Inside the Market’s roundup of some of today’s key analyst actions.
Investors should expect up to an 18 per cent hit to stock prices of the major Canadian wireless providers should Verizon Communications Inc. set up shop north of the border, according to a fresh analysis from Desjardins Securities.
The Globe and Mail reported last week that Verizon is considering an entry into Canada’s $19-billion wireless market. The company later confirmed that it was indeed in the preliminary stages of weighing a potential expansion here.
Desjardins analyst Maher Yaghi ran a sensitivity analysis to see just what impact there would be on the stock prices of the wireless incumbents in this country.
“While we do not see high odds of Verizon entering Canada, if this does occur, we estimate the potential impact on the stock prices of Canadian wirless incumbents will be material, running in the 10 per cent to 18 per cent even without assuming multiple contraction,” he wrote in a research note. Multiple contraction would be a reduction in the valuation of stocks based on price-to-earnings ratios.
Mr. Yaghi believes Verizon would be a very strong contender in Canada, given such factors as its huge size and strong handset buying power. The upcoming 700 Mhz spectrum auction in Canada could be used to roll out a national platform.
But the odds that Verizon will make the investment in Canada isn’t high, given that the Canadian wireless industry is already well advanced compared to other international markets, and because Verizon is already actively looking to buy out Vodafone’s position in Verizon wireless, he said.
Nevertheless, “we believe from a risk management point of view, investors would be well advised to ponder the potential downside in the stocks of wireless incumbents in Canada if Verizon decided to take the plunge into the market,” Mr. Yaghi said. “The potential downside could be sizable.”
His analysis assumed that Verizon would be able to gain a 15 per cent market share in Canada. He found that the earnings before interest, taxes, depreciation and amortization among incumbents would come down between 6 per cent and 13 per cent.
“For investors concerned about Verizon, our view is that BCE, Quebecor and Bell Aliant are the best positioned to weather the storm. BCE remains the least exposed to wireless among the incumbents. Quebecor is essentially a regional fourth player in Quebec with a growing wireless case and strong brand recognition in the area. Bell Aliant has effectively no exposure to wireless and it turning its trajectory around after several years of decline,” he said.
According to his study, BCE's stock would decline by 10 per cent, Rogers Communications Inc. by 18 per cent and Telus Corp. by 17 per cent.
Target: Mr. Yaghi has a “buy” rating on BCE with a $50 price target. He rates Rogers as a "hold" with a $51 price target, and Telus is rated as a "buy" with a $39 price target. The median analyst targets are $47, $51, and $39, respectively, according to Thomson First Call.
Elevated inventory levels suggest Apple Inc. may reduce iPhone production this quarter and next as it gets ready for the potential release of the iPhone 5S in September and the iPhone 6 next year, said Jefferies analyst Peter Misek.
Inventory levels are at about 10 weeks supply, versus more typical levels of four to six weeks, he said. He trimmed his fiscal third quarter 2013 iPhone shipment forecasts to 27 million units from 30 million; for the fourth quarter, his forecast went down to 45 million from 50 million.
“We had recently noted that smartphone inventory levels at retail and carriers were elevated but were unsure which original equipment manufacturers were most exposed,” Streetinsider.com quoted him as saying. “Our survey of several hundred Orange, Vodafone, and EE stores in the U.K. indicates that inventories are elevated for iPhones and the Samsung Galaxy 3.”
Target: Mr. Misek cut his price target to $405 (U.S.) from $420 and maintained a “hold” rating. Separately, BMO Nesbitt Burns analyst Keith Bachman today raised his price target to $450 from $435 and reiterated a "market perform" rating. The median target is $535.
The 42 firm orders Bombardier Inc. received at the Paris Air Show this month was "slightly underwhelming," as it was slightly lower than at the same industry gathering in 2011, said Desjardins Securities analyst Benoit Poirier. Competition was fierce, especially with the launch of the revamped E-Jets by competitor Embraer.
"Nonetheless, with the first flight of the C Series expected in a matter of days, we see many near-term catalysts to look forward to," Mr. Poirier said.
Target: Mr. Poirier maintained a "buy" rating and $6 price target. The median target is $5.39.
BMO Nesbitt Burns analyst Benjamin Pham upgraded Canadian Utilities Ltd. to "outperform," believing its stock price has fallen too far given the dividend growth the company offers.
"While power and utility stocks as a whole have taken a beating, CU shares have performed the worst despite having the highest dividend growth profile," Mr. Pham said. "Looking ahead to the balance of 2013, we expect quarterly results to confirm the sustainability of its strong earnings growth profile while successful execution of its regulated investment program should further showcase CU's positive shift in fundamental profile."
Target: Mr. Pham maintained a price target of $41.50. The median target is $42.
The recent pullback in the share price of Exchange Income Corp. is "an excellent opportunity" for investors with a long-term horizon to buy the stock, said Stonecap Securities analyst C. Scott Rattee.
He thinks its diversified portfolio of companies, a track record of earnings growth and a growing dividend make it attractive in current volatile markets. He does not believe the company's soft first-quarter results will persist.
Target: Mr. Rattee reiterated an "outperform" rating and $37 price target. The median target is $31.75.
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