Rally is over in Manulife, Great-West Lifeco shares: Barclays

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

There's still long-term value in holding shares in Canadian insurers Manulife Financial Corp. and Great-West Lifeco Inc., says Barclays analyst John Aiken. But he believes the rally that began this summer and brought shares to around 52-week highs has come to an end.

He suggests the core earnings growth that's required to maintain the buying momentum will likely fail to materialize during the upcoming fourth-quarter earnings season. Both companies are due to report their results on Feb. 7.

"Although we do forecast that both Manulife and Great-West will generate higher core earnings than in the third quarter, the growth for each is modest (one penny per share each)," Mr. Aiken said in a research note. "With interest rates remaining low to stimulate growth, a lack of commensurate growth in core earnings against the recent share-price appreciation could make valuations pause coming out of the fourth quarter."

Mr. Aiken did slightly raise his target prices on both stocks, but only to near current trading levels. Manulife's was raised to $14 from $13, and Great-West's was increased to $26 from $25.

He thinks investors will have to be patient for further price gains, as book value stagnates.

"With 10-year government yields still below 2 per cent, we remain reasonably cautious and believe that valuations may plateau on fourth-quarter earnings and additional volatility in their shares are likely before we see the strong share-price appreciation resume," he said.

"We continue to recommend Great-West for the stability and safety of its platform," he added. "Manulife, by and large, continues to trade in conjunction with the market factors, with equity markets more recently supplanting government yields as the primary driver of their valuations."

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National Bank Financial analyst Cameron Doerksen upgraded Air Canada to "outperform" from "sector perform," impressed with the company's 81.2 per cent load factor in the fourth quarter. He now expects the shares to rise more than 50 per cent over the coming year.

"We expect that Air Canada's results in the coming quarters will show year/year improvement, which should act as a catalyst for the stock," he said in a research note. "We also expect that in 2013 the federal government will approve a long-term cap on Air Canada's cash pension funding payments, which should also boost the stock."

Upside: Mr. Doerksen raised his price target to $3 from $2.10.

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Desjardins Securities analyst Keith Howlett is bracing investors for a disappointing fourth quarter at Sears Canada Inc. when it reports those results on Feb. 27.

Controlling shareholder Sears Holdings Corp. said late Monday that same-store sales at Sears Canada declined by 5.8 per cent for the nine weeks ended Dec. 29, and that fourth-quarter adjusted EBITDA is expected to be about half of the $97-million (U.S.) reported a year ago.

The EBITDA decline at Sears Canada was pegged primarily to a decline in electronic sales and unseasonably warm weather in most parts of Canada.

"We believe Q412 results will be below our prior expectation; our estimate for Q412 EPS was 60 cents," said Mr. Howlett. He had already been cautious on the outlook for Sears Canada, given the intense competition it will face later this year from Target.

Downside: He maintained a $9 price target and a "hold" rating on the stock.

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It could be a range-bound year for Fortis Inc., said BMO Nesbitt Burns analyst Benjamin Pham in downgrading the utility today to "market perform" from "outperform." While owning Fortis in the long-term should pay off thanks to consistent dividend growth (the stock has already performed relatively well), Mr. Pham says it is facing near-term regulatory headwinds, and has limited merger and acquisition catalysts this year. "As a result, we now think it will trade in line with the group over the next 12 months."

Upside: Mr. Pham maintained a price target of $35.50.

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RBC Dominion Securities analyst Kurt Hallead has downgraded Baker Hughes Inc. to "sector perform" from "outperform," citing uncertainties at its pressure-pumping business in North America and sluggish international drilling growth. Its Latin American operations are expected to be a drag on the company's growth this year, due to various factors that include permitting delays in Colombia, he said.

Upside: Mr. Hallead bumped up his price target by $1 to $46.

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Canaccord Genuity has added Bank of Nova Scotia to its Canadian "focus list" – the bank's highest conviction investing ideas. Analyst Mario Mendonca applauded the company's capital allocation strategy, including its acquisition of ING Direct, which should allow Scotiabank to outpace its peers in domestic retail banking this year. Meanwhile, its international business is benefiting from very strong organic and acquisitive loan growth. "Additionally, we no longer believe that BNS will raise its dividends at a slower pace than its peers," he said.

Upside: Mr. Mendonca maintained a $67 price target.

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