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(Kevin Van Paassen)
(Kevin Van Paassen)

Eye on Equities

An upgrade for Canadian Tire, a downgrade for Rona Add to ...

There's a lot more to Canadian Tire than tires - including, according to TD Newcrest, a good buying opportunity for stock investors.

With the stock trading well below its highs for the year near $68, and the acquisition of Forzani Group Ltd. promising to deliver significant growth to come, analyst Jessy Hayem upgraded Canadian Tire Corp. Ltd. to "buy" from "hold" while raising her 12-month target price by $6 to $72.

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Ms. Hayem believes that bringing Forzani into the fold will likely overshadow past concerns about the lack of growth within Canadian Tire's core retail division. Growth, after all, is exactly what Forzani will bring, along with some significant cost synergies.

"Near-term financials should begin to look incrementally better and this, combined with recent share price pressure, is causing us to revisit our thesis on CTC," Ms. Hayem wrote in a research note.

She cautioned, however, that key challenges at the retailing division persist for the longer run. "Growth has been acquired for the short to medium term," she pointed out.

Ms. Hayem, who believes there's little chance that a competing bid for Forzani will materialize, expects the acquisition will add 31 cents and 59 cents, respectively, to her fiscal 2011 and 2012 earnings per share estimates, assuming the $25-million in expected synergies is achieved in 2012. This will be partly offset, though, by an expected drop in store traffic in the second quarter of this year due to inclement weather conditions.

"Trading at 11 times our revised fiscal 2011 EPS, the stock looks attractive," she said.

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The unfavourable weather has also been unwelcome news for Rona Inc. , and that retailer is faced with another key problem: consumers are being stingy when it comes to opening up their wallets for big-ticket renovations.

TD Newcrest's Ms. Hayem today cut her earnings estimates for a second time since the company posted its first-quarter results in early May, due to lowered second-quarter same-store sales growth and margin expectations. Margins, she believes, will still be under pressure in the second quarter because promotional efforts to draw consumers into stores will likely have to be extended.

"Though profitability initiatives are still underway, their impact appears muted, in the context of tougher revenue growth," she said.

Downside: Ms. Hayem downgraded Rona to a "hold" from a "buy" and cut her 12-month target price by $2 to $13.

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Iamgold Corp. is expecting second-quarter production to be below forecasts due to short-term operational issues at its Essakane project in Burkina Faso and the Rosebel mine in Suriname. TD Newcrest analyst Steven Green also notes that cost inflation remains an issue at the company, particularly in West Africa.

Downside: Mr. Green cut his 12-month price target by $1 to $26 but maintained a "buy" rating.

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Analyst Scott Chan of Canaccord Genuity is lowering his price target on AGF Management Ltd. due to declining equity markets so far this month and his expectations for higher retail net fund redemptions for the balance of this year. AGF this week reported adjusted earnings per share of 37 cents, a penny shy on consensus forecasts.

Downside: Canaccord's new price target is $19.75, from $20. It rates the stock as a "hold."

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If ever there was a good time to buy Aecon Group Inc. stock, this just may be it, suggests analyst Yuri Lynk of Canaccord Genuity. The company's valuation is "extremely depressed" and with the company's backlog of work at a first-quarter record, margins in that backlog increasing, and improving bid margins, "our work shows this could be an excellent entry point," he said.

Upside: Mr. Lynk rates Aecon a "buy," and maintained a $13 price target.

(TD Newcrest analyst Steven Green says cost inflation remains an issue for Iamgold Corp. in West Africa, not South Africa. Incorrect information was published in an earlier version.)

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