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Berkshire Hathaway Chairman and CEO Warren Buffett is interviewed in New York, Monday, Feb. 22, 2010. (Seth Wenig/AP)
Berkshire Hathaway Chairman and CEO Warren Buffett is interviewed in New York, Monday, Feb. 22, 2010. (Seth Wenig/AP)

Why this year’s rally in Berkshire Hathaway has only just begun Add to ...

Inside the Market's roundup of some of today's key analyst actions

It’s been a great year so far for Warren Buffett: B class shares in his Berkshire Hathaway Inc. have risen an impressive 15 per cent.

And, according to Odlum Brown analyst Felix Narhi, the rally isn’t over.

Referring to Berkshire as “a compound growth machine still worth owning,” Mr. Narhi believes the company’s ownership in high-quality businesses means it’s built to last. Even after the run up, he thinks the stock is cheap relative to its “intrinsic value.”

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“The stock has outperformed almost all stocks and mutual funds that have existed for at least 30 years by buying cheap, safe, quality stocks and private businesses and boosting its underlying returns by using low-cost and stable sources of financing,” Mr. Narhi said in a research note.

“Berkshire is more mature now which will limit growth potential, but the core strategy remains the same and should enable the stock to continue to outpace the S&P 500 over the medium term.”

A key concern among investors has been what will happen to the stock after the 82-year-old Mr. Buffett is no longer at the helm. But Mr. Narhi notes that Berkshire has been set up to be successful when that day arrives.

Mr. Buffett has little day-to-day involvement in the running of the underlying businesses, which are run well by their own operators and will continue to generate strong cash flow without his direct involvement, he said.

Mr. Buffett has also hired two investment managers - Todd Combs and Ted Weschler - who have excellent track records and are gradually taking on more responsibility for capital allocation decisions, he noted.

Meanwhile, the stock is trading near multi-decade lows on a price-to-book value basis and the balance sheet is exceptionally strong, he said.

Target: Mr. Narhi has a $127 (U.S.) price target.

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Great Canadian Gaming Corp.’s performance at two sites will be unfavourably affected by changes to operating agreements with the Ontario Lottery and Gaming Corp., said Canaccord Genuity analyst Derek Dley.

“We, along with many investors, were hoping for an update relating to the expiring operating agreements at the company’s Ontario facilities, Georgian Downs and Flamboro Downs, which expire on March 31,” he wrote in a research note. “While light on details, Great Canadian did state that should the company reach lease agreements with the OLG, EBITDA from these two properties should be less than 2012 levels, which amounted to $17-million during 2012, or approximately 12 per cent of Great Canadian’s consolidated 2012 EBITDA. Great Canadian also stated that should the company not reach an appropriate lease agreement with the OLG, the company would be forced to record additional property write-downs.”

Targets: Mr. Dley rates the stock “hold” and lowered his price target to $9.50 from $10. The average analyst 12-month price target is $10.29, according to Bloomberg data.

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Cathedral Energy Services Ltd.’s fourth quarter represented its second weak quarter in a row, but its results should improve with expansion in its U.S. activity, Desjardins Securities analyst Jamie Murray said.

“We believe the difficult market conditions affected Cathedral’s Canadian customer base more than other service companies. The company lost market share in the second half of 2012, and we believe its customer mix has more to do with this drop-off than operational issues. We also speculate that the company has been less flexible in its pricing strategy,” he said.

Mr. Murray expects better financial performance in 2013, mainly from Cathedral’s expansion into Texas and Oklahoma. The company’s finances remain in good shape, and its dividend yield has “crept up to 6.3 per cent, even with a dividend payout that is just 26 per cent of our estimated 2013 funds from operations,” he said.

Targets: He rates the stock “buy” and has a $7 price target. The average Street target is $6.06.

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Shares in Linamar Corp. have had a very strong run over the past year but further gains will likely be harder to come by amid a more muted growth outlook for the engineering products supplier, said RBC Dominion Securities analyst Steve Arthur.

Linamar said in a conference call this week that revenue growth expectations appeared too high for 2013. It’ll likely see mid-single digit growth rates this year, instead of the double digits many were expecting.

Mr. Arthur, who downgraded Linamar to “sector perform” from “outperform,” suggested there are better buys within its peer group right now.

Targets: Mr. Arthur cut his price target by $2 to $29, which is also the average target among analysts.

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Torstar Corp. this week reported another weak quarter, “as the company failed to deliver against a set of very modest expectations,” commented CIBC World Markets analyst Robert Bek.

He believes investors should watch the stock only from the sidelines, given there’s litttle to suggest a quick rebound in operating conditions.

“Outlook from management remains cautious, with pension funding pressures on dividend safety adding further uncertainty, although our numbers do not suggest this pressure quite yet,” Mr. Bek said. “While shares are cheap, sector valuation pressures remain high and operating tone is still weak.”

Targets: Mr. Bek cut his price target by $1 to $8 and reiterated a “sector performer” rating. The average target price is $8.57.

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Wajax Corp. investors face a number of near-term concerns, such as increased financial leverage, persistently high inventory levels, a declining order backlog and “a rather sombre outlook from management,” said Raymond James analyst Ben Cherniavsky.

“The specific headwinds that are predominantly plaguing Wajax at present include softer oil and gas markets, tempered prospects in mining, pressure in eastern Canada's small machine market, and the discontinuation of the LeTourneau product line. These are more than offsetting some of the prevailing bright spots for the company such as forestry, infrastructure in western Canada, and robust growth in Equipment aftermarket revenues,” he wrote in a research note.

“Indeed, the combination of Wajax's low near-term earnings growth prospects and high dividend payout ratio compels us to remain neutral on the stock until the dust settles around some of the key issues outlined above,” he said. “In our view, this is still a solid company with good long-term growth prospects, but we remain concerned about near-term market headwinds at present.”

Targets: Mr. Cherniavsky rates the stock “market perform” and lowered his price target from $45 to $40. The average Street target of $42.44

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

Follow us on Twitter: @eyeonequities, @SVerma__

 
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