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Toronto-Dominion Bank reported return on common equity in 2012 from U.S. banking of 6.4 per cent. In Canadian banking, return on equity was 43 per cent. (MARK BLINCH/REUTERS)
Toronto-Dominion Bank reported return on common equity in 2012 from U.S. banking of 6.4 per cent. In Canadian banking, return on equity was 43 per cent. (MARK BLINCH/REUTERS)

EYE ON EQUITIES

TD Bank flood charges may prove ‘challenging to digest,’ says analyst Add to ...

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.

Turquoise Hill Resources Ltd.’s Oyu Tolgoi mine in southern Mongolia has hit an unexpected delay. The $4-billion in project financing from the Mongolian government is now going to need to be approved by parliament first. The setback has caused Rio Tinto PLC – which is a partner in the project – to suspend development of the underground portion of the copper-gold mine.

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That’s added and element of uncertainty to the project, said CIBC analyst Alex Kodatsky.

“It will also likely force TRQ to seek alternative financing to fund the repayment of bridge financing facilities (provided by RioTinto) due before the end of 2013,” added Mr. Kodatsky.

Target: Mr. Kodatsky has cut his price target to $5.50 down from $9.50.

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Losses from the recent flooding in Alberta and Ontario have hit Toronto-Dominion Bank hard.

The bank’s release of charges expected to be included in its third-quarter earnings report revealed that about one-quarter of those charges are related to flooding. The rest relate to strengthening of reserves for auto insurance and real estate loans.

“In aggregate the charges appear to total $510-million or $0.55 per TD common share,” noted Brad Smith, an analyst with Stonecap Securities.

Although the market will probably to accept charges from the storm are unusual and the need to strengthen reserves in the wake of regulatory reforms and real estate losses, “the large amount may prove more challenging to digest,” said Mr. Smith.

Target: Mr. Smith has set a price target for the bank at $72 and rated it as “Underperform.”

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The sale of high-end retailer Saks Inc. to Hudson’s Bay Co. for $1.5-billion was big news yesterday, but headlines alone aren’t going to move the bottom line.

Spinning Saks’ real estate holdings into an REIT will help HBC deleverage, and the $100-million in projected synergies play to HBC’s back-office strength, said CIBC analyst Perry Caicco. But he still sees sales growth as a potential challenge.

“It is difficult to see how HBC helps Saks materially grow or improve or how big the horizon is for the Saks brand or Saks online in Canada,” said Mr. Caicco.

Target: Mr. Caicco is holding his price target firm at $20 and rating it as “Sector Outperformer.”

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The slowdown in the mining sector and a glut of inventory will make growth a challenge for construction supplier Toromont Industries Ltd. , says Sara O’Brien, an analyst with RBC Dominion Securities.

But with large projects construction projects like road works holding up well and potential for opportunities with the Muskrat Falls hydro project in Newfoundland, the future looks good for the company, said Ms. O’Brien.

“We believe TIH shares will deliver double-digit earnings growth in F14 following flat earnings in F13, from improved margins in equipment group once excess inventory has been worked through the dealership system,” she said.

Target: Ms. O’Brien cut her price target to $26 from $27 but rated the company as “Outperform.”

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While the common view on Kellogg Co. is that the stock is poised for a positive surprise, Credit Suisse analyst Rob Moskow doesn’t share that optimistic outlook.

“The bullish view is based on the assumption that Kellogg is about to enjoy a significant operating profit benefit from the rollover of commodity hedges and the timing of expenses related to the acquired Pringles business,” said Mr. Moskow. “While it is hard to argue with the logic, the cadence of the earnings and the guidance strike us as very out of character, especially in the fourth quarter.”

The holiday season is typically “weak from an earnings perspective due to the lack of cereal merchandising,” he said.

Target: Mr. Moskow set a price target at $62 (U.S.) and rated the company as “Underperform.”

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