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Air Canada jets sit by the gates at Toronto Pearson International Airport in Toronto on April 25 2013. (Fred Lum/The Globe and Mail)
Air Canada jets sit by the gates at Toronto Pearson International Airport in Toronto on April 25 2013. (Fred Lum/The Globe and Mail)

Air Canada shares surge for a second day as analysts upgrade stock Add to ...

Inside the Market’s roundup of some of today’s key analyst actions. This post will be updated with more analyst commentary during the trading day.

Shares in Air Canada are continuing to fly higher, even after surging 25 per cent on Wednesday after a surprisingly strong earnings report, as analysts reveal new price targets that suggest substantial upside still ahead.

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In late afternoon trading, shares are up about 9 per cent on the TSX.

On an adjusted basis, Air Canada earned 41 cents per share in its latest quarter, reversing from a loss of 2 cents a year earlier and much better than analysts’ expectations for a 10-cent profit. It was the airline’s best-ever second-quarter and improvements were seen in several key metrics, including on costs and passenger revenue per available seat mile.

Even with Wednesday’s big share price surge, RBC Dominion Securities analyst Walter Spracklin upgraded his rating on the stock to “outperform” from “sector perform” and raised his price target by $1 to $4.

“Our prior cautious view on Air Canada stemmed from risks associated with emerging and potentially disruptive factors include: the spike in new capacity at both Air Canada and WestJet, roll out issues on new product (e.g. premium economy); and the likelihood of declining yields,” Mr. Spracklin said in a research note.

“Given, however, the encouraging signs in the second quarter, we are switching our focus to the significant opportunity from future re-fleeting at Air Canada,” he said.

While Wednesday’s stock rally was impressive, Mr. Spracklin notes it only brings shares back to where they were seven weeks ago and they are still 30 per cent below recent highs.

CIBC World Markets analyst Kevin Chiang similarly applauded the results, which also showed adjusted net debt falling by $162-million so far this year. He reiterated a “sector outperformer” rating while raising his price target to $4.75 from $4.

“The question now is whether Air Canada can execute on its plan, but with a lot of the pieces in place now (i.e., labour agreements, launch of Rouge, re-fleeting of widebody aircraft), we believe the company is on its way to creating a more sustainable airline through the cycle,” Mr. Chiang said.

Raymond James analyst Ben Cherniavsky upgraded Air Canada to “outperform” from “market perform” and set a new $3.75 price target.

“For as long as industry fundamentals remain favourable, we believe Air Canada's shares are poised to benefit from positive sector sentiment and momentum,” commented Mr. Cherniavsky.

“Finally, we need to give the company credit for its recent progress,” he added. “After watching Air Canada's stock do a full round trip over the 2.5 years that we have been ‘market perform,’ we believe the stock is now poised for a near-term run up.”

Target: The average target among analysts is $4.52, according to Bloomberg data.

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UBS analyst Eric Sheridan upgraded Groupon Inc. to "neutral" from a "sell" rating, liking the "bullish mobile commerce trends" that came out of its earnings report late Wednesday.

"We see mobile as a channel that could produce faster/more stable revenue growth with high margins given the limited need to re-market to customers," he said.

Mr. Sheridan also believes the company's announcement that Eric Lefkofsky would become the permanent CEO, and its authorization of a $300-million share buyback over the next 24 months, provides a new sense of stability.

"Groupon now presents a deep and stable management team to execute on its business transition & global platform turnaround. Net investors will likely have renewed comfort in Groupon’s business stability over the medium term," he said.

Target: Mr. Sheridan raised his price target to $11 (U.S.) from $6. But shares are already up 26 per cent in morning Nasdaq trading to near his new price target.

The average Street target is $11.41.

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Although the growth outlook for Dundee Industrial REIT has clearly softened given weakness in the real estate investment trust market, especially for acquisitions, the correction in its unit price has been overdone, said BMO Nesbitt Burns analyst Heather Kirk.

Year to date, Dundee units are down 25 per cent, more than double the decline in the REIT index.

She reiterated an "outperform" rating, noting the company is trading at a 21 per cent discount to net asset value. While vacancies have been on a rise, an increase in market rents should help offset this and grow revenues, she said.

Target: Ms. Kirk has a $10 price target. The average target is $10.40.

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RBC Dominion Securities analyst Sara O'Brien upgraded Russel Metals Inc. to "sector perform" from "underperform," citing recent market data that suggests improved pricing trends.

"While Russel's second-quarter results were weaker than we had expected, we believe steel pricing is firming and this will likely translate into both higher top line and margin in the second half of fiscal 2013," Ms. O'Brien said.

While Ms. O'Brien doesn't think the stock has a lot of upside potential for the moment, she believes its dividend - which works out to a 6 per cent yield - is safe.

Target: Ms. O'Brien has a price target of $26. The average target is $26.83.

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Canaccord Genuity analyst David Tyerman downgraded New Flyer Industries Inc. to "hold" from "buy," believing the stock's upside potential is already price into shares.

The company reported adjusted EBITDA of $18.1-million in the second quarter, modestly below Street views, but better than the $16.4-million in the year-earlier quarter as the company benefited from higher production rates.

"We think Q2/13 was the low water mark for margins and expect a gradual lift," Mr. Tyerman commented.

Target: Mr. Tyerman raised his price target by 50 cents to $11.75. The average target is $12.45.

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For more analyst actions, breaking investing news and analysis, follow Darcy Keith on Twitter at @ eyeonequities

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