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.
Citing their belief that a lumber “super-cycle” will be arriving sooner than expected thanks to the brisk upturn in the U.S. housing market, analysts at RBC Dominion Securities upgraded West Fraser Co. Ltd. today to an “outperform” rating from “sector perform.”
“While some in the industry (and a fair share of our sell-side counterparts) have been talking about an ‘imminent’ super-cycle in lumber since 2008, prosperity has always seemed just around the corner,” said the RBC analysts, led by Paul C. Quinn. “We had been believers that the ‘super-cycle’ would eventually come, but only in the 2016/2017 time-frame. Given the acceleration in the U.S. housing recovery, we now believe conditions will be ripe by the end of 2014.”
Lumber prices, which fell hard early in the second quarter, turned positive last week, Mr. Quinn noted. Meanwhile, in pulp markets, some producers of northern bleached softwood kraft, the paper industry’s benchmark grade of pulp, are trying to raise their prices. That suggests a tighter market than earlier anticipated, he said.
RBC also now sees attractive merger and acquisition opportunities for larger companies in the sector such as West Fraser.
“As the recovery progresses, we believe many family-owned/single-mill operators, who have come out of the worst cycle in history, will be looking to sell out in the boom,” Mr. Quinn said.
Target: Mr. Quinn has a $100 (Canadian) price target. The average price target among analysts is $98.71, according to Bloomberg data.
RBC’s Mr. Quinn also upgraded Weyerhaeuser Co. to “outperform” from “sector perform,” noting that the company is highly levered to all aspects of a U.S. housing recovery.
More than 70 per cent of its 2012 revenue was tied to the U.S. housing recovery, he said. It’s the No. 3 North American lumber producer, as well as being a top producer of oriented strand board and engineered word products.
“With operating rates in 2012 of only 85 per cent in lumber, 83 per cent in oriented strand board and about 44 per cent in engineered woods products, the wood products segment has significant runway ahead,” he added.
Target: Mr. Quinn raised his price target by $3 to $34 (U.S.). The average target is $32.90.
Facebook Inc. stock is up nearly 5 per cent at midday after it received an upgrade from analysts at Stifel Nicolaus Financial, who believe shares have bottomed and currently offer “one of the most compelling investments” in the Internet sector.
Fears over declining engagement and ineffective use of advertising have already been factored into its shares, analysts Michael Purcell and Nathaniel Brogadir said in their upgrade of Facebook to a “buy” rating from “hold.”
They see a number of “upside catalysts” that should soon see the share price trading higher, including Facebook joining the S&P 500 index, favourable seasonality trading during the back-to-school season, the eventual monetizing of Instagram, and upcoming new products, including video ads.
Target: The Stifel analysts have a $29 (U.S.) price target. The average target is $33.87.
While Open Text Corp. has had tremendous success in acquiring companies and growing free cash flow, its shares do not reflect any earnings per share or free cash flow growth from potential future mergers and acquisitions, said Raymond James analyst Steven Li.
The stock has been far outperforming the broader market of late, and Mr. Li sees this continuing given that the company still trades at a discount to its software peers based on price to forward earnings per share. He also believes Open Text is well positioned to sustain its strong organic growth into its fiscal 2014.
“We find OTEX shares attractive, given higher margins and ROE (return on equity) and expectations for faster earnings growth, evident in its PEG ratio of 0.7x versus 2.0x average,” he said. A PEG ratio is a stock price divided by its most recent 12-month earnings per share.
Target: Mr. Li raised his price target by $10 to $86 (U.S.) per share. The average target is $71.67.
CIBC World Markets analyst Todd Coupland has more confidence in Magna International Inc.’s future after touring its European operations this month.
The site visits to the Czech Republic and Austria were to determine the level of improvements in revenue, margins, and earnings. “Our takeaway was that Magna will continue to outperform the market in Europe with new programs and benefits from its restructuring program planned for about 10 facilities in Western Europe in 2013,” he said.
“Positive share momentum should continue in June.”
Target: Mr. Coupland raised his price target by $10 to $80 (U.S.) and reiterated his “sector outperform” rating. The average target is $72.19.
For more analyst actions, breaking investing news and analysis, follow Darcy Keith on Twitter at @ eyeonequities