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A CP train near Lake Louise, Alta.
A CP train near Lake Louise, Alta.

Eye on Equities

Canada's rail carriers hit with a downgrade as economy sours Add to ...

With the global economic picture darkening, Raymond James Ltd. analyst Steve Hansen has reversed his bullish stance on Canada’s major rail carriers, now advising investors to stay on the sidelines even as the shares appear to look cheap.

He notes that recent carload originations data from the American Association of Railroads provided confirmation that the North American economy is indeed slowing, although the figures did highlight some pockets of strength, such as motor vehicle and metallic ore shipments.

“The corollary, in our view, is that industry carload growth is likely slowing,” Mr. Hansen said in a research note today. “While there still is no definitive evidence to suggest a sharp decline is looming (contrary to many financial headlines), we are mindful of even a modest slowdown and the impact this will have on railroad ‘operating leverage,’ an underpinning theme that’s benefited the sector for the past seven to eight quarters. We have reduced our second half 2011 and 2012 financial estimates accordingly.”

He downgraded both Canadian National Railway Co. and Canadian Pacific Railway Ltd. to “market perform.” Previously, both had the equivalent of buy ratings.

“While we continue to believe the long-term outlook for Canadian railroads remains bright, recent downward revisions to global economic growth suggest the downside risk to the sector has increased materially, mitigating much of the upside reward, in our view,” he said.

Downside: Mr. Hansen cut his six- to 12-month price target on CN Rail by $5 to $76, and slashed his target on CP Rail by $18 to $55.

Related: CN would outperform other rails in a double-dip: RBC

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Sears Canada Inc. may see some benefit over the next year as a large number of Zellers stores close so that they can convert to Target and Wal-Mart banners. But with the new competitive threats looming and the retail environment looking shaky, Desjardins Securities Inc. analyst Keith Howlett sees little reason for investors to buy the company’s shares.

“Sears Canada will enjoy deceptive peace in 2012 as 189 Zellers stores close for months of renovation. The peace will be shattered when 39 of the stores reopen as Wal-Mart stores in late 2012, and most of the balance reopen as Target stores commencing in 2013,” Mr. Howlett said in a research note today.

The competitive threat doesn’t end there. Canadian Tire is also planning to enter Sears’ core businesses, such as major appliances and home-installation services.

Sears Canada’s new executive management team hasn’t had the time to implement changes necessary to compete in the new retailing landscape, and Mr. Howlett is growing skeptical that the company ‘s operating fundamentals will see any improvement. He also substantially reduced his earnings before interest, taxes, depreciation and amortization estimates for fiscal 2011 given poor first-half results.

Downside: Mr. Howlett cut his price target by $5 to $15 and maintained a “hold” rating.

Related: Sears Canada swings to loss

Related: Sears Canada under the gun as Target's invasion nears

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National Bank Financial is turning more cautious on the agriculture sector as grain prices start to suffer from weakening demand.

USDA’s September grain report indicated higher-than-expected U.S. inventories, and prices have tumbled in response, down 22 per cent from recent highs.

National Bank analyst Robert Winslow believes it’s still too early for investors to go bargain hunting in the equities sector, which has a high correlation to the value of grains.

“With the strong downtrend now unfolding for grain prices, we expect 2012 average grain prices to be less robust than the high levels seen through the first nine months of 2011,” he said. He reduced his fiscal 2012 earnings estimates and target prices for a number of ag equities. .

Downside: Mr. Winslow’s updated view on the sector resulted in two downgrades: Ag Growth International Inc. and Hemisphere GPS Inc. . Both went to “sector perform” from “outperform.” Ag Growth’s price target was cut to $39.50 from $45; Hemisphere’s was reduced to 85 cents from $1.50.

Related: Agriculture stocks get a downgrade

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Nevada Geothermal Power Inc. reported worse-than-expected financial results for its fiscal year ended June 30, posting a loss after one-time items of 13 cents a share, noted Canaccord Genuity’s Jared Alexander. The analyst is growing increasingly worried with debt financing problems at the company’s Blue Mountain power project in Nevada.

“While we believe a resolution remains possible, the slow progress to date is concerning to us,” Mr. Alexander said in a research note. “There is now just one quarter remaining until the company expects to potentially breach one of its debt covenants. Adding to the company’s woes is the current uncertain economic environment.”

He expects the value of Nevada Geothermal to remain depressed until the financing issues are resolved and economic uncertainty declines.

Downside: Mr. Alexander downgraded Nevada Geothermal to “sell” from “speculative buy” and slashed his price target to 10 cents from 55 cents.

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Major Drilling Group International Inc.'s $80-million acquisition of Bradley Group Ltd., which will add 124 rigs to its existing 577, was a “bargain” price, commented CIBC World Markets Inc. analyst Cosmos Chiu. “Bradley was the last privately held driller with a sizable fleet, and we believe Bradley fits well into MDI,” he said. Meanwhile, MDI shares have underperformed peers by as much as 50 per cent over the last six months, making MDI “very attractive,” he added.

Upside: Mr. Chiu upgraded Major Drilling Group to a “sector outperformer” and increased his price target by $1 to $17.

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Deutsche bank has downgraded Alcoa Inc. amid concerns about recent metal price declines, Reuters is reporting, sending the stock to 52-week lows.

The bank cut Alcoa’s investment rating to “hold” from “buy” and lowered its stock price target to $14 from $20, saying it believes industrial metals will be hurt by the European debt crisis and a slowdown in emerging markets.

The downgrade came after prices for three-month aluminum on the London Metals Exchange recently hit one-year lows below $2,150 per tonne, down from peaks of over $2,800 in May, on fears that the West’s sovereign debt crisis could depress the world economy.

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For the latest analyst actions and exclusive investing news and analysis, follow Darcy Keith on Twitter

 
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