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 during the trading day.

Canadian banks have dramatically outperformed Canadian life insurance stocks this year (up 17 per cent versus a rise of 3 per cent), but Canaccord Genuity analyst Gabriel Dechaine is sticking with his call that investors should favour the lifecos.

"Our bias rests largely on the relative growth outlooks for the two groups (i.e. we forecast 14 per cent 2015 earnings per share growth for the lifecos vs. 7 per cent for the banks) and a shift in the regulatory climate that we believe has become more favourable for the lifecos," Mr. Dechaine said in a research note today.

He first published a report in early July that detailed his preference for life insurance stocks over banks. Since then, he believes the regulatory climate has become ever more challenging for the banks, including talk of more regulation tightening at Canadian Mortgage and Housing Corp. and potential reductions to interchange fees. "Other factors that support our stance towards the lifecos include their relatively higher U.S. dollar exposure and the relative drivers of earnings growth for each sector.  On the latter point, lifecos have benefited from strong Wealth earnings growth, whereas the banks are challenged by a slowdown in Canadian Personal & Commercial earnings (which we believe could decelerate further in 2015)."

He says that valuation is another factor supporting his call to prefer life insurance stocks. "Both the banks and lifecos are currently trading at about 12x forward earnings per share. Considering the stronger growth outlook for the lifecos, as well as the other fundamental factors we highlight, we believe lifeco valuation is reasonable (whereas it appears full for the banks, in our view).  Additionally, we highlight that the lifecos have a higher proportion of excess capital as a percentage of their current market capitalization (6 per cent on average) than the banks do (1 per cent on average)."

Mr. Dechaine's top pick among life insurers is Manulife Financial Corp., due to its attractive earnings per share growth, "reasonable" relative valuation at 11.9 times forward earnings per share, attractive dividend growth potential, and leverage it gained from the Standard Life acquisition. His price target on Manulife is $25 (Canadian), just above the Street average of $24.86.

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Influential technology analyst Mark S. Mahaney of RBC Dominion Securities has downgraded Yahoo Inc., the owner of a large stake in Chinese e-commerce site Alibaba, which soared in its initial public offering last week.

Now that the Alibaba IPO is behind it, he doesn't see much reason to own Yahoo shares - which actually fell last week as Alibaba stock soared in its public debut. He lowered his rating to "sector perform" from "outperform."

"Over the past year and a half, shares of Yahoo have dramatically outperformed the market – up 97 per cent vs. the S&P 500 up 40 per cent (since 1/1/13)," Mr. Mahaney said in a research note. "Given the anticipation of the Alibaba IPO, we believe this outperformance has been justified. However, with the BABA catalyst behind us, we see upside as limited from here and now see more compelling risk-reward elsewhere in the large cap Internet sector – principally, Facebook, Amazon, Priceline, Google and Netflix."

"There are several factors influencing our YHOO downgrade, namely: 1) the passing of the BABA IPO catalyst; 2) the large run in YHOO shares since 2013; 3) the more compelling risk-reward elsewhere in the large-cap 'Net space; & 4) the absence of a turnaround in YHOO's core fundamentals (primarily in the key display advertising segment, where results have showed year/year declines for five of the last six quarters). At the margin we are also increasingly concerned that the strong growth in social media advertising platforms, the rapid rise of programmatic ad buying, and the consistent expansion of the Google ecosystem are creating intensified headwinds for YHOO."

To become more bullish on Yahoo again, Mr. Mahaney said he would need to see clear signs of improvement in the company's display advertising segment and evidence that it could generate material tax efficiencies if it sells its publicly-traded Asia assets.

He maintained a $44 (U.S.) price target. The analyst consensus price target over the next year is $40.97, according to Thomson Reuters data.

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CIBC World Markets analyst Todd Coupland sees potential in BlackBerry Ltd.'s new "Passport" device, but says the company is still on his "no fly list."

"In our view, Blackberry's turnaround has a long way to go and it is too early to state that this effort will stabilize device shipments and more importantly, service revenues," he says.

Mr. Coupland describes the Passport's hardware specs as "respectable, targeted and differentiated, which should help to entice some in enterprise segments such as banking, governments and the medical community".

The screen makes for easy reading, document editing and all forms of medical imaging, he adds, though one-handed typing is more difficult.

Other features, including a 13 MP camera, 2.26 GHz quad-core Snapdragon 800, 3GB RAM, 32GB storage, a 30-hour battery life and a $600 (U.S.) price tag "put the device in a stronger price to spec position," he says.

Mr. Coupland maintains his "sector underperformer" rating and price target of $6.25 (U.S.).

Elsewhere today, BGC Partners analyst Colin Gillis downgraded BlackBerry to "hold," believing hardware sales are likely to remain pressured by channel inventories. He predicts BlackBerry this week will report a quarterly loss of 11 cents, better than the consensus estimate for a loss of 15 cents. He argues, however, that BlackBerry's cost-cutting efforts have been priced in.

"We see that the stock market has absorbed the fact that the company has reduced its cost structure to preserve a cash floor of approximately $2.5-billion, but we expect the revenue declines to continue in the current quarter," he says.

Mr. Gillis has a price target of $11 (U.S.).

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Stantec Inc.'s planned acquisition of Montreal-based Dessau is widely being praised as positive for the company, but an expensive stock price has resulted in a downgrade from TD Securities Inc. analyst Michael Tupholme.

On the positive side, Mr. Tupholme notes that the deal is expected to meaningfully bolster Stantec's presence in Quebec. "We note that Quebec represents the one key region within Canada where Stantec currently has essentially no presence (only 70 employees)," he says. "Following the transaction, Stantec will have operations in every Canadian province and territory (and increases Stantec's Canadian employee base by about 16 per cent to 9,300 and its total headcount by about 9 per cent to 15,300)."

However, "with the stock trading at a historically high valuation on what we see as revenue growth and margin estimates that have little room to move higher, we see insufficient upside to our target to support a buy rating."

Mr. Tupholme downgraded Stantec to "hold" from "buy" and raised his target price to $83 (Canadian) from $81. The analyst consensus price target is $76.32, according to Thomson Reuters.

Raymond James analyst Ben Cherniavsky is more bullish on Stantec. "Although we harbour some near-term concerns about Stantec's decelerating organic growth rate (particularly in the resource markets) and its elevated valuation, the company boasts a pristine track record of execution and a very strong balance sheet that we believe will translate into continued long-term value creation for shareholders," he says.

He maintained an "outperform" rating and boosted his target price to $86 from $79.

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The surprise resignation of Sears Canada Inc.'s president and CEO does not bode well for the retailer, says Desjardins Securities analyst Keith Howlett.

Douglas Campbell, who took the top spot a year ago, is leaving to return to the U.S. to tend to personal family issues. He plans to continue as CEO until Sears Canada names a replacement, although no later than Jan 1, 2015.

It was also announced that the company's board will "review the appropriate level of cash for the company and any potential return of capital to shareholders, based on the performance of the company during the holiday season and the prospects for the business going forward". Mr. Howlett's interpretation is that there will be no declaration of a special dividend until the release of fourth-quarter 2014 results. Sears Canada has effectively no debt.

"Sears Holdings continues to explore strategic alternatives for its 51 per cent interest in Sears Canada," he notes. "Our interpretation is that the process is taking more time than had been expected by Sears Holdings. Last week, the controlling shareholder of Sears Holdings advanced $400-million (U.S.) to it, secured by 25 properties in the US. Sears Holdings had set an objective of raising $1-billion of cash in fiscal year 2014; our interpretation is that Sears Canada had been one potential source of cash, via special dividends and/or sale."

Mr. Howlett adds that both Sears Canada and Target Canada are posting substantial operating losses, and that the longevity of one may potentially be prolonged by the demise of the other.

"Long-term prospects for both of them appear to be very challenging. Target Canada, however, has a modern store network and is growing total sales, albeit from a low base. Sears Canada, on the other hand, has a shrinking store network which is in need of reinvestment, in our view, and is experiencing declining total sales."

Mr. Howlett maintains his "hold–speculative" rating and $15 (Canadian) price target. The analyst consensus price target is $16, according to Thomson Reuters.

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In other analyst actions:

HSBC upgraded Barrick Gold to "overweight" from "neutral" and raised its price target to $18.50 (U.S.).

Cormark Securities upgraded Sherritt International to "buy" from "market perform" with a price target of $5 (Canadian).

Raymond James downgraded Finning International to "market perform" from "outperform" and reiterated a $34.50 (Canadian) price target.

Raymond James upgraded Fortuna Silver Mines to "strong buy" from "outperform" and maintained a $6.50 (Canadian) price target.

RBC Dominion Securities downgraded KB Home to "sector perform" from "outperform" with a price target of $17 (U.S.), down from $20.

Argus upgraded Northrop Grumman to "buy" from "hold" with a target price of $145 (U.S.).

Cormark Securities initiated coverage on DataWind with a "speculative buy" rating and 12-month target price of $6.50 (Canadian).

Mackie Research Capital initiated coverage on Intertain Group with a "buy" rating and 12-month target price of $14 (Canadian).