Analyst actions: The two telecom stocks that will outperform all others

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Inside the Market's roundup of some of Thursday's key analyst actions. Watch for our fresh file on Friday's analyst actions this morning. For breaking analyst actions prior to market open every day, read our Before the Bell morning report.

Euro Pacific Canada initiated coverage on the Canadian telecom sector today with an "overweight" recommendation – and is particularly bullish on two names.

Both Quebecor Inc. and Cogeco Cable Inc. got "strong buy" ratings thanks to a promising growth outlook. Euro Pacific analysts Rob Goff and Mark Belcarz believe their shares could both see gains of more than 20 per cent over the coming year.

"Buy" ratings went to Telus Corp. and Rogers Communications Inc.

Three telecom stocks were seen with less potential to reward investors: BCE Inc., Shaw Communications Inc. and Manitoba Telecom Services Inc. They were all rated as a "hold."

Here's a summary of some of what Mr. Goff and Mr. Belcarz had to say about all six companies:

Quebecor (Price target $30): "We expect Quebecor shares to outperform, driven by financial growth and a modest narrowing of the current relative valuation discount. We believe investors place an excessive discount on Quebecor shares due to their lower dividend yield, lesser liquidity and lack of confidence in management that is at odds with the strategic and operational performance over the past five years."

Cogeco Cable (Price target $60):  It likes the company for an integrated strategy that is emerging and what it sees as "clear value drivers" – especially in enterprise services.

Telus (Price target $40): "We recommend Telus shares to dividend yield and flexible GARP investors. We view the current valuation at 6.8x 2014 EV/EBITDA and 4.5 per cent free cash flow yield as attractive measured against peer leading baseline five-year EBITDA/FCF CAGRs at 5.1 per cent/11.1 per cent. More bullish wireless scenarios support stronger growth and return profiles."

Rogers Communications (Price target $52): "Rogers Wireless has underperformed its peers over the past three years fighting the legacy burdens of its leadership in smartphones, iPhones and roaming. With greater parity across the three leaders, we look for Rogers to narrow the gap. Our forecasts for Rogers reflect stronger peer performance leaving upside potential with execution parity….With the current dividend payout at 56.7 per cent/54.5 per cent against 2013/14 free cash flow, we could see Rogers continue its path of annual dividend increases around the 8-10 per cent range while repurchasing roughly 5 per cent of its shares."

BCE Inc. (Price target $47): "The current valuations at 6.9x 2014 EV/EBITDA, 5.2 per cent fully taxed free cash flow yield, and 2.6 per cent dividend yield spread suggest limited upside from positive revaluations. Consequently, we forecast annual returns largely in line with our five-year free cash flow compounded annual growth rate at 4.7 per cent plus the dividend yield."

Shaw Communications (Price target $25): "We support Shaw's efforts to strengthen its consumer franchise while it builds out in business services. Valuation supports hold rating; however, we see positive momentum."

Manitoba Telecom Services (Price target $31): "MTS's modest growth profile and competitive challenges limit prospective returns. Current valuations favour alternative investments. Takeover speculation is unattractive."

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TD Securities initiated coverage on the Canadian big banks this morning, with Bank of Nova Scotia its top pick of the bunch.

TD gave Scotiabank an "action list buy" rating, with a price target of $71 (Canadian). It's currently trading near $60.

It started coverage on Bank of Montreal with a "hold" rating and $76 (Canadian) price target.

Royal Bank of Canada and National Bank also got "hold" ratings. It gave "buy" ratings to both Canadian Imperial Bank of Commerce and Toronto Dominion Bank.

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RBC Dominion Securities analyst Walter Spracklin downgraded two of the biggest U.S. rail companies - CSX Corp. and Norfolk Southern Corp. - to "sector perform" ratings, citing concerns over pricing and coal shipment trends. Both stocks were previously rated "outperform."

At CSX, core pricing only grew 1 per cent in the third quarter, after gaining 2.7 per cent in 2012 and 7.1 per cent in 2011, he noted. "While largely due to declining coal rates, non-coal pricing has unexpectedly tracked lower as well. We had been forecasting +3.5 per cent core pricing growth for 2014, but given management commentary on recent trends, we have reduced our pricing estimate to +1.5 per cent," he said in a research note.

"While the challenges in coal markets are not new news, this segment did not rebound in 2013 and we have to recognize the risk that these headwinds could persist indefinitely. Management noted coal needs to rebound for CSX to achieve its EPS guidance, and at this point, we lack the conviction to say that it will," he added.

Mr. Spracklin is also taking a more conservative view on Norfolk Southern for similar reasons. He is recommending investors now take profits in the stock.

Targets: RBC cut its price target on CSX to $28 (U.S.) from $31, and its target on Norfolk was lowered to $89 (U.S.) from $94.

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RBC Dominion Securities upgraded Enerplus Corp. to "outperform" from "sector perform" and raised its price target by 10 per cent, predicting the stock could see a total potential return of 35 per cent within the next year.

"Our renewed bullish stance reflects Enerplus' operating momentum, relative valuation and improved capital discipline – which should fuel further multiple appreciation," RBC analyst Greg Pardy said in a research note.

"While Enerplus has proven itself adept at timely acquisitions and dispositions, its organic growth profile – anchored by the Bakken and Marcellus, has plenty of running room," he added.

Mr. Pardy expects Enerplus to achieve production growth of 5 per cent in both 2014 and 2015, and sees its dividend holding steady during that period. He notes the company's balance sheet remains in good shape.

Target: Mr. Pardy raised his price target to $22 (Canadian) from $20.

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TMX Group Inc. saw lower-than-forecast non-initial public offering financing activity on the Toronto Stock Exchange in the third quarter, but recent weakness in its share price fully discounts this, said BMO Nesbitt Burns analyst John Reucassel.

He modestly cut his price target on the stock while reiterating an "outperform" rating.

"Despite weaker non-IPO financing activity, which can be volatile and difficult to predict, margins should remain attractive (45-50 per cent) given synergies from the Maple transaction. In addition, we continue to believe that recent smaller transactions (fixed income joint venture with FTSE and acquisition of transfer agent/corporate trust business) should provide interesting growth opportunities and allow for further diversification," he said.

Target: Mr. Reucassel cut his price target to $56 (Canadian) from $58.

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In other analyst actions today:

Canadian stocks:

Dundee Securities downgraded Colossus Minerals to "sell" from "neutral," and cut its price target to 50 cents (canadian) from 80 cents.

CIBC World Markets cut its price target on Gluskin Sheff & Associates to $20 (Canadian) from $21.50 and reiterated a "sector performer" rating.

CIBC World Markets cut its price target on SNC-Lavalin Group to $48 (Canadian) from $50 and maintained a "sector outperformer" rating.

M Partners initiated coverage on Trevali Mining with a "buy" rating and $2 price target.

Clarus Securities initiated coverage on Raging River Exploration with a "buy" rating and $8 (Canadian) price target.

U.S. stocks:

UBS downgraded IBM to "neutral" from "buy" and cut its price target to $186 (U.S.) from $235. BMO Nesbitt Burns cut its target to $195 from $215 and reiterated a "market perform" rating. Goldman Sachs cut its target to $175 from $195 and maintained a "neutral" rating.

Oppenheimer upgraded Best Buy to "outperform" from "perform" and raised its price target to $50 (U.S.) from $36.

Needham & Co. upgraded SanDisk to "strong buy" from "buy" and raised its price target to $90 (U.S.) from $80.

BMO Nesbitt Burns raised its price target on Yahoo to $32 (U.S.) from $27 and reiterated a "market perform" rating.

Cowen upgraded Cliffs Natural Resources to "market perform" from "underperform" and raised its price target to $20 (U.S.) from $11.

RBC Dominion Securities raised its target on American Express to $65 (U.S.) from $61 but reiterated an "underperform" rating.

RBC cut its target on EBay to $59 (U.S.) from $64 and reiterated an "outperform" rating.

RBC Dominion Securities upgraded Alliant Techsystems to "outperform" from "sector perform" and raised its price target to $122 (U.S.) from $109.

Credit Suisse downgraded Stanley Black & Decker to "neutral" from "outperform" and cut its price target to $71 (U.S.) from $88.

Pacific Crest raised its target on Pandora to $32 (U.S.) from $24 and maintained an "outperform" rating.

UBS raised its price target on BlackRock to $305 (U.S.) from $280 and reiterated a "neutral" rating.

Canaccord Genuity downgraded Amarin to "hold" from "buy" and cut its price target to $3 (U.S.) from $10.

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