaccord Genuity analyst Dalton Baretto upgraded Imperial Metals Corp. (III-T) in response to revisions to his commodity price deck for copper, zinc and metallurgical coal.

In a research note on the base metals sector, Mr. Baretto said: "Our overall thesis for each of these materials remains unchanged – ongoing demand strength coupled with increasing supply side risks. We note that aside for copper (2017-2019) and metallurgical coal (2017), we have made almost no changes to our overall forecasts."

After updating his estimates to reflect his price forecast changes, Mr. Baretto moved Vancouver-based Imperial Metals to "hold" from "sell."

"As of the time of writing, III has not yet released Q1/17 production results or indicated when they will release overall results for the quarter," the analyst said. "Given the ongoing operating struggles, limited cash balance and significant leverage on the company's balance sheet, we expect the market to continue to focus heavily on management's plans to shore up liquidity in the near term. On a longer-term basis, we expect a focus on the ultimate strategy to realize value from the significant resource at Red Chris, including the funding of the initial capital commitment. We continue to indicate that the significant debt level neutralizes a large portion of the value of the current Red Chris mine plan, and that the company will likely face another cash crunch in the near future should any further operating issues materialize.

"On a valuation basis, we note that III trades at a substantial premium to its peers on a near-term basis, but in line on a NAV [net asset value] basis, reflecting the longer-term value of Red Chris. The company trades at 11.0 times our 2017 EBITDA forecast, and 0.79 times our NAV8% estimate as compared to the peer group averages of 7.6 times and 0.77 times, respectively."

His target price for the stock is $6.50, up from $6.25. Consensus is $7.21

"Our new price target is based on a 50/50 weighting of 8.0 times our NTM [next 12 months] EBITDA estimate and 0.7 times our NAV8% estimate, both measured as at the beginning of Q2/18," said Mr. Baretto. "Our previous price target was based on 0.7 times our NAV8% estimate measured at the beginning of Q1/18. Our revised target price of $6.50 per share implies a return of 7 per cent to the current share price."

Mr. Baretto revised his target prices for the following stocks:

- Capstone Mining Corp. (CS-T, buy) to $1.60 from $1.70. Consensus: $1.31.
- First Quantum Minerals Ltd. (FM-T, buy) to $19 from $18.50. Consensus: $17.97.
- HudBay Minerals Inc. (HBM-T, buy) to $11.50 from $11. Consensus: $11.89
- Teck Resources Ltd. (TECK.B-T, buy) to $37 from $39.50. Consensus: $35.31.

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Citing a "wide" valuation spread to its peers and the potential for renewed focus from its asset manager, BMO Nesbitt Burns analyst Heather Kirk raised her rating for Dream Industrial Real Estate Investment Trust (DIR.UN-T) to "outperform" from "market perform."

On Tuesday, the Toronto-based REIT announced chief executive officer Brent Chapman is departing early in 2018. Chair Vincenza Sera will lead a search committee to find his replacement.

"We view the CEO announcement as an indication of renewed interest in DIR by Dream Asset Management Corp. (DAMC) and a slight shift in strategic direction to include a greater focus on development and entering new markets," said Ms. Kirk. "More involvement of senior management of DAMC with the strategic direction and operations of DIR is expected to be a positive catalyst for the stock."

Ms. Kirk raised her target price for the REIT to $9.50 from $9. Consensus is $8.69.

"Although we believe some discount to peers is warranted to reflect the quality and geographic mix of the REIT's portfolio, we believe that the current spread is too wide," she said. "The REIT now trades at a 7.4-per-cent implied cap rate, a spread of 170 basis points to Pure Industrial Real Estate Trust (AAR.UN-T) and 80 basis points to Summit Industrial Income REIT (SMU.UN-T). The REIT trades at a 15-per-cent discount to NAV [net asset value] peers at 3-per-cent average premium. On a P/AFFO [price to adjusted funds from operations] basis, DIR trades at 13.3 times versus. peers at an average of 14.5 times."

"The REIT's unit price has increased 6 per cent (13-per-cent total return) over the last 12 months lagging industrial peers (AAR, GRT, WPT, SMU) who have delivered an average unit price return of 24 per cent (32 per cent total return) for the same period."

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Rogers Communications Inc.'s (RCI.B-T, RCI-N) "strong" first-quarter results should meet investor expectations, said RBC Dominion Securities analyst Drew McReynolds.

On Tuesday, Rogers reported consolidated revenues and earnings before interest, taxes, depreciation and amortization of $3.338-billion and $1.166-billion, respectively, representing year-over-year increases of 2.9 per cent and 5.9 per cent. Mr. McReynolds's projections were $3.364-billion and $1.144-billion.

"Q1/17 postpaid net additions of [about] 60,000 were ahead of our 34,000 estimate and up versus 14,000 in Q1/16," the analyst said. "With gross additions (up 13 per cent year over year) largely in-line with our estimate, better than expected postpaid net additions were driven by an unexpected 7 basos points year-over-year reduction in postpaid churn (versus our estimate of flat). Management attributed the year-over-year improvement in churn mainly to customer service improvements and the impact of value-added offerings. Notwithstanding a material change in the competitive environment, management believes year-over-year improvement is sustainable. While Shaw's full impact on the wireless market has yet to be seen (and likely will not until 2018), we have lowered our postpaid churn assumption for Rogers from 1.22 per cent in 2016 to 1.17 per cent in 2017. This decrease has in turn increased our 2017 postpaid net addition estimate from 264,000 to 352,000. Our revised forecast assumes: (i) a modest level of postpaid market share gain mainly at the expense of TELUS (where a greater emphasis is on maximizing lifetime value per subscriber); and (ii) continued elevated wireless activity across the industry that commenced in Q2/16."

Mr. McReynolds also emphasized that it was the second consecutive quarter of mid-single digit wireless EBITDA growth. The company reported a rise of 6.6 per cent, in line with his 6.1-per-cent projection.

"Management attributed Q1/17 growth to renewed ARPU [average revenue per user] growth, stable COA [cost of acquisition] and cost efficiencies," he said. "While the cadence of the current upgrade cycle under two-year contracts (post-double cohort) and the related margin impact remain unclear to us, our forecast does factor in mid-single digit wireless EBITDA growth through 2017."

Based on the results, Mr. McReynolds raised his 2017 and 2018 full-year EPS projections to $3.58 and $3.82, respectively, from $3.46 and $3.70.

"Despite the strong start to the year (Q1/17 revenue and EBITDA growth of 2.9 per cent and 5.9 per cent, respectively), 2017 revenue and EBITDA growth guidance of 3-5 per cent and 2-4 per cent was unchanged," he said. "Management noted that while maintaining guidance may prove to be conservative, the competitive environment in both wireless and cable remains intense. Our 2017 forecast assumes revenue growth of 4.2 per cent (mid-point of the guidance range) and EBITDA growth of 5.2 per cent (above the guidance range)."

With a "sector perform" rating, he raised his target price for the stock to $61 from $59. Consensus is $58.14.

"With improved performance over the past two quarters, Rogers now largely trades in line with large cap wireless peers (forward 12 month enterprise value/EBITDA multiple of 7.9 times  versus 7.9 times for TELUS and 8.2 times for BCE)," he said. "While Rogers' improved performance came earlier than we had expected (particularly renewed wireless operating leverage), we do believe recent share price gains should be sustained reflecting: (i) comparable NAV growth to large-cap peers; (ii) rising expectations for X1; (iii) the potential resumption of dividend growth in 2018; and (iv) the anticipation of new initiatives from new CEO Joe Natale."

Elsewhere, Citi analyst Adam Ilkowitz raised his target to $60 from $58 with a "neutral" rating.

"Ahead of the new CEO taking the reins, Rogers has made solid progress in improving customer satisfaction and results due to changes made during the prior regime," he said. "We don't expect much to change near term given the focus on improving retention company-wide and the X1 product launch in 2018 in Cable. We do expect further changes to customer care and a strategic evaluation of the Business Solutions and Media divisions, but don't expect any near-term change in the Board's view on the Cogeco stake."

BMO Nesbitt Burns analyst Tim Casey bumped his target to $67 from $65 with an "outperform" rating.

Mr. Casey said: "Q1/17 results reflect a continuation of recent trends. That is, more evidence of turnaround progress at Rogers, particularly in wireless (its largest and most important business). Following years of underperformance in wireless, recent results reflect a marked turn in operating momentum. The challenge for Rogers under Joe Natale's leadership is to now convert the turn in subscriber metrics to sustainable/ accelerated EBITDA and FCF growth. We expect a continued turn in sentiment as Rogers closes the fundamental performance gap."
 
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A "tough" first quarter removed the "excess" premium on Goldman Sachs Group Inc. (GS-N), according to Citi analyst Keith Horowitz.

In response, he raised his rating for the stock to "neutral" from "sell."

"We believe the risk/reward for GS shares are more balanced and we are upgrading GS," he said.

"Our cost of equity analysis shows the group at 10.2 per cent, which we have found is representative of a more balanced valuation. Additionally, Goldman's relative valuation within the group is more appropriate now than it was when we believe investors were not appropriately discounting the inherent volatility in trading results. While 1Q fixed income trading results were disappointing, we believe it would be a mistake for investors to extrapolate these results. Our near term estimates are roughly unchanged … and we continue to see longer term ROTE [return on tangible equity] in the mid teens."

He kept a $225 (U.S.) target. The analyst average target is $243.96, according to Bloomberg.

Meanwhile, BMO Nesbitt Burns analyst James Fotheringham bumped his target to $208 from $201 with a "market perform" rating (unchanged).

"GS missed on FICC [fixed income, currencies and commodities] but beat on compensation costs and buy-backs," said Mr. Fotheringham.

"We are relieved by recent news suggesting a pragmatist (not an ideologue), Randal Quarles, is set to be nominated as Bank Supervisor. Among large-cap banks and specialty finance, we prefer stocks that are still cheap (even after the Trump banks rally), and benefit more than peers from policy changes proposed by the new administration; MS and COF are our top picks.

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RBC Dominion Securities analyst Paul Quinn changed his rating for six companies in a first-quarter earnings preview for the paper and forest product industry.

He upgraded the following stocks:

International Paper Co. (IP-N) to "outperform" from "sector perform" with a target of $56 (U.S.), rising from $50. Consensus is $55.23.

WestRock Co. (WRK-N) to "outperform" from "sector perform" with a target of $59 (U.S.), up from $54. Consensus is $58.62.

He downgraded:

Canfor Corp. (CFP-T) to "underperform" from "sector perform" with a $17 target (unchanged). Consensus is $20.50.

Cascades Inc. (CAS-T) to "sector perform" from "outperform" with a $16 target, up from $15. Consensus is $17.08.
 
Potlach Corp. (PCH-Q) to "sector perform" from "outperform" with a $47 (U.S.) target, up from $45. Consensus is $42.75.

Western Forest Products Inc. (WEF-T) to "sector perform from "outperform" with a $2.25 (Canadian) target. Consensus is $2.39.

Mr. Quinn also tweaked his targets for the following Canadian companies:

Canfor Pulp Products Inc. (CFX-T, sector perform) to $12 from $11. Consensus: $13.10.

Interfor Corp. (IFP-T, outperform) to $22 from $20. Consensus: $20.71.

Tembec Inc. (TMB-T, outperform) to $4.25 from $3.25. Consensus: $3.50.

West Fraser Timber Co Ltd. (WFT-T, sector perform) to $55 from $50. Consensus: $60.21.

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Coca-Cola Co. (KO-N) "doesn't need as much bubble to sparkle again," said Credit Suisse analyst Laurent Grandet.

He upgraded his rating for the stock to "outperform" for "neutral."

"With incoming CEO James Quincey set to take the helm on May 1, we have conducted a global review of the Coca-Cola business post-refranchising and explored the options he will have to return Coke to growth," the analyst said. "Quincey has already revealed his desire to build a total beverage portfolio focused around five category clusters, and the company recently announced a new organizational structure designed to support these growth and innovation initiatives. Now that the refranchising is nearly complete, Coke is on the path to defining its new frontier, and we think the company has all the pieces in place to be successful again. In our view, Coke's key competitive advantages are the strength and breadth of its global system, its dominance in the onpremise channel that can be leveraged to roll out new brands and explore new categories, and its significant balance sheet flexibility to invest in the business and fill the gaps in the current portfolio."

Mr. Grandet said the company's refranchising, expected to be completed by the end of 2017, allows Coke to be "lighter, stronger, more aligned" and allows it to have the proper focus, which he said is building global brands in a franchise model.

"We've heard the phrase 'total beverage company' a few times from Quincey, and we're encouraged by the more open approach to managing the company as an integrated beverages business, willing to go where the consumer wants with new, more disruptive offerings," he said. "This growth approach, focusing behind five clearly defined category clusters with the nomination of a chief growth officer and an chief innovation officer, should re-invigorate the entire organization and the global bottling network."

Expecting the return of earnings per share growth, he raised his 2018 and 2019 projections to $1.95 (U.S.) and $2.12, respectively, from $1.93 and $2.09.

"After the refranchising, the core Coke business will deliver EPS growth not seen for at least the last five years," said Mr. Grandet. "We expect price/mix will more than compensate for soft CSD [carbonated soft drink] volumes with continued volume growth in select NCB categories, complemented further by strong growth in equity earnings from the bottlers and Monster Beverage investments."

He also increased his target price for the stock to $49 from $44. Consensus is $44.36.

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In other analyst actions:

Allstate Corp. (ALL-N) was downgraded to "neutral" from "outperform" with a target of $81 (U.S.) at Macquarie by analyst Amit Kumar. The analyst average target price is $87.62, according to Bloomberg.

Bank of America Corp. (BAC-N) was raised to "strong buy" from "market outperform" at Vining Sparks by analyst Marty Mosby with a target of $28 (U.S.). The average is $25.64.

Copper Mountain Mining Corp. (CMMC-T) was raised to "speculative buy" from "hold" by TD Securities analyst Craig Hutchison with a target of $1.55, down from $1.60. The average is $1.42.

Savanna Energy Services Corp. (SVY-T) was downgraded to "market perform" from "buy" at Cormark Securities by analyst Jason Zhang. His target fell to $2 from $3.25, versus the average of $2.60.