Wednesday’s analyst upgrades and downgrades

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

Despite delivering third-quarter financial results that fell short of expectations, Pure Technologies Ltd. (PUR-T) is well positioned to deliver a strong 2017, according to Canaccord Genuity analyst Raveel Afzaal.

However, he downgraded the Calgary-based company to "hold" from "buy," citing valuation concerns.

"Given the recent run-up in the share price, we are revising our recommendation," said Mr. Afzaal.

"That said, we continue to view Pure Technologies as an interesting acquisition candidate by Xylem if the latter gains traction with marketing the company's solutions in international markets (which commence in 2018)."

On Tuesday after market close, Pure, a company with technologies for inspection, monitoring and management of critical infrastructure around the world, reported quarterly revenues of $31-million, up 9 per cent year over year but below the Street's estimate of $34-million. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $4.7-million was an increase of 12 per cent, however it missed the projections of both Mr. Afzaal ($5.4-million) and the consensus ($6.4-million).

"The company's year-to-date EBITDA has improved 59 per cent to $15.7-million as it heads into its seasonally strongest fourth quarter," the analyst said. "Pure is competitively positioned to deliver 2017 EBITDA of $23-million (up 53 per cent year over year), break out of the $13-$15-million EBITDA range that it has been stuck in, and show the operational leverage inherent in the business mode."

Mr. Afzaal maintained a target for the stock of $5.50. The average target is currently $6.46.

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Source Energy Services Ltd. (SHLE-T) is well-positioned to remain an industry leader in the Canadian market, said CIBC World Markets analyst Jon Morrison.

He initiated coverage of the stock with an "outperform" rating.

"Although the Canadian completion market faced immense duress over 2015 and 2016, the tides are turning and the industry has shown durable activity and pricing improvements over the first half of 2017 and we believe these tailwinds should continue in second half of 2017 and 2018," said Mr. Morrison. "Further, North American completions continue to rise and we estimate that 2017 WCSB proppant demand will increase more than twofold year over year and eclipse 2014 levels on the back of rising activity and material step-changes in sand intensity per well. And while investors shouldn't glaze over a number of headwinds facing the company and industry as a whole (e.g., increasing competitive threats, growing appetite for cheaper domestic proppant options, etc.), we believe Source is well positioned to overcome these challenges and remain the industry-leading frac sand supplier in Canada."

Mr. Morrison set a price target of $13.50 for the stock. The average is $14.13.

"The company operates in what has been one of the strongest secular oilfield services growth markets over the past decade," the analyst said. "And while investors shouldn't glaze over a number of rising headwinds facing the company and industry as a whole (e.g., increasing competitive threats, growing appetite for cheaper domestic proppant options, etc.), we believe Source is well positioned to overcome these challenges and remain the industry-leading frac sand supplier in Canada. We also believe the near-term likelihood of some of the proposed projects progressing is somewhat overstated."

"Further, North American completion intensity continues to grow and is causing a secular demand growth that is far exceeding the simple cyclical recovery and rising E&P spending profile that is unfolding. More specifically, we estimate that completion intensity in Canada has grown threefold on a per well basis since 2010, and trailing data and E&P messaging around forward completion designs aligns with our internal view that completion intensity is likely to expand by upwards of another 10-15 per cent on a per well basis in H2/17 and 2018. And while it would be naive to believe that Source won't face any increased competition in the coming years, we do not believe many of these Canadian potential projects will materialize and view Source's first-mover advantage and existing logistics platform as providing it with a strong footing to defend against some of this new potential competition."

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Canadian Natural Resources Ltd. (CNQ-T, CNQ-N) has reached "an inflection point" in its ability to generate free cash flow, said BMO Nesbitt Burns analyst Randy Ollenberger following its 2017 Investor Day in Toronto.

"The completion of Phase 3 of the Horizon development marks the end of a journey that began with the sanctioning of the first phase of Horizon in 2005 and the promise of a 'wall of cash,'" he said. "Canadian Natural is now well positioned to generate significant free cash flow for decades from Horizon and the Athabasca Oil Sands Project (AOSP). The company has made it clear that its near-term priority is to reduce debt and bring its balance sheet metrics back into targeted ranges, something that we believe could be achieved by the end of 2018. Once that is achieved we expect the company to return more cash to shareholders through a growing dividend and to invest in its large, diversified portfolio. These organic investment opportunities could support sustained compound annual growth of roughly 4 per cent over the next decade."

Keeping an "outperform" rating for the stock, he raised his target to $54 from $50. Consensus is $48.78.

"We believe the shares remain attractively valued given the company's growing amounts of free cash flow, longer-term organic production growth potential, long low-risk reserve life, and improving return profile," said Mr. Ollenberger. "At current prices the shares are trading at a 2018 estimate enterpriser value/EBITDA multiple of 9.2 times, which is ahead of its North American peer group average of 8.4 times."

Elsewhere, Raymond James analyst Chris Cox hiked his target by a loonie to $50 with an "outperform" rating.

"With the construction of the Phase 3 expansion at Horizon now complete, the company passes an important inflection point in production growth, and more importantly, FCF generation," said Mr. Cox. "In this respect, CNQ's Investor Day largely served to underscore the company's priorities with this robust FCF generation. We continue to view CNQ as a unique risk-reward opportunity within the context of a broader North American E&P environment, with the robust FCF and low sustaining capital nature of its asset base providing good downside support, while still delivering above-average leverage to higher oil prices and with a deep inventory of attractive short-cycle development opportunities that the company can deploy capital toward."

Calling it "a well-oiled free cash flow machine," AltaCorp Capital's Nick Lupick bumped up his target to $50 from $48 and also keeping an "outperform" rating.

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The "new new" Finning International Inc. (FTT-T) "stays on script" with its third-quarter result, said Raymond James analyst Ben Cherniavsky, suggesting its stock has more room to rise.

"Deep value investors who were buying Finning's stock close to book value two years ago may be inclined to cash-in some of their 70-per-cent returns (versus the TSX up 23 per cent over the period)," he said. "While we can't argue with profit-taking or rebalancing, our view is that there is still further upside to Finning's stock from here. The equipment market recovery that we have been highlighting recently is gaining traction while Finning's 'operational excellence' platform continues to bear fruit. The script, in fact, is going very much according to plan, with Finning's earnings tracking very closely to the 'full cycle' projections we outlined [in late September]."

On Tuesday, the Vancouver-based heavy equipment dealer reported quarterly earnings per share of 31 cents, rising 9 cents from the same period a year ago. Adjusted EPS, excluding a premium related to the early redemption of notes, was 35 cents, exceeding Mr. Cherniavsky's 28-cent projection and the consensus of 33 cents. Revenues of $1.55-billion also topped the analyst's expectation by $177-million.

"Gross margins were the only material disappointment, falling 140 basis points year over year to 26.2 per cent on constant mix, versus our 28.7-per-cent estimate," said Mr. Cherniavsky. "Prevailing weakness in price realization was cited (again) as a headwind. This, however, was more than offset by a marked drop in the SG&A/sales ratio to 19.7 per cent, yielding a 3Q17 EBIT margin of 6.6 per cent, ahead of our 6.1-per-cent forecast and 5.4 per cent last year. Notably, Canada's EBIT margin rose to 8.0 per cent for the first time since 3Q14 on higher sales volumes and lower costs."

With the results, the analyst raised his full-year 2017 and 2018 EPS estimates to $1.38 and $1.70, respectively, from $1.30 and $1.60.

Maintaining his "outperform" rating for the stock, he raised his target to $36.25 from $32. Consensus is $33.75.

"We estimate a 2020 target price of $41.75, which implies a 10-per-cent annual return from today's close," he said. "We therefore continue to recommend the purchase of this stock."

Meanwhile, BMO Nesbitt Burns analyst Devin Dodge raised his target for the stock to $37 from $32 with an "outperform" rating.

"We believe Finning continues to have significant runway to improve the financial performance of its business, particularly in Canada and South America," said Mr. Dodge. "To the extent profitability improves, we expect return on capital to shift higher, which should be supportive for valuation."

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The visibility for Snap Inc. (SNAP-N) is "poor" after weaker-than-expected third-quarter results, according to RBC Dominion Securities analyst Mark Mahaney, who downgraded the social media company to "sector perform" from "outperform."

"We initiated with an Outperform when the stock was at $24 (U.S.)," he said. "We have had the wrong call.

"We do believe that SNAP is a very interesting asset with great product innovation. However, we see 3 outstanding issues: 1) Visibility: The revenue shortfall against expectations and management commentary implies that management likely has much less visibility into the business than we thought. 2) Daily Active User Growth: We still haven't seen an inflection in DAU growth despite substantial product innovation (Maps, Search, etc.). Advertisers go where the eyes are and we need to see further user growth. 3) Uncertain Engagement: This quarter we didn't see any detailed metrics highlighting that engagement was improving, with management noting simply that time spent, frequency of use, and Snap creation were all increasing. We believe these issues will take time to resolve and are thus moving our rating to Sector Perform."

Snap reported quarterly revenue growth of 62 per cent year over year to $208-million, well both Mr. Mahaney's projection ($222-million) and the Street's expectation ($236-million). It reported an adjusted EBITDA loss of $179-million, which was better than the estimates of both the analyst ($201-million loss) and the consensus (a $193-million loss).

"80 per cent of ad impressions were delivered programmatically in Q3 (versus 60 per cent last quarter and 0 per cent a year ago)," said Mr. Mahaney. "This caused a rapid decline in CPMs [cost per impressions], which dropped 60 per cent year over year as advertisers moved to unreserved auction. What's more, DAUs came in below expectations as management highlighted its focus to grow users in older demographics, in ROW and amongst Android users. The company will be launching a new better-performing Android version of its app as well as an overall Snap redesign to make it easier to use and attract new users. Management highlighted that this redesign may be disruptive to the business in the short-term."

With the results, Mr. Mahaney lowered his revenue projections for 2017 and 2018 to 4 per cent and 11 per cent, respectively. His EPS estimates moved to losses of $3.01 and $1.19 from losses of $2.83 and $1.02.

He dropped his target for the stock to $15 from $20. The analyst average is $14.06.

Several other analysts lowered their ratings for Snap stock too, including:

- JPMorgan analyst Douglas Anmuth to "underweight" from "neutral" with a target of $10 (from $14).

- UBS analyst Eric J Sheridan to "sell" from "neutral" with a target of $7 (from $12).

- Stifel analyst Scott Devitt to "hold" from "buy" with a target of $13 (from $18).

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Touting its "attractive" valuation and the possibility of re-rating as it executes its plan, Canaccord Genuity analyst Dalton Baretto initiated coverage of Titan Mining Corp. (TI-T) with a "buy" rating.

Mr. Baretto called the Vancouver-based company "a turnkey operation in a safe jurisdiction," noting its Empire States Mines, a fully permitted past-producing operation, in upstate New York has "strong" support for both local and state governments. It is projecting production to start in two months with a "relatively low" capital budget of $10.7-million.

"ESM is levered to the zinc price; zinc is our preferred near-term commodity," said Mr. Baretto. "A significant supply / demand gap has emerged in the zinc market, with visible inventories declining to critical levels, and concentrate supplies tightening significantly. We expect zinc prices to stay at current levels for the next three years, before declining to our long-term forecast of $1.10 per pound. Despite the forecast eventual decline in zinc prices, we believe TI will continue to generate free cash flow at those levels.

"We see upside to the current mine plan. We see upside to the implied reserves in the mine plan (4.2 million tons at 9.2-per-cent Zn). TI has identified 2.5 million tons of previously defined (but un-mined) reserves grading 7.4-per-cent Zn that it is in the process of reclassifying – our estimates use TI's mine plan as a base case, with 75 per cent of this material as incremental production beginning in 2020."

He set a price target of $2 for Titan shares.

"Based on our estimates, TI trades well below the junior base metal producer peers we cover on both a near-term as well as a long-term basis," said Mr. Baretto. "The company currently trades at just 3.4 times 2018 EBITDA and 1.6 times 2019 EBITDA, versus the peer group averages of 7.7 times and 5.6 times, respectively. On a P/NAV basis, TI trades at 0.7 times our NAV estimate, versus the peer group average of 0.8 times. We believe the market views TI as a 'show me' story, particularly given the challenges experienced by the previous operator (more on this later in this document). As such, should TI execute as per its plan, we believe the stock will re-rate, given the lack of investment opportunities in pure-play zinc producer."

Elsewhere, Scotia Capital initiated coverage of the stock with a "sector outperform" rating and $1.80 target.

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In other analyst actions:

TD Securities analyst Brian Morrison downgraded Spin Master Corp. (TOY-T) to "buy" from "action list buy" with a target of $55, up from $54. The average is $54.89.

TD Securities analyst Mario Mendonca downgraded Intact Financial Corp. (IFC-T) to "hold" from "buy" with a target of $115, rising from $110. The average on the Street is $108.88.

National Bank Financial analyst Greg Colman downgraded Pason Systems Inc. (PSI-T) to "sector perform" from "outperform" with a $22 target. The average target is $20.50.

TD Securities analyst Timothy James upgraded Magellan Aerospace Corp. (MAL-T) to "buy" from "hold" and raised his target to $25 from $23. The average target is $24.

JPMorgan analyst Jeffrey J Zekauskas downgraded Scotts Miracle-Gro Co. (SMG-N) to "neutral" from "overweight" and raised his target to $99 (U.S.) from $98. The consensus is $104.67.

Given its pending acquisition by United Technologies Corp. (UTX-N), Credit Suisse analyst Robert M Spingarn downgraded Rockwell Collins Inc. (COL-N) to "neutral" from "outperform" and hiked his target to $140 (U.S.) from $133. The average is $136.08.

Raymond James analyst Christopher Caso upgraded Qualcomm Inc. (QCOM-Q) to "outperform" from "market perform" with a $75 (U.S.) target. The average is $63.31.