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.
Apple Inc. should be able to almost double the size of its $60-billion (U.S.) share buyback program and still carry manageable debt levels, RBC Dominion Securities analyst Amit Daryanani said in a new analysis as he raised his price target on the tech giant.
Carl Icahn’s disclosure earlier this week on Twitter that he bought a large stake in the company has ramped up speculation that Apple could increase the size of its buybacks, especially given low bond yields and what many consider to be an attractive share price.
“To assess the magnitude of a buyback, we looked at debt levels that are carried by large-cap companies across the board,” Mr. Daryanani said in a research note. “Our analysis shows on average large-cap companies have a 2x debt/EBITDA ratio (vs. Apple at 0.3x) and this doesn’t include the reality that AAPL has the largest cash position across these companies.”
“Should AAPL get comfortable with incremental debt, they could increase their buyback by $50-90-billion (debt/EBITDA range of 1.3-1.8x),” he added. “We estimate this could translate into EPS accretion of $4.00 to $7.00( about 10-17 per cent) and possible stock appreciation of $50 to $90.”
Apple’s current buyback program of $60-billion ends by December 2015. The company has bought back $17.95-billion of stock so far. The company is currently sitting on about $147-billion in cash.
Mr. Daryanani argues that Apple’s stock is undervalued, and he thinks the comapny can continue to gain share in both tablet and smartphones.
“We believe the recent pullback on AAPL’s stock creates an attractive entry point for investors to benefit from AAPL’s ability to sustain material revenue and EPS growth over the next several years,” he said. “We believe multiple catalysts remain as the company benefits from: 1) iPhone 5s and iPhone Mini ramps; 2) continued MacBook refresh cycle; 3) potential iTV launch or other major product lines; and 4) improvements in capital allocation policy. We believe the fundamental reality remains that AAPL’s valuation is materially sub-par to what we anticipate its long-term revenue and EPS potential is.”
Target: Mr. Daryanani raised his price target to $525 (U.S.) from $475 and reiterated his “outperform” rating. The average analyst target is $517.11, according to Bloomberg data.
CIBC World Markets analyst Alex Avery downgraded Brookfield Asset Management to "sector performer" from "sector outperformer," citing its strong relative share price performance, the potential for higher interest rates to erode its net asset value, and expected higher returns from elsewhere in the sector.
Target: Mr. Avery raised his price target to $41 (U.S.) from $40.
RBC Dominion Securities analyst Geoffrey Kwan downgraded Equitable Group Inc. to “sector perform” from “outperform,” believing the recent rally in the Canadian mortgage lender’s shares has made it less attractive as new investment.
Shares have risen 35 per cent so far this year, well ahead of the 10 per cent rise, on average, for its peers.
“Today, ETC’s shares trade at 7.2x our 2014 EPS forecast, less than a 1x discount to the peer average, which we believe is fair given ETC’s return on equity, which has improved in the past couple of years but remains below peers, and ETC’s smaller market capitalization and liquidity,” Mr. Kwan said in a research note.
“As a result, our sector perform rating reflects our view that ETC’s shares are likely to perform in line with the average of our coverage universe. Factors that we would see as likely to drive relative outperformance and that therefore could make us positive again on the stock include higher EPS growth, a further significant narrowing of the ROE discount, and/or an emerging catalyst (e.g., ETC expanding into the prime insured residential market).”
Target: Mr. Kwan kept his price target unchanged at $47 a share. The average target is $45.83.
Even though re-branding efforts and labour contract buyouts are expected to leave Metro Inc. with a $40-million charge in the fourth quarter of 2013, Credit Suisse analyst David Hartley still sees a lot that he likes.
With low levels of leverage on their balance sheet, Metro’s management has signaled that it might go shopping itself.
Mr. Hartley said that B.C.-based grocery chain Overwaitea Food Group seems like the most logical fit, estimating that Metro’s share price could see a $10.50 bump from such a deal.
But with management signaling that they would like to grow their pharmacy business in Quebec, HY Louie/London Drugs, Rexall, Uniprix and Familiprix could all be on their shopping list, added Mr. Hartley.
Target: Mr. Hartley has raised his price target to $72 from $63. The average price target is $71.91.
Exchange Income Corp. had an unexpectedly weak second quarter, caused by plunging margins at its subsidiary WesTower Communications Inc.
While Stonecap Securities analyst C. Scott Rattee called the recent efforts that Exchange made to restructure WestTower “laudable,” he noted none of them are likely to impact the depressed margins at the company until 2014.
“Unfortunately, the softness at WesTower masked several positives in the quarter,” said Mr. Rattee.
Target: While Mr. Ratee maintained his "outperform" rating he lowered his price target $31, down from $37. The average price target is $29.28
Detour Gold Corp.'s namesake mine ramped up to commercial production this week, beating out Credit Suisse predictions by a month, said analyst Anita Soni.
While costs per ounce came in $140 above what Credit Suisse was expecting, “in talking to the company, there were a number of one-time items during the ramp-up that the company does not expect to carry over into 2014,” said Ms. Soni.
Target: Ms. Soni maintained her "outperform" rating and her $15 price target. The average price target is $17.18
For more analyst actions, breaking investing news and analysis, follow Darcy Keith on Twitter at @ eyeonequities