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A Lululemon store on Queen St. West in Toronto. Lululemon said Monday it will take a ‘significant’ financial hit as a result of production problems and an expected shortage of its signature black ‘luon’ women’s yoga pants. (Fred Lum/The Globe and Mail)
A Lululemon store on Queen St. West in Toronto. Lululemon said Monday it will take a ‘significant’ financial hit as a result of production problems and an expected shortage of its signature black ‘luon’ women’s yoga pants. (Fred Lum/The Globe and Mail)

Lululemon’s yoga pants are nearly back, but shares are still marked down: UBS 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.

Lululemon Athletica Inc.’s black luon yoga pants, which garnered a lot of attention earlier this year for being a little too revealing, should be back on store shelves next month.

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Investors have been bidding up the stock since the start of April, partly in anticipation that the new pants will now meet Lululemon’s “level of sheerness” standards and help rejuvenate the company’s sales.

UBS analyst Roxanne Meyer thinks that’s a good strategy and predicts shares still have a lot higher to go.

It is isn’t just the return of the popular yoga pants that’s making her optimistic. Sales of other products have generally been favourable recently and price markdowns minimal, she says.

“We believe the bar was set low in writing off black luon pants and assuming no transfer to other pant styles in the first quarter,” Ms. Meyer said in a research note.

UBS’s weekly first-quarter channel checks at retailers pointed to a lineup of strong products in the first quarter and “controlled” markdowns. “In April, we noted only a few racks of sale items averaging 30 to 35 per cent,” she noted.

She raised her earnings per share estimate for the fiscal first quarter by 2 cents to 32 cents, predicting comparable sales will rise 8 per cent. The results will be announced by the company on June 10.

For the second quarter, which got underway in May, she sees earnings of 35 cents a share, up from earlier estimates of 32 cents. She notes that the second quarter will not only see the return of the yoga pants, but the period usually sees less markdowns and year-over-year comparisons will look more favourable.

“We believe LULU’s traffic and fundamentals remain strong, and view growth in e-commerce, men’s, product capsules, easier comp and margin comparisons, lapping of normalized mark downs (in Q2/Q3) and multiple Q4 opportunities (40 per cent of annual EPS) as positives,” she said. “International is the next leg of growth to ramp in coming years.”

The company warned in March that the error that resulted in the recall of 17 per cent of its women’s pants would chop as much as $67-million (U.S.) from its revenue this year, or 27 cents off its 2013 earnings per share.

Target: Ms. Meyer raised her price target to $90 (U.S.) from $77 and reiterated a “buy” rating. The average price target among analysts is $78.56, according to Bloomberg data.

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At least a couple of analysts are trimming their price targets on the Bank of Nova Scotia after its slightly weaker-than-expected second-quarter earnings report on Tuesday.

Scotiabank reported core earnings per share of $1.24 per share, a couple cents shy of the consensus estimate, in part because of higher expenses and provisions for credit losses. Many on the Street were a bit surprised by weakness in its international division while domestic results showed progress despite a sluggish economy.

Desjardins Securities analyst Michael Goldberg cut his price target to $67.50 from $69, commenting that the shares may lag in the near term given the earnings miss and because Scotia has been trading at a premium valuation against peers.

But he’s far from recommending investors ditch their shares. “Scotia continues to execute well,” he said in a research note. “Its bolt-on acquisitions and organic initiatives deliver steady, balanced revenue, earnings and dividend growth. It is for this reason that Scotia remains a top pick.”

Canaccord Genuity analyst Mario Mendonca cut his target to $67 from $69, but reiterated a “buy” rating and suggested that international earnings growth should improve next quarter, with growth expected in the low double-digits.

“Over the last five years, the bank’s better earnings stability and momentum has earned Scotia an average premium (to peers) of 5 to 7 per cent,” said Mr. Goldberg. His estimates suggest the stock currently trades at a 5 per cent premium, and he set his price target on the belief that Scotiabank should trade at a 6 per cent premium.

Stonecap Securities analyst Brad Smith echoed other analysts in their optimistic views on the bank as he reaffirmed an “outperform” rating and $58 price target.

“While the bottom line missed expectations modestly, we saw very encouraging trend development in the domestic bank,” Mr. Smith said. “Deceleration in core International segment revenues and earnings, while not anticipated, appear set to be recovered in the second half of 2013.”

Target: The average price target on the Street is $65.12 (Canadian).

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It’s time for investors to buy Bird Construction Inc. , said Raymond James analyst Frederic Bastien as he upgraded the stock to “outperform” from “market perform.”

Bird Construction hit a 52-week low this week and is now down about 25 per cent from when the company lost a key oil sands contract earlier this year. As a result, Bird’s valuation is now on par with its Canadian peers at 9.9 times based on 2014 earnings per share estimates, but its stock has historically commanded a premium, Mr. Bastien noted.

It’s dividend yield, meanwhile, stands at 6.7 per cent, and he sees no risk of it being cut given the company’s net cash position and cash flow levels, he said.

“Although Bird faces a challenging operating environment in 2013, we believe its valuation and dividend yield have returned to levels that are simply too attractive to pass up,” he said.

Target: Mr. Bastien has a $14 price target. The average price target is $13.21.

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With Surge Energy Inc.'s recent appointment of Paul Colborne as CEO, the company is likely to transform itself into a dividend-paying entity later this year, said CIBC World Markets analyst Arthur Grayfer.

He thinks the company has the financial capability to offer a 36 cents-per-share dividend, for an annual yield of 7.2 per cent.

Mr. Colborne, a veteran of the energy sector, has successfully transitioned a number of Canadian junior oil and gas companies into dividend- paying companies.

Target: Mr. Grayfer raised his price target by $1 to $6.50. The average target is $6.27.

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Domtar Corp. is winning a lot of analyst praise - and price target hikes - for its $272-million purchase this week of U.S. diaper maker Associated Hygienic Products.

"We like this acquisition as it increases Domtar's exposure to the growing personal care segment while leveraging synergies with its Attends brand of adult incontinence products," said RBC Dominion Securities analyst Paul Quinn. He thinks the company's synergy goal of $10-million is conservative.

Raymond James analyst Daryl Swetlishoff echoed that point of view: "We are constructive on the deal as it represents a continuation of Domtar's strategy of expanding non-paper income streams in end markets with positive secular growth."

Target: Both analysts hiked their price targets by $5 to $95 (U.S.) and reiterated "outperform" ratings. The average target is $83.62.

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

Follow on Twitter: @eyeonequities

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