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Toilet paper on a conveyer belt at Cascades Tissue Group plant in Candiac, Queb.The Globe and Mail

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

Nordstrom Inc. (JWN-N) is the "best house in the neighbourhood," according to RBC Dominion Securities analyst Brian Tunick.

However, he said the U.S. retailer is not immune to the headwinds facing the retail sector, calling its first-quarter financial results "disappointing" despite an earnings beat.

"The upside from commendable SG&A management wasn't enough to offset disappointing off-price results (both comps slowed and merch margins declined)," he said. "As we continue to view JWN as the best-positioned department store (with its best-in-class ecommerce, off-price, Canada), we believe the stock should trade at a healthy premium to its peers, as it already does."

On May 11, the fashion specialty retailer, based in Seattle, reported earnings per share of 37 cents and a comparable same-store sales decline of 0.8 per cent, both ahead of Mr. Tunick's projections of 29 cents and a 0.9-per-cent drop.

"Despite the beat versus published estimates, the results were disappointing given: 1) elevated expectations for JWN to deliver more meaningful upside with its lower exposure to B/C mall traffic and later tax refunds as well as bigger gross margin opportunity; 2) slowdown in off price business in Q1 (weakest combined comp in two years); and 3) lack of meaningful outperformance vs. rest of the department stores, all of which reported downbeat earnings (once again reiterating the secular bear case against the group.)," he said.

Mr. Tunick added: "We are somewhat discouraged by JWN's flat gross margins (versus our model for a 120 basis point increase), particularly against last year's 160-bps decline and elevated expectations (in Q4 recaptured 60 per cent of the prior-year declines). Although it is encouraging to hear that full-price merch margins actually improved (with full-price mix increasing 100bps), off-price gross margins declined as the company took additional markdowns to move slower-moving items (coats, boots, etc.). All in, we believe the increasing full-price selling should start to help gross margins going forward (inventory up 1.6 per cent versus sales up 3 per cent), while off-price markdowns are not expected to be ongoing. That said, given mix shifts in the business, we are modeling flat gross margins in FY17."

Though he said he's encouraged that "cost-rationalization initiatives recently put in place are starting to bear fruit," Mr. Tunick expects further moves toward "more prudent" expense management moving forward.

Maintaining a "sector perform" rating, he lowered his target price for the stock to $45 (U.S.) from $47. The analyst consensus price target is $47.17, according to Thomson Reuters data.

"While we are encouraged by JWN's initiatives and investments in store selling, differentiated product, e-commerce, and offprice, we expect recent weakness in top-line trends to persist while continuing investment cycle prevents the earnings flowthrough and stretching balance sheet does not leave a lot of room for shareholder cash returns via buybacks," he said. "Although historically JWN was viewed as in an enviable position compared to department store peers with its sizeable but balanced presence in full-price, off-price, brick & mortar, and online channels as well as innovative product and store selling, deteriorating top-line trends of the past few quarters started to put into question its immunity to secular headwinds. Given our view that the competitive landscape will continue to intensify at all channels, we await signs that JWN's growth initiatives/investments will be able to offset secular challenges and enable profitable share gains in the near term."

In a separate research note, Mr. Tunick also dropped his target for Urban Outfitters Inc. (URBN-Q) by a dollar to $21 (U.S.) with a "sector perform" rating. Consensus is $27.05.

"URBN's weaker 1Q17 results and disappointing 2Q17 comp/ gross margin outlook are likely to sustain buyside skepticism about the company's ability to inflect 2H17 comps and gross margins given persistent store traffic pressures, particularly with two of the three brands comping negatively," the analyst said. "At 14-times our updated 2017 EPS, we remain on the sides given the current lack of top and bottom line visibility."

Mr. Tunick lowered his target price for shares of TJX Companies Inc. (TJX-N) to $79 (U.S.) from $82 with an "outperform" rating (unchanged). Consensus is $85.04.

"Given how well-liked the stock was, TJX's Q1 results were disappointing, as comps slowed down from the recent run rate and the outperformance vs. the department store group was lower than in the past few quarters," he said. "That said, we expect TJX to continue to be a share gainer as it invests in future growth drivers, which, combined with shareholder cash returns, provides one of the best opportunities in retail."

Meanwhile, Morgan Stanley analyst Kimberly Greenberger upgraded TJX to "overweight" from "equal-weight" with a target of $86.

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Canaccord Genuity analyst Raveel Afzaal upgraded Mosaic Capital Corp. (M-X) in response to its recent acquisition "spree."

Moving the Calgary-based investment company to "buy" from "hold," Mr. Afzaal also expressed increased confidence in his revised forecast following its first-quarter conference call.

The analyst said Mosaic's pace of acquisitions is "ramping up" as it has acquired majority interest in three businesses since the second half of 2016 with a total cost of $72-million. He added management has a "robust" acquisition pipeline and an estimated $30-million in capital available for further moves.

"In Q3/16, Mosaic acquired Mackow [Industries] which is a Winnipeg-based company that provides metal parts to transit buses and motor coaches, and is expanding into U.S.," he said. "Bassi [Construction Ltd.] was acquired in Q1/17 and provides industrial and commercial renovation and construction services out of Ottawa. In May 2017, Mosaic completed the acquisition of Cedar Infrastructure for $18.3-million. This Ontario-based company provides municipal casting and related products to road, water and sewer infrastructure industry."

On Monday, Mosaic reported quarterly revenues of $58-million, meeting the expectations of the Street and Mr. Afzaal. Adjusted earnings before interest, taxes, depreciation and amortization of $5.3-million fell short of the consensus projection ($6.3-million) and the analyst ($6.6-million).

"On the Q1/17 conference call, we estimate management's commentary on growth targets implied EBITDA guidance of $35-million for 2017," said Mr. Afzaal. "Furthermore, we have reduced our EBITDA estimate by $1.7-million for the Infrastructure portfolio with an uncertain outlook, which along with seasonality, resulted in Q1/17 EBITDA of $5.3-million coming in below our and consensus estimates of $6.3-million and $6.6-million, respectively. This helps increase our confidence in our new forecasts. Our 2017 EBITDA forecast of $33-million is conservative relative to management's guidance, and has upside potential from new acquisitions as well as improvement in the Western Canadian economy which should lift the performance of businesses with exposure to this region."

Mr. Afzaal raised his target price for Mosaic shares to $10.75 from $10. Consensus is $10.58.

"The increase is primarily due to the acquisition of Cedar in May partially offset by a reduced EBITDA forecast for certain businesses in the Infrastructure division," he said. "This results in a $1.30 per share increase. However, net debt was $5-million higher than our forecast which results in a 50 cents per share decline to our target. The net impact is our target increasing to $10.75 per share. (28-per-cent implied return). The low number of shares outstanding makes our target price very sensitive to estimate changes. We continue to derive our target using 10.5 times enterprise value/2017 EBITDA versus its historical EV/LTM [last 12 month] multiple of 11.0 times."

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BMO Nesbitt Burns analyst Wayne Hood raised his target price for shares of Home Depot Inc. (HD-N), expressing confidence in the retailer's near-term outlook following better-than-expected first quarter earnings.

On Tuesday, the Atlanta-based company reported earnings per share of $1.67 and "strong" consolidated same-store sales growth of 5.5 per cent, both exceeding Mr. Hood's projections ($1.60 and 4.1 per cent).

"Strong 5.5 per cent (U.S. 6.0 per cent) 1Q17 comps against a difficult comparison (6.5 per cent last year) lead us to believe 2Q17 comps could grow slightly slower than 1Q17 before accelerating in 2H17 against an easy comparison," said Mr. Hood.

Mr. Hood thinks the company's 2-cent raised in 2017 EPS guidance (to $7.15) was conservative, and noted its sales and SSS guidance (4.6 per cent) was maintained.

"Expenses for the year are now expected to grow at 39 per cent of sales growth rate, down from the 49-per-cent guide on the back of strong 1Q expense management," he said. "The cadence of expense growth is guided to be higher in 2Q17 and lower in 2H17. Management reiterated GM rate is still expected to contract 15 basis points this year on higher inflation in lumber and the estimated tax rate should be 36.3 per cent even after lower taxes in 1Q17 on new stock-based compensation accounting methods."

Mr. Hood raised his 2017 and 2018 EPS projections to $7.23 and $8.03, respectively, from $7.17 and $7.92.

Maintaining his "outperform" rating, his target rose to $176 from $155. Consensus is $165.43.

"We continue to see HD as the best leveraged to late-stage growth in the $550-billion addressable market and see further opportunities for it to grow market share and expand operating margin rate while throwing off significant free cash flow to repurchase common stock and grow the dividend," he said.

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Despite trimming his earnings per share expectations for Cascades Inc. (CAS-T), CIBC World Markets analyst Hamir Patel said it's still his "top pick in the trees."

On May 10, the Quebec-based company reported quarterly adjusted earnings before interest, taxes, depreciation and amortization of $75-million, missing Mr. Patel's Street-low forecast of $78-million and the consensus of $85-million, due largely to higher tissue and corporate costs.

"When we double-upgraded Cascades to Outperformer (from Underperformer) on Aug. 28 (on the back of IP leading a $50 U.S. per  ton November price hike), CAS was trading at $9.80 per share," he said. "Fast forward nine months, the NA containerboard industry has implemented two price hikes, Cascades has consolidated Greenpac, an index addition is around the corner (CAS just needs to trade above $16.10 over May 29-31) and conditions are ripe for another price hike in 2018 (which could propel CAS closer to our upside scenario of $25 per share). Our $19 price target (base case) and estimates do not yet factor in a third price hike. While Canadian lumber stocks have staged an impressive recovery over the last 12 months, their share price gains pale in comparison to Cascades (up 76 per cent for CAS versus 32 per cent /37 per cent for CFP/WFT and up 14 per cent for TSX Composite), and whereas the risks to our pricing forecast on containerboard skew to the upside, we remain concerned that lumber prices are set to soften (and deflate some lumber equities along the way)."

Mr. Patel dropped his 2017 EPS projection by 2 cents to $1.20 to account for corporate costs. His 2018 and 2018 estimates moved to $1.68 and $2.08, respectively, from $1.74 and $2.15.

He maintained an "outperformer" rating and $19 target. Consensus is $17.75.

"Over the cycle, we expect Cascades businesses to generally trade at a discount to segment peers in the United States given the company's recycled asset base, weighting to Canada and limited shareholder liquidity."

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Calling the latest data from its Centera self-expanding transcatheter heart valve "scintillating," Canaccord Genuity analyst Jason Mills raised his target price for Edwards Lifesciences Corp. (EW-N), reiterating the stock as his top large-cap med-tech pick and recommended investors add to their positions.

On Wednesday morning at the EuroPCR 2017 conference in Paris, Edwards announced the device had demonstrated "excellent" clinical outcomes for transcatheter aortic valve replacement (TAVR) patients.

"We increase our forward 2018-2021 estimated TAVR estimates given the robustness of Centera CE Mark study and SAPIEN 3 SOURCE registry data presented at PCR," said Mr. Mills. "We are also encouraged by progress in EW's transcatheter mitral program – namely PASCAL transcatheter repair system which, coupled with the firm's other shots on goal (i.e. CardioBand, CardiAQ TMVR), represents a formidable, albeit long-term growth engine for the company, in our estimation. We see upside to our higher-than-consensus TAVR and EPS estimates for 2017 and 2018 vis- à-vis incremental operating leverage potential not factored into our current, published earnings targets."

With an increased 2018 earnings per share projection ($4.25 U.S. from $4.17), Mr. Mills increased his target to $150 from $140 with a "buy" rating. Consensus is $119.36.

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RBC Dominion Securities analyst Tyler Broda raised his rating for Rio Tinto plc (RIO-L) to "top pick" from "outperform."

"Following the recent pullback, Rio Tinto is screening as inexpensive as it's been over the past 5 years," he said. "We believe the market is taking too negative a view on the medium-term iron ore market, and this is obscuring a growing, low cost, high free cash flow story."

His target remains 4,400 GBp. Consensus is 3804.68

"We continue to like the space and see substantial upside in both Glencore and Anglo American; however, we see most potential for RIO in the near term," the analyst said.

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In other analyst actions:

Cormark Securities Inc. analyst Garett Ursu upgraded Storm Resources Ltd. (SRX-X) to "buy" from "market perform" and raised his target to $6.25 from $5.75. The analyst average target is $5.95, according to Bloomberg data.

Veritas Investment Research Co analyst Nigel D'Souza downgraded ECN Capital Corp. (ECN-T) to "sell" from "buy" and dropped his target by a dime to $3.60. The average is $4.57.

National Bank Financial analyst Rupert Merer downgraded 5N Plus Inc. (VNP-T) to "sector perform" from "outperform" and bumped his target up to $3.40 from $2.75. The average is $3.30.

UBS analyst Michael Lasser downgraded Dick's Sporting Goods Inc. (DKS-N) to "neutral" from "buy" and lowered his target to $45 (U.S.) from $55. The average is $53.42.

Macquarie analyst Timothy Nollen downgraded Walt Disney Co. (DIS-N) to "neutral" from "outperform." His target fell to $105 (U.S.) from $125. The average is $118.93.

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