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Shoppers Drug Mart, RBC team up on loyalty debit card (Deborah Baic/Deborah Baic)
Shoppers Drug Mart, RBC team up on loyalty debit card (Deborah Baic/Deborah Baic)

Eye on Equities

Desjardins downgrades Shoppers Drug Mart Add to ...

Desjardins Securities Inc. analyst Keith Howlett, who covers the pharmacy sector, has had a change of heart.

For some time now, he had been predicting rapid consolidation in the industry, prompted largely by new drug reforms in Ontario and other provinces that threatened the bottom line of retailers. Those reforms, he figured, would have smaller retailers hurtling toward the arms of the giants - especially Shoppers Drug Mart Corp. .

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But there’s been little consolidation so far and a number of recent events have Mr. Howlett now believing it’s not going to materialize anytime soon.

The government of Ontario says it is saving $500-million annually from its drug reforms, yet there’s been little sign of any economic hit to retailers, Mr. Howlett notes. Meanwhile, he believes the announcement this week that McKesson Corp. is acquiring the independent outlets and franchise businesses of Katz Group Canada Inc. will further slow the already glacial pace of industry consolidation.

“We will continue to monitor the situation closely but are no longer confident that meaningful consolidation of retail pharmacies will occur within the next two years,” Mr. Howlett said in a note.

As a result, he cut his fiscal year 2012 earnings per share estimate for Shoppers by 20 cents to $3, and downgraded the stock to “hold” from “buy.”

“Retail pharmacy capacity is not visibly leaving the market. Without industry consolidation, there is little wind in Shoppers’ sails. We see no near-term catalyst for the shares,” he said.

Downside: Mr. Howlett cut his price target by $3 to $42.

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Open Text Corp. shares are sharply higher today after the business software company posted a big jump in quarterly profit.

Profit and revenue both beat analyst expectations, and licence revenue - an indicator of future demand - also beat Street views, rising 13 per cent year-over-year. That’s more than double the growth rate of industry peers.

“Results were solid across the board, which is encouraging, given the slowing software spending environment,” commented Versant Partners analyst Tom Liston.

Upside: Mr. Liston maintained a “buy” rating and raised his price target by $6 to $70 (U.S.). Stifel Nicolaus analyst Blair Abernethy upgraded the company to a “buy,” while Raymond James Ltd. analyst Steven Li reiterated an “outperform” rating and $74 (U.S.) price target.

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Petronova Inc. has announced an oil discovery at Puerto Gaitan-1 - the company's first-ever exploration well - on block CPO-6 in Colombia's Western Llanos Basin. Given that PetroNova shares have surged more than 100 per cent over the past month in anticipation of the initial drilling results, some of the exploration success has already been priced into the stock, notes Raymond James Ltd. analyst Rafi Khouri. “Still, we view the news as unambiguously positive for PNA, as it establishes the prospectivity of the company's Llanos basin assets and lays the ground for near-term cash flow generation,” he said.

Upside: Mr. Khouri raised his price target by 10 cents to $2 and reiterated an “outperform,” rating.

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CIBC World Markets Inc. analyst Stephanie Price suggests investors should load up on CGI Group Inc. stock following its fiscal first quarter results this week. While they only met expectations for the most part, the IT service firm had a strong quarter for new business signings. “We expect CGI to see renewed revenue growth in the second half of 2012 as recent contract wins ramp up,” commented CIBC World Markets Inc. analyst Stephanie Price.

Upside: Ms. Price reiterated her “sector outperfomer” rating and $25.50 price target.

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Essential Energy Services Ltd. has sold its non-core wireline division to Welltec Canada Inc. for $7.5-million in cash. Raymond James Ltd. analyst Andrew Bradford applauded the transaction, noting the price was favourable for Essential and that proceeds will help the company lower its debt.

Upside: Mr. Bradford reaffirmed his “strong buy” rating and $3.10 price target.

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