Analysts cut targets on SNC-Lavalin, but many still insist it’s a buy

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

Everywhere you look today are analysts cutting price targets on SNC-Lavalin Group Inc., which was battered on the stock market Friday after releasing disappointing earnings and guidance.

But many analysts have also reaffirmed their buy ratings, believing that long-term investors will still be rewarded.

SNC-Lavalin reported earnings per share of 63 cents, far missing the consensus estimate of 92 cents, with much of the shortfall resulting from cost overruns at two projects. It projected earnings per share of $2.25 to $2.35 in 2013, well below the average Street forecast of $2.84.

"We maintain our outperform rating on the stock, notwithstanding last week's disappointing outcome, as we believe SNC will find a way to surface significant value from its Infrastructure Concession Investments in the near-term," commented Raymond James analyst Frederic Bastien.

Canaccord Genuity analyst Yuri Lynk said SNC-Lavalin still has an attractive reward-to-risk profile, especially given his expectations that margins will improve in coming years. A key catalyst for further stock gains, he said, is the company's annual general meeting in May, when CEO Bob Card is expected to unveil his strategic plan going forward.

Desjardins Securities analyst Pierre Lacroix noted the company's work backlog continues to grow. "We believe there are solid reasons to buy the shares on weakness," including Mr. Card's upcoming strategic plan and the monetization of the infrastructure investments, he said.

RBC Dominion Securities analyst Sara O'Brien said she expects the stock to stay range-bound until the annual meeting, as investors remain focused on the lower-than-expected engineering and construction earnings for fiscal 2013. She rates the stock as "sector perform" - the equivalent of a hold - but also sees upside in the longer term.

SNC-Lavalin is continuing an internal investigation into a host of issues that have plagued it for a year, many involving allegations of bribery and missing money. Shares on Friday fell about 6 per cent and were down a further 0.6 per cent in afternoon trading today.

Target: Raymond James cut its target to $49 from $52. Canaccord Genuity cut its target to $53 from $55. Desjardins cut its target to $52 from $54. RBC cut its target to $48 from $50. The average 12-month price target among analysts is $49.25, according to Bloomberg data.

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Google Inc. shares are up about 30 per cent since mid-November, a rally that RBC Dominion Securities analyst Mark Mahaney believes is "justified and sustainable."

Though the stock is now trading at 18 times his fiscal year 2013 earnings per share estimate, he thinks that valuation is reasonable given his expectations for 17 per cent compounded annual earnings growth rate between 2013 and 2015.

Mr. Mahaney argues that skyrocketing use of mobile devices will aid Google's search growth, rather than slow it down. Its YouTube division will benefit from the video channel attracting TV advertising budgets. And he believes the company is well positioned to benefit from improving market trends in Europe and emerging markets.

"We still see significant moats around Google's core search and display advertising business and have confidence in the execution and innovation track record of the management team," he said.

Target: Mr. Mahaney raised his price target to $950 (U.S.) from $840 and reiterated his "outperform" rating. The average target on the Street is $861.34.

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CIBC World Markets analyst Paul Holden is cutting his earnings estimates for Sprott Inc. after the company announced a new equity issuance that is expected to help fund the launch of a new offshore macro hedge fund.

He now expects 2013 earnings per share of 18 cents, down from 28 cents. The revised forecast partly reflects the equity dilution that will result from Sprott issuing a $25-million private placement. But the action also reflects a decline in Sprott's assets under management, with many of its funds having lost 10 per cent to 20 per cent year to date.

"Recent performance of Sprott's other funds has clearly detracted from the ability to raise capital," Mr. Holden said in a note. "A new performance track record is required."

Target: Mr. Holden cut his price target to $3.75 from $4.25 and reiterated a "sector performer" rating. The average Street target is $4.31.

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Raymond James analyst Andrew Bradford downgraded Savanna Energy Services Corp. to "outperform" from "strong buy" after a surge in drilling costs weakened the company's profitability in the fourth quarter.

He suspects that the higher costs may be tied to labour turnover, which can rise when customers rapidly accelerate or decelerate their drilling programs. "We have noticed that Savanna's customer base has a larger representation of smaller intermediate and junior explorers and producers, which can accentuate these month-to-month activity swings," he said.

Target: Mr. Bradford cut his price target to $9 from $9.75. The average analyst target is $8.80.

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About 65 million new units of H&R Real Estate Investment Trust are about to hit the market worth $1.5-billion, which has likely hurt the REIT's performance of late. But RBC Dominion Securities analyst Neil Downey believes investors need not worry. "While it is difficult to predict whether the pressure may actually intensify once the deal settles, we generally believe this situation is already providing a good entry point for the units," he said.

"We continue to rate H&R REIT's units outperform, and we believe they offer investors an attractive combination of current yield, income growth, and long-term capital appreciation through net asset value/unit growth."

Target: Mr. Downey cut his target by $1 to $26, which matches the average Street target.

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