Buy BCE, Rogers now while they’re down, analyst says in upgrade

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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.

Buying opportunities have emerged in the Canadian telecommunications sector, says Canaccord Genuity analyst Dvai Ghose, who believes the recent pullback in share prices has been overdone.

He upgraded both BCE Inc. and Rogers Communications Inc. to "buy" from "hold," while reiterating Telus Corp. as a "top pick" – Canaccord's highest rating for a stock.

Part of the attraction to telecom stocks is that they pay out sizeable dividends. But the recent rise in long-term U.S. and Canadian bond yields have made them relatively less attractive, given that fixed income is now paying out more. The stocks are down between 8 per cent to 14 per cent since hitting 52-week highs earlier this spring.

But Mr. Ghose points out that while rising interest rates are generally negative for yield-driven telecom stocks, they also reduce pension deficits. "Beneficiaries, in order of their magnitude, are 1) Manitoba Telecom; 2) Bell Aliant; and 3) Bell Canada, who have large pension solvency deficits relative to their market cap," he pointed out in a research note today. He also does not believe interest rates will rise dramatically from current levels; economies just aren't strong enough.

Another concern for telecom investors was the CRTC's recent decision to essentially ban three-year wireless contracts, given that it could lower margins and spur customers to switch carriers at a faster clip. Again, Mr. Ghose sees a silver lining: carriers could reduce their subsidies on handsets to consumers in response to the new regulatory changes. He also notes that despite two-year contract limits in the U.S., Verizon Wireless reported industry-leading margins and customer retention in 2012.

Meanwhile, Mr. Ghose believes that the competitive risks posed by new entrants entering the sector has been overblown.

"While we conclude that the sector is still far from being 'dirt cheap' and regulatory and interest rate uncertainties could linger for some time, we believe that patient investors could be rewarded by taking advantage of recent weakness in telco stocks," he said.

Targets: Mr. Ghose maintained a $46 price target for BCE, a $50 target for Rogers and $40 for Telus. The average targets among analysts, respectively, are $47.11, $51.92, and $37.93, according to Bloomberg data.

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M Partners analyst Patrick Ruiz believes this is a good time to buy shares in fund company Sprott Inc.

The stock has fallen out of favour with investors given the recent downturn in the resource sector – which Sprott has much exposure to.

But Mr. Ruiz notes that the TSX Venture exchange, made up largely of resource companies such as gold explorers, has remained stable over this past month even though it's down nearly 25 per cent for the year. Gold prices have stabilized to near the $1,400 (U.S.) per ounce level after peaking close to $1,800 in October. Meanwhile, some recent merger and acquisition activity in the sector, including New Gold and Rainy River, has helped to bolster sentiment somewhat.

Management has also stated that redemptions from its hedge fund products have stabilized, and sales in the upcoming quarter should include figures from a couple of new hedge fund products, he noted.

Target: Mr. Ruiz maintained a "buy" rating and $4 price target. The average target is $3.14.

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Desjardins Securities analyst Keith Howlett upgraded food-service distributor Colabor Group Inc. to "hold" from "sell," expecting that restaurant industry conditions will improve as the weather becomes more seasonable after a cold and wet spring.

"Colabor continues to improve the operational efficiency of its business and to meld a more cohesive, value-added food-service distributor from the disparate assets acquired in recent years," Mr. Howlett commented.

He also thinks the share price already reflects a consensus that the company's dividend will be reduced.

Target: Mr. Howlett maintained a $4 price target. The Average target is $4.95.

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A rise in gas licensing activity in northeastern British Columbia should be particularly beneficial to Calfrac Well Services Ltd. given its exposure to key clients in the region, said RBC Dominion Securities analyst Dan MacDonald.

He upgraded Calfrac to "outperform" from "sector perform," also citing its rebounding U.S business and a valuation discount to its historical average.

Target: Mr. MacDonald raised his price target to $42 from $30. The average target is $33.43.

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Sears Canada Inc. is almost done selling off some of its store leases, believes Desjardins Securities analyst Keith Howlett – a prospect that would limit the amount of future cash it can raise.

Sears Canada last week announced it will exit two leased full-line department stores in return for $191-million, which followed four lease take-back deals last year that generated $175-million.

"We do not expect more than two to three additional store locations to be monetized over the next 18 months, as the company's infrastructure is built to support revenue from its current network of stores," Mr. Howlett said.

He expects the company to declare a $1 special dividend before year-end, using proceeds of the latest lease sales.

Target: Mr. Howlett raised his price target by $1 to $11 and maintained a "hold" rating. The average target is $9.75.

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