Thursday’s analyst upgrades and downgrades

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Inside the Market's roundup of some of today's key analyst actions. This file will be updated often during the trading day so check back for new details.

The valuation of Birchcliff Energy Ltd (BIR-T) has "fallen too far" given the company's operational performance, said Macquarie Research analyst Brian Bagnell.

"Birchcliff has done an excellent job in driving down its cash costs and improving its capital efficiencies over the last couple of years, which is necessary in the current low commodity price environment," he said. "Because of service cost reductions and operational efficiencies, Birchcliff expects to deliver higher production on lower capex, which we find encouraging."

On the basis of both its relative valuation and material improvements to its cost structure, Mr. Bagnell upgraded his rating for the company to "outperform" from "neutral."

Birchcliff reported second-quarter funds from operations per share of 30 cents, in line with Mr. Bagnell's estimate and two cents better than consensus projections. Its production of 38.5 millions of barrels of oil equivalent per day missed his 38.4 mboe/d estimate due to pipeline constraints from TransCanada's NGTL system. However, lower cash costs, royalties, operating expenses, G&A and interest all came in lower than expected, leading to the FFOPS result.

"Because of service cost reductions and operational efficiencies, Birchcliff expects to deliver higher production on lower capex, which we find encouraging," said Mr. Bagnell.

He noted shares of Birchcliff have fallen approximately 35 per cent since their early May peak, compared to a 21-per-cent for the S&P/TSX Equal Weight Oil & Gas Index. It trades at just 6.0 times his 2016 estimate enterprise-value-to-debt-adjust-cash-flow ratio on strip pricing versus 8.0 times for its peers.

With a target multiple set at 7.2 times, which he notes is still a discount to the group, Mr. Bagnell maintained his price target of $8.25 (Canadian). The analyst consensus price target is $9.88, according to Thomson Reuters

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It is a good time for investors to step into CAE Inc. (CAE-T, CAE-N) following "decent" first-quarter results and a recent drop in share price, said Desjardins Securities analyst Benoit Poirier.

With a potential return of 17 per cent on his target price, Mr. Poirier upgraded his rating for the stock to "buy" from "hold."

Driven by "solid" civil results to offset "weaker" defence contributions, the flight simulator and training company reported revenue of $557-million for the first quarter of 2016, an increase of 6 per cent year over year and equal to Mr. Poirier's estimate (though below the consensus projection of $571-million). Earnings per share, adjusted for a normalized tax rate, was 18 cents, matching both the analyst's and consensus' estimate.

The company's weaker-than-expected free cash flow from continuing operations of negative $61.2-million (versus a consensus estimate of $8-million) caused a net-debt-to-total-capital (NDTCR) ratio of 37 per cent, up 1 per cent from the previous quarter,

"The lower-than-expected FCF was explained by higher-than-expected investment in working capital due to seasonality," said Mr. Poirier. "Recall that CAE typically makes a large investment in non-cash working capital in 1Q and a smaller investment in 2Q before the item reverses in 3Q and 4Q. Nevertheless, we believe the current NDTCR still reflects a healthy balance sheet, which supports management's decision to increase the quarterly dividend by 7 per cent to $0.075 (from C$0.070)."

CAE also announced a new plan to update its production processes and products, which is likely to lead to the layoff of approximately 350 workers. The plan, expected to be completed by the first quarter of the 2017 fiscal year, is likely to result in $15-20-million in savings or 3-4 cents on EPS per year.

"Overall, we like management's proactive approach toward addressing the tougher competitive landscape and reiterating its focus on improving margins," said Mr. Poirier.

He increased his price target for the shares to $17 (Canadian) from $16.50. The average analyst price target, according to Bloomberg, is $16.68.

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The "strong" second-quarter results from Air Canada (AC-T) are "clear evidence that management is executing," said RBC Dominion Securities analyst Walter Spracklin.

"While low fuel prices are providing for a financial benefit, management is utilizing the proceeds to further lower leverage and structurally transform its fleet and operational network - which we see generating significant shareholder value.," he said.

The quarter featured "significant margin expansion" of 3.5 per cent year over year and "robust" return on invested capital, increasing to 16.2 per cent from 11 per cent in the same period in 2014.

"With each passing quarter, Air Canada continues to progress on its significant transformation - becoming stronger both from an operational and financial basis," said Mr. Spracklin. "Highlights include: (1) positive free cash flow; up over $1 per share in Q2; (2) improving debt leverage, now at a net debt of 2.3x earnings before interest, taxes, depreciation, amortization and restructuring/rent (moving towards peers at 1.4x and management's 2018 target at 2.2x); and (3) return on invested capital at 16.2 per cent compared to 11% a year ago. As these drivers continue to improve, we see operational and financial strength increasing, the trading discount contracting, with significant potential share price appreciation as a result."

He added: "Management noted that the overall demand environment remains robust. And while there are pockets of weakness and areas of higher competitive pressures (Western Canada), there are regional segments which have been coming in better  than expected (U.S. transborder, trans-Atlantic). The key here is that the flexibility afforded by AC's labour agreements and revamped fleet network (including a diverse cabin/rate offerings), allows AC to adjust appropriately across its consolidated network to drive profit maximization."

After adjusting his forecasts to account for the results as well as new fuel prices and Canadian dollar projections, Mr. Spracklin increased his EBITDAR estimate for 2016 to $2.377-billion (from $2.281-billion). His price target for shares rose to $20 (Canadian) from $18. The average analyst target is $19.20.

"At 3.6x [enterprise value]/EBITDAR, the AC shares are trading at a meaningful discount to peers at 4.7x, despite the transformational change that is driving significant earnings growth," said Mr. Spracklin.  "With continued delivery of strong financial performance and positive structural balance sheet/network changes, we see the AC shares as one of the most compelling investment opportunities in our coverage universe today."

Elsewhere, Scotia Capital analyst Turan Quettawala downgraded his rating for the stock to "sector perform" from "sector outperform."

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Following a 57-per-cent dividend cut and removal of its dividend reinvestment plan, AltaCorp Capital analyst Thomas Matthews expects institutional investors to return to Crescent Point Energy Corp. (CPG-T).

Crescent Point reported second-quarter cash flow per share of $1.12, beating both Mr. Matthews's estimate of $1.02 and the consensus of $1.08. Its production of 151,636 barrels of oil equivalent per day also topped the analyst's projection of 149,236 and the consensus of 150,594.

The energy company reduced its monthly dividend to 10 cents per share from 23 cents, and it suspended its share dividend plan (SDP) and dividend reinvestment plan (DRIP).

"The precipitous drop in commodity prices, combined with a lower-for-longer outlook and a hedging program that decreased in 2016, required Crescent Point to address its sustainability and protect the balance sheet," said Mr. Matthews. "Pro-forma the dividend cut we forecast that Crescent Point's payout ratio will be [approximately] 105 per cent in 2016 assuming crude averages $60/bbl WTI. However, if commodity prices were to improve to $70/bbl, we forecast a payout ratio of 89 per cent and a resulting free cash flow generation of $250 million which can be used to accelerate development or fund future acquisitions."

He added: "Although Crescent Point entered the recent downturn with a solid hedge book, the precipitous fall in the commodity price combined with a lower-for-longer outlook resulted in the dividend cut and removal of the DRIP program. In our view, the dividend cut has addressed the three biggest issues the company needed to address in order to regain institutional market support: 1) monthly dilution via the DRIP eating away at per share growth, 2) stretching the balance sheet and using debt to sustain the dividend and 3) payout ratios above that of its peer group. With those three hurdles now addressed, investors can focus on its large inventory (>10 years), economic core areas (Midale and Bakken payout in less than 12 months at current strip), and waterflood initiatives which will improve decline rates and sustainability over the long-term. In addition, an improving commodity price environment will generate free cash flow (ie. $70/bbl WTI generates ~$250 million/year) which Crescent Point can use to fund future acquisitions."

Mr. Matthews maintained his "outperform" rating for the stock while lowering his target price to $30 (Canadian) from $35. The average analyst target is $30.82

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Calling it "Glory Days" for the Canadian grocery markets and seeing "clear sailing" for 2015 and 2016, CIBC World Markets analyst  Perry Caicco upgraded his rating for both Metro Inc. (MRU-T) and Loblaw Companies Ltd. (L-T) to "sector outperformer" from "sector performer."

"So far 2015 has been excellent, and it looks like 2016 will be another great year for grocers," said Mr. Caicco. "The Canadian consumer is holding in and spending up; square footage growth should stay at about the pace of tonnage growth; the Canadian dollar will likely eventually be less of a headwind (and thus USD-driven cost increases should moderate); the Target (TGT-NYSE) space will mostly not be re-deployed for food; and a recovering Ontario adds materially to grocer profitability. As a result, grocers can continue to engineer strong inflation, and more than cover their increased costs."

On Wednesday, Metro reported "strong" third-quarter results with same-store sales growth of 4.3 per cent, beating the analyst's estimate of 3.5 per cent, with inflation rising 3.5 per cent, versus a 3.0-per-cent forecast.

"Gross margins were very strong, reflecting the easiness of pricing, and the shift to fresh," said Mr. Caicco. "Costs ran high, partly due to labour investments. But EBITDA came in at $284-million (adjusted for impairments), higher than our $280-million forecast."

In the wake of the results, he raised his earnings per share forecasts for both 2015 and 2016 to $2.08 and $2.41 from $2.03 and $2.30, respectively.

He also raised his target price for Metro to $42 (Canadian) from $37.50. The average analyst target price is $39.33.

For Loblaw, he raised his target to $89 from $71. The average is $76.50.

"Store closures, few square footage additions, a reduced CAD headwind, a reasonable consumer situation, a calm consolidated market, improved physical plant and enough inflation to cover costs should drive strong earnings results," he said on the sector. "There are some issues, but impacts are likely to be further out."

He added: "The multiples of grocery companies are generally higher than historical averages. However, given the calm conditions of the market and the post-consolidation pricing stability, there could be outsized earnings expansion for the next 18-24 months. There are issues, but they are longer-term in nature: suppliers are in cost-cutting mode, putting vendor funds at risk; Wal- Mart (WMT-NYSE) is becoming a better grocer, as are independents; and Aldi or Lidl will arrive sooner or later."

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In other analyst actions:

Aramark (ARMK-N) was raised to "outperform" from "neutral" at Robert Baird by equity analyst Andrew Wittmann. The 12-month target price is $37 (U.S.) per share.

Alibaba Group Holding Ltd (BABA-N) was downgraded to "neutral" from "overweight" at Atlantic Equities by equity analyst James Cordwell. The 12-month target price is $80 (U.S.) per share.

Boston Pizza Royalties Income Fund (BPF.UN-T) was downgraded to "hold" from "buy" at Laurentian Bank by equity analyst Michael Glen. The 12-month target price is $20 (Canadian) per share.

Community Health Systems Inc (CYH-N) was raised to "outperform" from "market perform" at Raymond James by equity analyst John Ransom. The 12-month target price is $70 (U.S.) per share.

Glacier Media Inc (GVC-T) was downgraded to "sector perform" from "outperform" at RBC Capital by equity analyst Haran Posner. The 12-month target price is C$1.00 per share.

GuestLogix Inc (GXI-T) was downgraded to "market perform" from "speculative buy" at Cormark Securities by equity analyst Hubert Mak. The 12- month target price is $1.25 (Canadian) per share.

Kirkland Lake Gold Inc (KGI-T) was raised to "sector outperform" from "sector perform" at CIBC by equity analyst Cosmos Chiu. The 12-month target price is $7 (Canadian) per share.

Merck & Co Inc (MRK-N) was raised to "outperform" from "market perform" at BMO Capital Markets by equity analyst Alex Arfaei. The target price is $70 (U.S.) per share.

Microsoft Corp (MSFT-Q) was raised to "buy" from "hold" at Stifel by equity analyst Brad Reback. The 12-month target price is $55 (U.S.) per share.

Petrowest Corp (PRW-T) was raised to "speculative buy" from "hold" at Salman Partners by equity analyst Kam Mangat. The 12-month target price is 40 cents (Canadian) per share.

Spectra Energy Partners LP (SEP-N) was raised to "overweight" from "neutral" at JPMorgan by equity analyst Jeremy Tonet. The 6-month target price is $61 (U.S.) per share.

Yahoo! Inc (YHOO-Q) was raised to "outperform" from "market perform" at Bernstein by equity analyst Carlos Kirjner. The target price is $52 (U.S.) per share.

With files from Bloomberg