Suncor Energy Inc.’s late winter rally has now completely evaporated, with shares back down to where they started the year. Shareholders can be forgiven for feeling frustrated; Suncor has largely treaded water over the past four years, even as crude oil prices soared from their recession lows.
But buying a stock when it’s down can often make for profitable returns, and two analysts today are urging investors to do just that.
BMO Nesbitt Burns Inc. analyst Randy Ollenberger upgraded Suncor to “outperform” from “market perform” while raising his price target by $1 to $39. While this partly reflects BMO raising its oil price projections, the main impetus was the recent share price weakness.
And National Bank Financial added Suncor to its “action list,” a small selection of stocks that its analysts consider the most compelling investment ideas. National Bank analyst Kyle Preston predicts investors could make a 40 per cent return by buying Suncor now; he rates the stock as an “outperform” with a target price of $43.
“We believe that Suncor shares are attractively valued at current levels given the combination of long-term production growth and expanding free cash flow that could support dividend growth,” BMO’s Mr. Ollenberger said in a note. “At current prices, we believe that Suncor shares are attractively valued, trading at a 2012 estimated enterprise value/earnings before interest, taxes, depreciation and amortization multiple of only 4.3 times and in line with our proved net asset value estimate.”
One of the reasons Suncor shares have been in the dog house has been a litany of production problems in recent years at its oil sands operation. But Mr. Ollenberger notes that operating performance improved in the core oil sands business last year, resulting in improved returns that “could ultimately drive an expansion in valuation multiples if it can be maintained.”
Mr. Ollenberger also notes that Suncor clarified in recent investor meetings that it is not negatively impacted by the wide discounts between Brent and West Texas intermediate. That’s because whatever they are losing in their upsteam business, they are making up on their downstream margins. Suncor estimates it’s capturing 93 of Brent pricing, which is trading much higher than WTI.
Meanwhile, Suncor has projects and regulatory approvals lined up to grow production to 1 million barrels per day by 2020, although management plans to slow the pace of growth if it isn’t economical to do so.
Mr. Ollenberger raised his 2012 earnings per share estimate to $3.57 from $3.48. That’s above the analyst mean estimate of $3.34.
Shareholder activist Bill Ackman may be downplaying Canadian Pacific Railway Ltd. ’s improved first-quarter results as having been distorted by a mild winter, but analysts are sounding more optimistic. Several modestly raised their price targets today, suggesting momentum is now in place for better operating results to come.
CP reported earnings per share of 82 cents, two cents better than consensus, while revenue surged 18.3 per cent and operating expenses showed improvement.
“CP’s strong first quarter was hardly a surprise given last year’s weather-impaired results, this year's relatively feeble winter, and the firm's prior guidance. Still, notwithstanding weather, CP appears to be gathering operational momentum alongside the global economic recovery, in our view,” said Raymond James Ltd. analyst Steve Hansen in a report titled “more than just weather.”
He raised his price target by $2 to $77 and maintained a “market perform” rating, but cautioned the improvement being seen may have “come too little too late” to change the direction of the proxy batter with Mr. Ackman’s hedge fund, Pershing Square Capital Management LP.
Canaccord Genuity analyst David Tyerman continued to recommend investors buy CP, and raised his price target by $3 to $92. He believes the company will produce “materially” better results in 2012 and beyond, assuming it’s successful in improving its operating ratio and that there’s normal operating conditions. “We recommend buying CP for very strong EPS growth in the next 3-5 years and the potential for upside surprises along the way,” he said.
UBS analyst Hilda Maraachlian raised her price target by $3 to $78 and maintained a “neutral” rating while Desjardins Securities Inc. analyst Benoit Poirier raised his target by $1 to $78.
CGI Group Inc. releases second-quarter results Wednesday morning and National Bank Financial analyst Kris Thompson warns bookings at the IT services firm could be weak, based on soft industry data and the lack of press releases during the period. While reiterating an “outperform” rating, he advises investors not to add to their positions ahead of the results. “If bookings are soft (after three very strong quarters) the stock could come under pressure providing a more attractive entry point,” he said.
Upside: Mr. Thompson maintained a $26 price target.
While believing investors should be underweight insurers relative to other sectors, National Bank FInancial has upgraded its rating on Great-West Lifeco Inc. . Analysts Peter Routledge and Grant Connor said Great-West is their top pick in the sector given the stability of its operating model, its “manageable” exposure to European credit, and the simplicity of its balance sheet. “We think the risk/return characteristics of this stock warrant an outperform,” they said.”
Upside: National bank raised its price target by $2 to $27.
Jean Coutu Group has sold 56 million shares in Rite Aid, bringing its ownership in the U.S. drugstore chain down to nearly 20 per cent, or 178.4 million shares, noted Desjardins Securities Inc. analyst Keith Howlett. While that will generate about $84-million (U.S.) in cash, the sale would appear to indicate that there is no looming takeover of Rite Aid, as had been rumoured earlier this year. “We would also interpret the share sale by PJC to mean that the turnaround of Rite Aid will remain a slow, laborious process, and that there is little near-term visibility of a substantially higher Rite Aid share price,” he said.
Downside: Mr. Howlett has a $13.25 target on Jean Coutu and rates it as a “hold.”
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