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Wednesday’s analyst upgrades and downgrades

Air Canada planes are pictured at Toronto Pearson International Airport on May 18, 2014.

Matthew Sherwood/The Globe and Mail

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

Shaw Communications Inc.'s (SJR.B-T) $430-million deal to acquire wireless spectrum licenses from Quebecor Inc. (QBR.B-T) is a positive for both stocks, according to Desjardins Securities analyst Maher Yaghi.

On Tuesday, Shaw also announced it was selling its data center subsidiary ViaWest Inc. to Peak 10 Holding Corp. for $2.3-billion, which Mr. Yaghi called a "good multiple."

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"Shaw expects to realize net proceeds of $900-million after the repayment of ViaWest's debt, which the company values at $580-million (U.S.)," he said. "Net proceeds are slightly higher ($100-million Canadian) than we had anticipated. The deal values ViaWest at 15.7 times enterprise value/EBITDA (fiscal 2018 estimate). This valuation is warranted by ViaWest's high expected organic growth rate of 10 per cent per year. ViaWest is able to achieve this kind of growth through its high-end focus and capex investments, which have made the company relatively immune so far to competition from Internet giants in the data centre business.

"This sale is not a surprise, and we had discussed this possibility many times in previous comments. In our view, this sale makes sense for Shaw since synergies with ViaWest were limited given the latter's footprint is mainly in the U.S. This transaction should allow Shaw to redeploy cash where it is needed—wireless. Moreover, this will improve the amount of attention the company can direct to wireless deployment, which is positive given the high amount of operational risk in the wireless venture."

Utilizing funding from that transaction, Shaw also moved to strengthen its Freedom Mobile business through the acquisition of 700 megahertz and 2500 MHz wireless spectrum licences from Quebecor Media Inc.

"We believe Shaw required additional spectrum to continue its wireless deployment—especially in the low-band (700MHz) range—and we view the price tag as reasonable for the company," he said.

"We estimate that the spectrum sold yesterday would have been worth C$509m at the time (2014, 2015). Overall, we believe Shaw paid a reasonable price. The spectrum sale is still subject to regulatory approval, but we believe this is unlikely to be a major hurdle as regulators likely favoured Shaw as an acquirer of the spectrum vs an incumbent."

Mr. Yaghi said Shaw has "greatly improved" its spectrum position in its major Canadian markets, adding the acquisition adds potential to its wireless deployment going forward.

"Shaw currently does not operate its network on either 700MHz or 2,500MHz, which could result in additional equipment expense," he said. "We believe [Tuesday's] transactions neither lengthens nor shortens the timeline for Shaw to be competitive, as the network still has to be improved to level the playing field with incumbents. In fact, we estimate that market dynamics may be similar for the next two years as Shaw catches up to its competitors. To be clear, this deal does provide Shaw with crucial tools to deploy wireless (cash plus spectrum), but our base-case assumptions regarding the company's wireless growth already assumed that Shaw was able to access the needed spectrum. Moreover, we believe this transaction creates a situation where no wireless provider is likely in a rush for the 600MHz auction. Most operators have sufficient spectrum positions to grow for the next few years, and none would want to deploy capital earlier than needed."

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Mr. Yaghi raised his target price for Shaw shares to $30.50 from $30 with a "hold" rating (unchanged). The analyst consensus price target is currently $31.04, according to Thomson Reuters data.

For Quebecor, the deal comes after a June 9 announcement of a $184-million sale of its AWS-1 spectrum assets in Toronto to Rogers Communications Inc. (RCI.B-T)

"We believe the company is now in a much better position to potentially buy back both the outstanding convertible debentures and the CDP [Caisse de dépôt et placement du Québec ] position in QMI by the end of 2018," said Mr. Yaghi. "If both transactions are executed, they could unlock around C$3/share above our previous assumptions. Given the higher probability of executing such transactions, we are increasing our target."

Mr. Yaghi hiked his target for Quebecor to $48 from $46.59 with a "buy" rating. Consensus is $47.79.

Elsewhere, Canaccord Genuity analyst Aravinda Galappatthige raised his target for Shaw shares to $30 from $28 with a "hold" rating.

Mr. Galappatthige said: "y: We view the two transactions announced yesterday as largely positive for Shaw. While these moves were anticipated by the street, the valuations in both cases were in Shaw's favour in our view. The proceeds for ViaWest were $300-500-million ahead of street expectations in our view and the cost of the Quebecor spectrum was arguably at least $100-million-$150-million below what we would have expected Shaw would have had to pay for it. Perhaps more importantly it positions Shaw to aim higher in terms of its wireless ambitions and gives it financial flexibility to navigate through the initial ramp up and potential variances during this time. One of our primary concerns here was that the capital investments contemplated for Freedom's plans appeared to be light and there was always the risk of cost overruns down the road. Now, with low band spectrum, an additional $350-million investment to deploy the 700MHz and further balance sheet room for additional network and operational enhancements, Shaw-Freedom have a clearer path to achieving their wireless objectives."

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It's too soon for investors to "hit the air brakes" on Air Canada (AC-T), according to Canaccord Genuity analyst Doug Taylor.

"While Air Canada shares have had a very strong run, we expect the stock to continue to perform through the fall," he said. "This has historically been a period of strength for AC shares, lining up with the strongest seasonal period for its operations. This year, the fall will also feature the company's investor day (Sept. 19) which will once again train investors' eyes on the long game which this time around we expect to feature a company transitioning from growth to optimization mode. We believe investors should build positions through the summer ahead of this."

In a research note on the airline, Mr. Taylor suggested the company's second-quarter results are likely to follow on the trends noted in Q1, particularly heavy spending on new aircraft as it prepares for the busy summer travel season. He also expects "stronger" Atlantic and Transborder traffic as well as an "increasingly competitive" Pacific market.

"Sentiment continues to build after the recent loyalty program announcement," he said. "Air Canada's recent announcement that it would internalize its loyalty program has driven a re-rate of the stock as it argues for a narrower discount to U.S. peers."

He added: "The September/October period has historically been strong for AC. Our ongoing positive stance on Air Canada shares is supplemented at this point by a history of strong performance in the September/October time frame as the company exits and then reports its strongest seasonal results (the summer Q3)."

Mr. Taylor stressed the importance of the airline's investor day as a likely catalyst for the stock, noting: "While the stock performance around previous analyst days in 2013 and 2015 was mixed, the message during those analyst days was largely around the expansion of Air Canada's operations which preceded a substantial investment in new aircraft and years of well-above-market capacity growth. This, at the time, was associated with higher risk. We expect this investor day will hold a different tone as the company lays out a medium-term plan which reflects the company migrating back to more modest growth plans."

With an unchanged "buy" rating, Mr. Taylor raised his target price for Air Canada shares to $21 from $18. Consensus is $18.73.

"Our revised target equates to 5.4 times forward EBITDAR and 7.3 times forward EPS using our current model. U.S network carrier peers trades at 6.4 times forward EBITDAR and 9.9 times EPS," he said. "We argue that Air Canada's multiple versus U.S. peers can continue to narrow given repatriating the loyalty program should help reduce the profit margin spread vs. peers and as the company lays out plans for further deleveraging (AC is among the higher leveraged North American network carriers at present)."

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CIBC World Markets analyst Prakash Gowd downgraded Medical Facilities Corp. (DR-T) in reaction to the departure of Britt Reynolds as president and chief executive officer.

"We believe the sudden departure of Mr. Reynolds is a negative event, particularly because he was brought on board just over a year ago to revamp the company from a low-growth, sleepy dividend-paying business to a high-growth acquisition machine," said Mr. Gowd.

"No reasons for the departure were given and this will lead to immense trepidation among investors. Potential reasons could range from personal reasons, disagreements with the board, to an all-out firing. Regardless, we believe the M&A activity may be slowed while the company plans for a new CEO, which may take some time. Growth through M&A is an important part of the business model longer term, and delays on this front would be viewed negatively."

On Tuesday, the company announced Jeffrey Lozon, a member of the board, has been appointed interim CEO to replace Mr. Reynolds. Mr. Gowd said Mr. Lozon is "capable" of the position, but he feels future M&A activity is likely to be delayed.

He moved the stock to "neutral" from "outperformer" and lowered his target to $18.25 from $24. Consensus is $19.47.

"The company had previously indicated that 2017 acquisitions could materialize in the second half of the year," the analyst said. "However, in light of this event, management priorities will likely shift to the search for a new CEO and any ongoing acquisition discussions involving Mr. Reynolds should conceivably be placed on the back burner."

Meanwhile, Industrial Alliance analyst Neil Linsdell dropped his target by a loonie to $20 with a "buy" rating.

"While the sudden departure of the CEO is surprising and creates uncertainty for investors as the Company works through a transition period, we are confident that the hospitals and centres in the MFC network will continue to operate as before and the new team will continue to proceed with the strategic plan," said Mr. Linsdell. "Overall, our outlook remains positive."

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Acumen Capital analyst Brian Pow lowered his target price for shares of MTY Food Group Inc. (MTY-T) in the wake of its recent acquisition spree.

"We highlight management's continued focus on the acquisition of franchised (or franchisable) restaurant concepts at reasonable metrics," he said.

"Management noted that M&A is inherently unpredictable which makes it a challenge to predict the type of concepts and timing of acquisitions."

On Monday, the Montreal-based company revealed the acquisition of 80 per cent of the assets of Houston Avenue Bar & Grill and Industria Pizzeria + Bar for $13-million. It gains 12 current franchised restaurants (nine and three, respectively) as well as three locations under construction with total trailing 12-month sales of $38-million.

Three days earlier, MTY announced the completion of its $8-million acquisition of The Works Gourmet Burger Bistro, which includes 23 franchised and 4 corporate restaurants as well as a location on construction with sales of $35-million over the last year.

Citing headwinds faced from a competitive acquisition environment, increased minimum wage and "the potential for continued weakness in the Western Canadian market," Mr. Pow dropped his target price to $53.50 from $57.50. The analyst average is $51.12, according to Bloomberg data.

He maintained a "buy" rating for the stock.

"The acquisition of these full-service, casual dining concepts moves MTY a little bit outside of the Company's traditional quick service realm," said Mr. Pow.

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Starbucks Corp. (SBUX-Q) is likely to disappoint the Street with its second-half comparable same-store sales growth, according to Wedbush analyst Nick Setyan.

Noting the company's stock is up over 12 per cent since mid-March, versus a 3.2-per-cent rise for the S&P 500, Mr. Setyan said that outperformance is likely based on expectation of improved U.S. comps on the heels of improving trends in March and April.

Based on recent U.S. store surveys, the analyst, however, expects third-quarter Americans comps to fall in line or below the consensus expectation of 5.3 per cent, which he said does not provide sufficient upside to margins.

"Checks indicate U.S. comp acceleration, but acceleration is in line to slightly below expectations," he said.

Accordingly, citing valuation, he downgraded the stock to "neutral" from "outperform," maintaining a $65 (U.S.) target price. The analyst average target is $67, according to Bloomberg data.

"We believe Starbucks has the highest visibility into sustained annual mid-single digit comp growth and mid-to-high-teens EPS growth within the publicly traded restaurant universe," said Mr. Setyan. "Nevertheless, we believe these factors are fully incorporated in current valuation."

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A pair of analysts  initiated coverage of MedReleaf Corp. (LEAF-T) with "buy" ratings on Wednesday.

Dundee Securities' Daniel Pearlstein set a target price of $13 for the Markham-based company, while Clarus Securities' Noel Atkinson gave the stock a $14 target.

"MedReleaf Corporation is one of the largest licensed producers of medical cannabis in Canada," said Mr. Atkinson. "The company enjoys premium pricing for its award-winning strains, has reported the lowest quarterly cash production cost per gram of any indoor producer in the sector and has a solid track record of consistent production at scale. We believe it will be one of the winners as the industry evolves to a wholesale business model over the next 12-18 months."

The analyst average target price is $12.67.

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In other analyst actions:

TD Securities analyst Mario Mendonca upgraded Industrial Alliance Insurance & Financial Services Inc. (IAG-T) to "buy" from "hold" with a $61 target. The consensus average is $60, according to Bloomberg data.

Oppenheimer & Co analyst Brian Bittner upgraded Restaurant Brands International Inc. (QSR-T) to "outperform" from "market perform" without a specified target. The consensus target is $82.90.

Wells Fargo Securities analyst Timothy Conder downgraded BRP Inc. (DOO-T) to "market perform" from "outperform" with an unchanged target of $41. The average is $41.23.

Cormark Securities analyst Kyle McPhee initiated coverage of Imvescor Restaurant Group Inc. (IRG-T) with a "buy" rating and $4.45 target. The consensus is $4.29.

Laurentian Bank analyst Ewa Kiwa initiated coverage of PRO Real Estate Investment Trust (PRV.UN-X) with a "buy" rating and $2.50 target. Consensus is $2.48.

Scotia Capital analyst Cameron Bean upgraded Delphi Energy Corp. (DEE-T) to "sector perform" from "sector underperform" with a target of $1.65, up from $1.20. The average is $2.22.

National Bank Financial analyst Brian Milne initiated coverage of Petrus Resources Ltd. (PRQ-T) with an "outperform" rating and $3 target. The average is $3.71.

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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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