Inside the Market's roundup of some of today's key analyst actions
For the best stock values in the retail sector this year, investors may want to look beyond the neighbourhood dollar store in the U.S.
The sector had been on a remarkable tear until the second half of last year, when the trend of slowing sales growth started to become entrenched. Since then, shares in most of the buck-for-a-product retailers in the U.S. have been sliding.
Today, the challenges for the sector came under the spotlight again as RBC Dominion Securities downgraded two of the largest such U.S. retailers, Dollar General Corp. and Family Dollar Stores Inc., to “sector perform” from “outperform.”
“While discounts to their historical valuations may help reduce the potential for further downside in these stocks, we believe it will be difficult for them to generate much upside in the first half 2013, given recent trends and the incremental challenges we see for 2013,” said analyst Scot Ciccarelli in a research note.
While calling himself a “long-term bull” on the sector, he listed five reasons investors had better be cautious in the shorter term:
1) The potential for lower U.S. government subsidies;
2) More discounting and promotions among retailers;
3) A less profitable sales mix;
4) Direct tobacco competition (Dollar General and Family Dollar Stores are both rolling out tobacco offerings);
5) The potential spending impact from rising U.S. payroll taxes.
Mr. Ciccarelli cut his price target on Dollar General to $49 (U.S.) from $54. His target on Family Dollar Stores went to $63 from $67. Both those targets are about 15 times his 2013 earnings per share estimates.
He also cut his price target on Dollar Tree Store Inc. to $47 from $51. While that represents a higher price-to-earnings multiple of 16.5 times, he thinks that’s justified and recommends Dollar Tree over the other two U.S. dollar retailers.
“We believe that several factors should help DLTR shares outperform DG and FDO in 2013, including lower expectations, the timing of easier comparisons, a differentiated product mix due to its $1 price points and broader customer base." But he added that "valuation levels for the whole sector will likely remain under some pressure through 2013."
Mr. Ciccarelli does not cover Canada's big dollar-store retailer, Dollarama Inc., which fared better on the stock market last year. However, RBC did put Dollarama on the list of its 30 top stock picks for 2013.
Goldcorp Inc. shares fell 23 per cent last quarter and they could slide further in the near term, given the higher capital expenditure and cash cost guidance the gold producer revealed this week, warned CIBC World Markets analyst Alec Kodatsky. But he’s retaining a “sector outperformer” rating, believing “the shares offer a compelling return and exposure to a high-growth, low political risk gold producer with achievable 2013 guidance.”
Upside: Mr. Kodatsky cut his price target to $55 (U.S.) from $64. UBS analyst Brian MacArthur slashed his target to $48 from $58.
RBC Dominion Securities has upgraded Elizabeth Arden Inc. to “outperform,” believing that “prestige beauty” will remain one of the better fundamental growth subsectors in consumer staples this year. The stock “is emerging into a pure-play name on the space at a more attractive valuation,” said analyst Jason Gere, adding that recent brand acquisitions has positioned the company for growth, while its namesake band repositions and expands globally.
Upside: Mr. Gere, who previously rated the stock as “sector perform,” raised his price target by $4 to $55.
UBS Securities Canada trimmed its price target, but reiterated a “buy” rating, on Barrick Gold Corp. after news Tuesday that it ended months of efforts to sell its underperforming African unit to China National Gold Group. Analyst Brian MacArthur notes the focus will now turn to how successful Barrick is at developing the Pascua-Lama project in South America, slated to begin production in the second half of 2014.
Upside: Mr. MacArthur cut his target to $49 (U.S.) from $52.
While lowering his fourth-quarter earnings estimates on Citigroup Inc. because of sluggish capital markets revenue, RBC Dominion Securities analyst Gerard Cassidy has turned more bullish on the stock. He thinks the management team of chairman Michael O’Neill and CEO Mike Corbat will help increase shareholder value through cost cuts and returning capital. He also believes improvement in the U.S. economy, and likely higher interest rates over the next 12 to 18 months, will further support the stock.
Upside: Mr. Cassidy raised his price target by $4 to $48 (U.S.) and reiterated an “outperform-above average risk” rating.
For more analyst actions, breaking investing news and analysis, follow Darcy Keith on Twitter at @eyeonequities