Rogers, Telus smacked with downgrades on Verizon threat

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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.

Analysts are reassessing their views on the Canadian telecom sector in light of revelations this week that Verizon Communications Inc. may be coming up north - and it's not looking very favourable.

RBC Dominion Securities dramatically cut its price targets on three of the largest telecom companies in Canada on the increasing likelihood that the U.S. giant will be entering the wireless market here.

And, both RBC and BMO Nesbitt Burns downgraded their ratings on Rogers Communications Inc. and Telus Corp. to "sector perform" from "outperform."

"In our view, Verizon entering Canada would be a game changer for the Canadian wireless market given the company's significant resources and scale," said RBC analysts Drew McReynolds and Haran Posner. "Until visibility emerges with respect to the market impact of a Verizon entry into Canada, we would expect the wireless stocks (BCE, Rogers and Telus) to remain under considerable pressure and at best be range bound."

RBC slashed its price target on Rogers to $43 from $54; on Telus to $31 from $38, and on BCE Inc. to $40 from $48.

BMO cut its price target on Rogers to $45 and on Telus to $35.

"We are downgrading shares of large incumbent providers with relatively high exposure to wireless," said BMO analyst Tim Casey. "On a consolidated basis, Rogers, along with Telus, derives greater than 60 per cent of its EBITDA (earnings before interest, taxes, depreciation and amortization) from wireless, vs. about 30 per cent for BCE and zero per cent for Shaw. Given that it has the largest base of wireless subscribers, we believe that Rogers has a significant amount to lose from the incursion of a new large, well-capitalized competitor (Verizon)."

Mr. Casey upgraded his ratings on the incumbent providers that have relatively low exposure to wireless. He now rates Shaw, which abandoned its wireless strategy in 2011, as "outperform." And he moved up his rating on BCE, which derives about 30 per cent of its EBITDA from wireless, to "outperform" as well.

RBC also believes the smaller wireless providers in Canada will be less affected.

"Although other Canadian telecom stocks are not immune to a more formidable competitor in the Canadian marketplace, we maintain our outperform recommendations for Cogeco Cable, Quebecor and Manitoba Telecom. We continue to see limited potential for share price appreciation, but Bell Aliant should be reasonably immune to heightened wireless competition, particularly if rising bond yields erase pension solvency obligations," the RBC analysts wrote in a research note.

Canadian telecom stocks took a beating on Wednesday after the Globe and Mail reported that Verizon is pushing forward with its efforts to expand into Canada's $19-billion wireless market, putting an initial offer on the table for Wind Mobile and starting talks with Mobilicity.

The RBC analysts said they have spoken to Verizon management and they reiterated their interest in exploring the possibility of entering the Canadian wireless market.

"At the moment, Verizon is awaiting the spectrum transfer rules (due out by Industry Canada imminently) and is seeking clarification on the rules governing the 700 MHz auction. While we continue to question whether the 'prize' of entering Canada is worth the effort, in terms of strategy, Verizon appears to be focused on leveraging its 4G LTE leadership globally with Canada, offering a number of advantages towards this end, including an adjacent market with the opportunity/roadmap to acquire compatible spectrum for LTE at a reasonable cost. Although we understand the charter at Verizon Wireless effectively restricts Verizon Wireless from expanding outside of the U.S., management did indicate that the company could either seek a waiver from Vodafone or alternatively enter Canada through setting up arm's length intercompany agreements to leverage the Verizon Wireless infrastructure."

Mr. Casey believes the impact on the telecom firms' balance sheets would likely begin next year, "as we would expect the incumbents to re-price in order to protect market share." He also thinks incumbents' ability to continue to grow their dividends will be at risk starting in 2015, given wireless growth may slow with Verizon as a new competitor.

Targets: The median analyst price target for Rogers is $52; for Telus $39; and for BCE $47, according to Thomson First Call.

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The recent downturn in real estate investment trusts because of surging bond yields has been overdone, said Raymond James analyst Ken Avalos. He recommends REIT investors use the pullback to add to or build positions in some of the highest quality, strongest balance sheet trusts, which includes RioCan Real Estate Investment Trust.

He upgraded RioCan to "outperform" from "market perform."

"As hot money leaves the sector, we expect investors will again begin to differentiate between companies with strong balance sheets, attractive growth strategies and the ability to execute on growth and balance sheet initiatives in a more rational (on the equity side at least) capital markets environment," Mr. Avalos said.

"We believe RioCan presents investors with the opportunity to own a high-quality portfolio, financed by a flexible balance sheet, and run by one of the longest tenured and most value-creation oriented management teams in the Canadian real estate sector," he added.

Target: Mr. Avalos has a $27 price target. The median price target is $30.

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Raymond James analyst Steve Hansen has lowered his stock price forecast on Bombardier Inc. after the company announced this week that its first C Series flight has been delayed by another month to the end of July.

"Albeit an obvious disappointment, we are willing to look past this deferral (for now) based upon our view that residual issues likely remain minor, and that First Flight will ultimately transpire in July," Mr. Hansen said in a research note. "While precise details remain unclear, we understand that the recent delay primarily stems from last minute software updates aimed at improving the aircraft's 'system maturity and functionality' — a manageable task, in our view."

But he's worried that the company may miss its mid-2014 target date for the C Series entry into service (EIS), "as incremental delays stack up."

"We feel there is likely an increasing risk to the company's EIS guidance, which we believe bears monitoring," he said.

Target: Mr. Hansen cut his price target by 50 cents to $5.50 but reiterated an "outperform" rating. The median price target is $5.39.

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Desjardins Securities analyst Jeremy Rosenfield thinks TransAlta Corp.'s plans to surface value from its renewable power portfolio by creating TransAlta Renewables Inc. through an initial public offering is a good idea.

But "we believe that the pricing may not be attractive enough to generate sufficient investor support," he cautioned.

He is also anxious to hear further details from the company on other potential near-term growth opportunities.

Target: Mr. Rosenfield maintained a "hold" rating and a $17 price target. The median price target is $15.

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Canaccord Genuity analyst Jonathan Dorsheimer upgraded GT Advanced Technologies to "buy" after concluding that capacity in the polysilicon and sapphire markets is tighter than many think, which will benefit the maker of products for solar, LED and electronics industries.

"We are by no means expecting an explosion in solar demand; however, we can still foresee a tightening in polysilicon as soon as 2015 with modest solar installation growth," Mr. Dorsheimer commented. "While economics throughout the supply chain should remain challenging, a tightening upstream could lead to more polysilicon equipment orders within the next year to 18 months."

He also thinks new handset applications will tighten the sapphire market, "thus creating a rush to expand capacity that will benefit GT."

Target: Mr. Dorsheimer raised his price target by $1 to $5. The median target is $4.

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