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A teller at a customized mobile telephone service provider transacts through on the Internet in Nairobi in this 2006 file photo. (TONY KARUMBA/TONY KARUMBA/AFP/Getty Images)
A teller at a customized mobile telephone service provider transacts through on the Internet in Nairobi in this 2006 file photo. (TONY KARUMBA/TONY KARUMBA/AFP/Getty Images)

Eye on Equities

As telecom shakeup looms, two stocks seen outperforming Add to ...

The Canadian telecommunications sector is bracing for a tumultuous year ahead that may forever change the competitive landscape.

UBS analyst Phillip Huang is out today with some predictions on how events will unfold and sees two stocks, in particular, offering investors a good opportunity to play the sector.

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Mr. Huang expects we'll get some clarity on telecom foreign ownership rules, with the government likely relaxing restrictions on those operators with less than a 10 per cent market share. He believes spectrum auction rules will be amended to promote greater competition.

Meanwhile, he foresees consolidation among wireless providers, including a possible merger between Mobilicity and Wind Canada. It'll come at a time when he expects more people will exit their landlines in favour of increasingly popular unlimited wireless plans.

Concerning data usage, he believes large telecom providers may consider increasing usage caps or lowering charges to appease current public sentiment.

So what stocks are safe investments in this shifting environment and still offer good upside potential? Quebecor Inc. is UBS's "industry top pick" with a $45 target price. Mr. Huang calls the stock a good buying opportunity given its significant long-term growth potential as it refocuses on wireless, its next pillar of growth.

He also likes BCE Inc. , with a target price of $39. With an attractive yield of 5.6 per cent, "it represents a relatively low-risk investment in the Canadian telecom sector" and management has demonstrated the ability to execute on their strategic plans while reducing costs, said Mr. Huang.

Canaccord Genuity analyst David Tyerman sees smooth flying ahead for Air Canada , which last week slashed planned seat capacity amid soaring fuel costs. The airline's debt and pension deficits are set to decrease substantially at a time when strong gains should arise from a cyclical industry recovery and the company makes further progress with its cost transformation program, he said.

Upside: Mr. Tyerman lowered his price target slightly by 25 cents to $9.

Despite foreign exchange headwinds, Tembec Inc. remains well positioned to generate decent EBITDA growth in fiscal 2011, said Canaccord Genuity analyst Neal Gilmer. Tembec should benefit from strong dissolving-pulp prices in 2011 and higher lumber prices heading into fiscal 2012, diminishing downside risks, he said.

Upside: Mr. Gilmer raised his price target by $1.50 to $6.75.

Shutterfly Inc. has agreed to acquire e-commerce site operator Tiny Prints for $333-million, a price tag Canaccord Genuity analyst Heath Terry called "somewhat rich." But given Tiny Prints' rapid growth, easily available cost synergies, and a higher value customer base, "management is capable of creating value well beyond the purchase price," he said.

Upside: Mr. Terry raised his price target by $6 to $44, seeing a buying opportunity "should uncertainty around the transaction impact the stock."

Goldcorp Inc. stock has had a "major breakout," with the recent rise to a two-year high of $49.30 signalling the start of a new major up-leg, said technical analyst Monica Rizk of Phases & Cycles. Technical indicators including the rising 40-week moving average and the MACD confirm the bullish status and only a decline below $43-$44 would negate the upside potential, she said.

Upside: Ms. Rizk said point and figure measurements suggest an initial target of $54.

The damage suffered by some of Hitachi's heavy equipment manufacturing facilities in Japan may cause delivery delays for some Hitachi products distributed by Wajax Corp. , said TD Newcrest analyst Michael Tupholme. But he doubts this will result in order cancellations, and "we do not believe that possible supply disruptions stemming from recent events in Japan in any way affect the company's longer-term earnings potential."

Upside: Mr. Tupholme rates the stock as a "buy" with a $44 price target.

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