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Rotation in telecom stocks ‘baffling,’ says Canaccord Add to ...

Inside the Market’s roundup of some of today’s key analyst actions.

Investors today bet that shares in Telus Corp. and Rogers Communications Inc. were oversold in reaction to news last month that Verizon Communications Inc. may enter the Canadian wireless arena. Telus stock closed up 3.1 per cent and Rogers 2.8 per cent.

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Canaccord Genuity thinks they’re on to something.

Not including today’s trading, the combined market capitalization of Telus and Rogers have plunged by $5.2-billion, or 11 per cent, since The Globe and Mail first reported on June 17 that Verizon was considering entering Canada.

While Verizon is a serious threat to existing wireless providers, Canaccord Genuity analyst Dvai Ghose believes the concerns are overblown. Verizon may face several obstacles in setting up shop here, including the inheritance of small, patchy networks should it acquire Wind Mobile and Mobilicity. It would also lack distribution channels and, unlike the incumbents, could not bundle its wireless offerings with other services, such as cable TV.

But what Mr. Ghose finds particularly “baffling” is that investors have been rotating into Canadian companies focused on wireline and cable operations.

Over that same time period when Telus and Rogers shares were plummeting, the combined market caps of Shaw Communications Inc., Bell Aliant Inc. and Manitoba Telecom Services Inc. rose $1.3-billion, or 7 per cent.

“We find this rotation from Telus and RCI to anything that does not have much wireless exposure to be questionable,” Mr. Ghose said in a research note. “Even after we have chopped 3 to 6 per cent off our incumbent wireless EBITDA (earnings before interest, taxes, depreciation and amortization) forecasts, Telus and RCI shares seem to be trading at a significant discount to their wireline telco and cable driven peers.”

Despite the recent drubbing in their shares prices, Telus and Rogers are not the most susceptible to a financial hit should Verizon come north, he argues. He thinks it’s BCE Inc., owner of Bell.

“While Bell derives 35 per cent of its EBITDA from wireless vs. 64 per cent for its peers, it is reporting the worst wireline subscriber and EBITDA declines and relies heavily on wireless for dividend per share growth,” Mr. Ghose said.

As such, he downgraded BCE today to “hold” and cut his price target to $44 from $46.

Target: The average analyst price target on BCE is $44.96, according to Bloomberg data.

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While some investors may be concerned with the increased debt load Valeant Pharmaceuticals International Inc. will take on with the acquisition of Bausch & Lomb, the $800-million in anticipated synergies should help allay cash-flow fears, said RBC Dominion Securities analyst Douglas Miehm.

The recent jump in interest rates may make debt financing more expensive, but Mr. Miehm notes that roughly half of Valeant’s total debt is fixed.

He also thinks that Bausch & Lomb product launches should help sustain solid organic growth levels – and that Valeant will be back on the acquisition path in the near future.

“Investors should not think that management is done assessing additional targets,” Mr. Miehm said. “It will probably take six to nine months for B&L to be integrated, and by that time, we expect management to be well on its way to considering/completing potentially a merger of equals. That deal would likely be financed with equity and should take significant pressure off of the balance sheet, in our view.”

The $8.7-billion acquisition of Bausch & Lomb is set to close in the third quarter.

Target: Mr. Miehm raised his price target to $100 (U.S.) from $76 and reiterated an “outperform” rating. The average target is $103.29.

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Although subscriber growth remains marginal at Shaw Communications Inc., the company’s focus on improving the monetization of its existing customers is working, said RBC Dominion Securities analyst Drew McReynolds.

In addition to reporting better-than-expected quarterly results last week, Shaw made upward revisions to its fiscal 2013 free cash flow guidance and committed to 5 per cent to 10 per cent annual dividend increases.

“While our forecast already factored in 5 per cent annual dividend increases, we view this target as an incremental positive for the Shaw story,” he said.

Target: Mr. McReynolds raised his price target by $1 to $24 and reiterated a “sector perform” rating. The average target is $24.67.

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Rewards program operator Aimia Inc.’s plans to part ways with long-time credit card partner Canadian Imperial Bank of Commerce in favour of Toronto Dominion Bank “is very much a calculated move to sacrifice margin and fiscal cash flow in the near term for the longer-term health and growth of Aeroplan,” commented Canaccord Genuity analyst Aravinda Galappatthige.

In the short term, Aimia should see a downturn in billings, adjusted EBITDA and free cash flow as CIBC billings end and the new card activity starts to ramp up.

But he expects a strong rebound in 2015 – albeit not to levels prior to TD taking over the card.

Target: Mr. Galappatthige cut his price target to $18.10 from $18.30 and maintained a “buy” rating. The average target is $16.28.

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CIBC World Markets analyst Jeff Killeen downgraded Orezone Gold Corp. to “sector performer” from “sector outperformer,” after the company changed the scope of its Bomboré project in Burkina Faso.

It will now become a heap leach project and target only the oxide and transition resources of the project, which make up about 43 per cent of total measured and indicated resources.

“Our production profile changes significantly with the removal of sulphide ore,” said Mr. Killeen, but added that he was encouraged by the shift to a lower capital expenditure project in light of current market conditions.

Target: Mr. Killeen cut his price target to $2 from $3.15. The average target is $1.94.

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

Follow on Twitter: @eyeonequities

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