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Almost half – 48 per cent – of sales at Dollarama in the second quarter were from products sold for more than $1, chief operating officer Stéphane Gonthier told analysts. (Peter Power/The Globe and Mail/Peter Power/The Globe and Mail)
Almost half – 48 per cent – of sales at Dollarama in the second quarter were from products sold for more than $1, chief operating officer Stéphane Gonthier told analysts. (Peter Power/The Globe and Mail/Peter Power/The Globe and Mail)

Eye on Equities

As analysts hike targets on Dollarama, investors flee Add to ...

So much for the celebration over Dollarama Inc.’s latest quarter of double-digit growth. Shares are down about 4 per cent in early afternoon trading, wiping out the gains Wednesday after the discount retailer announced a 33 per cent rise in profit.

But several analysts think the reversal of the rally won’t last long and are becoming even more bullish on the stock.

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CIBC World Markets Inc. analyst Perry Caicco today raised his price target by $8 to $48 and Desjardins Securities Inc. analyst Keith Howlett lifted his by $3.50 to $46.50. Both rate the stock as buys. Raymond James Ltd. analyst Kenric S. Tyghe is more cautious, affirming his “market perform” rating and hiking his price target by $2 to $38.

Dollarama has been a tremendous growth story over the past decade, with its store count of 680 more than its next five largest competitors combined.

But some warning signs have emerged. The company’s market value has surged about 43 per cent so far this year, giving it a significant valuation premium to other big retailers. Meanwhile, the company has been seeing a decline in customer traffic over the past year. In the three-month period ended Oct. 30, traffic slipped 0.1 per cent, following a 0.5 per cent drop in the second quarter.

CIBC’s Mr. Caicco isn’t too concerned. “We do not believe that same-store traffic is an incredibly useful statistic for DOL, since 93 per cent of stores in the calculation are mature and successfully selling more to the same customers,” he said in a research note today.

Meanwhile, he believes Dollarama may benefit from Zellers soon leaving the Canadian retailing scene, since many Dollarama outlets are close to the stores being converted to the Wal-Mart or Target banners. That proximity may mean higher traffic levels.

Desjardin’s Mr. Howlett agrees. “We see no imminent competitive threat to Dollarama’s growth... It remains one of the most attractive organic growth stories in the consumer space.”

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Penn West Petroleum Ltd.’s third-quarter, which saw the oil and gas producer’s declining production per share streak reversed, represents the start of a new growth trend in production and reserves and the time to buy the stock is now, said Canaccord Genuity analyst Brian Kristjansen. “We believe the company is at an inflection point, with the current share price being relatively undervalued,” he said.

Upside: Mr. Kristjansen initiated coverage with a “buy” rating and $22.75 price target.

Related: Charts suggest Penn West Exploration a hold

________

Although it faces margin pressure and a weak capital markets environment, Laurentian Bank of Canada is seeing a favourable trend in its earnings power, said Desjardins Securities Inc. analyst Michael Goldberg. Laurentian has just raised its dividend by 7 per cent, and he believes the bank’s earnings and capital are strong enough to prompt another 9 per cent hike over the coming year.

Upside: Mr. Goldberg upgraded the stock to a “buy” from a “hold” and raised his price target by $3 to $58.

Related: Laurentian profit hit by one-time charge

________

RBC Dominion Securities Inc. analyst Andre-Philippe Hardy has upgraded Bank of Nova Scotia to “outperform” from “sector perform,” believing that the recent share price decline provides an attractive entry point for a bank with above-average medium-term growth prospects.

“We continue to like Scotiabank's consistent strategy and execution, the greater growth potential of its international banking arm versus purely North American banking franchises, and the improved wealth management platform,” he commented. “With the stock trading at a lower relative price-to-earnings than peers than earlier in 2011 (Scotiabank has been the worst performing Canadian bank stock in 2011), we feel that the negative elements to the Scotiabank story (capital and domestic retail revenue growth) are better 'priced' than they were before.”

Upside: Mr. Hardy maintained a price target of $62.

Related: Canaccord’s new view: Buy RBC, not Scotiabank

Clarus Securities Inc. analyst David Ricciardi has initiated coverage on Iona Energy Inc. with a “speculative buy” rating, believing the junior will realize value in assets that have been overlooked by others. “Iona’s business plan capitalizes on assets that are considered too small for the majors in the North Sea, but are ideal for a junior because they hold little exploration risk and are developmental in nature,” he said.

“Most plays hold legacy wells that have produced in the past, but were shut-in due to technological limitations and low oil prices – most were drilled in the 1990s.”

Upside: Mr. Ricciardi set a 12-month price target of $1.25.

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