J.C. Penney faces risk of bankruptcy, BMO warns in downgrade

The Globe and Mail

Penney thinks it can cut costs by $900-million over two years in part by running only 12 pricing and product promotions a year compared with the 590 such events it ran last year. (Mark Lennihan/Associated Press/Mark Lennihan/Associated Press)

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

The future of struggling U.S. retailer J.C. Penney is looking increasingly dire, says BMO Nesbitt Burns analyst Wayne Hood, who warns that there’s a chance it could be heading into bankruptcy over the next couple of years.

“We were hoping to become more constructive on JCP following the significant underperformance in fiscal years 2012/2013. However, our research leads us to move in the opposite direction and lower our rating back to underperform from market perform,” Mr. Hood said in a research note.

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J.C. Penney’s fourth quarter showed a continued steep deterioration in its business since launching a turnaround strategy nearly a year ago, with same-store sales dropping by 32 per cent.

Mr. Wood sees four potential outcomes for the company over the next 12 to 24 months – and three of the four would be bearish.

In the most bullish scenario, J.C. Penney restores sales growth and maintains sufficient liquidity by throttling back capital expenditures while selling non-core assets.

Mr. Wood’s “base-case scenario” sees the company reversing the steep slide in comparable store sales to post modest sales growth of 0.9 per cent in fiscal 2014. That scenario also assumes capital spending cuts and the sale of non-core assets, but assumes the company will continue to post annual earnings per share losses over the next five years.

The last two scenarios involve bankruptcy filings. One would be a voluntary Chapter 11 bankruptcy that enables the company to become smaller and more profitable. The fourth, and most dire outcome, would be the company being forced into an involuntary bankruptcy in the first or second quarter of fiscal 2014.

Target: Mr. Hood slashed his price target to $12 (U.S.) from $18. The average price target among analysts is $16.20 (U.S.), according to Bloomberg data.

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At least two analysts have hiked their price targets on Thomson Reuters Corp. after attending the company’s investor day in Toronto on Friday.

While there were no real surprises, management pointed to improving operations at its financial and risk segment, which accounts for about 55 per cent of revenues, noted CIBC World Markets analyst Robert Bek.

“TRI is confident about its prospects heading into the second half of 2013, where management reiterated its belief that net sales will turn positive, with this growth in sales manifesting in top line revenues into 2014,” commented Mr. Bek.

RBC Dominion Securities analyst Drew McReynolds is feeling more comfortable with the stock given that the company has provided longer-term revenue growth targets. Another positive: the severe negative sentiment that’s been plaguing the global financial services sector appears to be lifting.

“We expect the shares to grind higher on improved investor sentiment around ‘less negative’ trends,” said Mr. McReynolds.

Target: CIBC raised its target by $1.50 to $33 (U.S.) and RBC raised its target by $2 to $33. Both rate the stock as the equivalent of a hold rating. The average Street target is $30.73.

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Renegade Petroleum Ltd.‘s quarterly results were disappointing and the company’s lucrative 13.5 per cent yield is now at risk, warn analysts.

Raymond James analyst Luc Mageau, who downgraded the stock to “market perform,” noted the company’s debt has now risen to more than two times cash flow. “We are recommending caution until we see improvements on capital efficiency measures,” he said.

Desjardins Securities analyst Tim Murray downgraded Renegade to “hold” from “buy,” commenting that “we now believe the sustainability of the company’s dividend model is clearly in question and we note that it could be forced to revisit the current payout should it face operational challenges or a crude oil pricing correction.”

Target: Raymond James has a $2.50 price target while Desjardins has a $2.10 target. The average Street target is $2.95.

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Fission Energy Corp., along with its 50 per cent partner Alpha Minerals, have announced “a world-class level” assay result from the Patterson Lake South uranium project in Canada’s Athabasca basin, noted Cantor Fitzgerald Canada analyst Rob Chang.

“The assay result from hole PLS13-038 is one of the best we have ever seen and continues to suggest that this may be the world’s next world-class uranium deposit,” commented Mr. Chang.

Target: Mr. Chang raised his price target to $1.30 a share from $1.25 and reiterated a “buy-speculative” rating. The average analyst target is 1.30.

Read more about the assay results here.

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Raymond James analyst Steve Hansen is turning more bullish on Methanex Corp. based on his belief that the methanol producer “is superbly positioned” to capitalize on improving demand and pricing trends for that commodity.

“Methanol markets continue to innovate and evolve at a furious pace, providing the foundation for robust global demand growth (8-10 per cent compounded annual growth rate) over the next five years, in our view,” commented Mr. Hansen. “Meanwhile, the methanol supply base remains highly erratic, with only modest growth on the horizon. And while neither of these dynamics is necessarily new, recent developments suggest to us that the sector’s resiliency, or ability to absorb frequent supply outages, continues to erode-particularly in Europe and the Americas.

"Taken together, we believe these dynamics favour higher, sustained methanol prices through our forecast horizon."

Target: Mr. Hansen raised his price target by $10 to $50 (U.S.) per share and reiterated an “outperform” rating. The average analyst target is $44.40.

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