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Shoppers outside of Sears Canada at Toronto's Eaton Centre. (Deborah Baic/The Globe and Mail)
Shoppers outside of Sears Canada at Toronto's Eaton Centre. (Deborah Baic/The Globe and Mail)

Eye on Equities

Sears Canada under the gun as Target's invasion nears Add to ...

Sears Canada Inc. is under siege from competitors and will soon have to face Target’s aggressive Canadian invasion. In a fresh assessment today, Desjardins Securities Inc. analyst Keith Howlett suggested there’s little time to waste for the retailer to turn its struggling business around.

“A declining consumer franchise, a cautious consumer and the pending entry of Target in 2013 lend a sense of urgency to the mission of reviving profitable sales growth at Sears Canada,” Mr. Howlett said. Last week’s announcement “that Wal-Mart Canada will purchase up to 39 Zellers leases from Target adds to the pressure.”

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By Desjardin’s “rough approximation,” the company’s market share has declined by 25 basis points per year since 2005, even though the company has benefited from cost reductions. A new president and chief executive officer has been hired, but he has much work to do.

“Sears Canada has been and continues to be under assault from emerging competitors across essentially all the categories of merchandise it sells,” said Mr. Howlett, adding that sales have been feeble “despite aggressive promotional programs.”

Not all news is bad, however. Sears has a “strong” balance sheet, Mr. Howlett said, and “good” -- albeit fading -- free cash flow. Controlling shareholder, Sears Holdings, and the company itself have been scooping up shares and Mr. Howlett said that “value may surface” if, at any point, there is a bid for Sears Canada’s minority stake or if the company issues a special dividend or sells leases.

But the central message is clear: with Target’s acquisition of up to 220 of Zellers’ leases and Wal-Mart’s own expansion, new management needs to get moving and investors need to be attentive.

Upside: Mr. Howlett rates Sears Canada as a “hold-above-average risk” and his target price remains at $20.

As Yellow Media Inc. shares hit fresh lows again Tuesday, yet another analyst cut his price target on the stock. Desjardins Securities Inc. analyst Maher Yaghi lowered his earnings and revenue forecasts for the next year and a half, concerned with the continuing decline in advertising sales.

“While the company’s online business growth has helped to stabilize revenue, online growth is serving only to partly mitigate the erosion of print advertising revenue, as we have yet to witness and increase in average revenue per advertiser,” Mr. Yaghi said in a research note.

That said, he believes the company’s current dividend is probably safe for now, given the company has sufficient cash on hand and generates enough cash flow. “Ultimately, however, we estimate the dividend will need to be cut if current trends fail to improve,” he said.

Downside: Mr. Yaghi reduced his price target to $3.90 from $5. 30. He rates the stock as a “hold,” but acknowledges that the very large short interest position will need to be covered at some point, creating periods of strong upswings.

Homburg Canada REIT has purchased three small office buildings in Calgary for $39.7-million, and has now bought $173-million worth of real estate since an equity offering in March. “The REIT has been extremely active on the acquisition front, and we would like to see management sit back and integrate the assets,” commented Beacon Securities Ltd.

Upside: Beacon maintained a “hold” and $13.50 price target.

Cogeco Cable Inc. is acquiring Quiettouch, an independent provider of outsourced managed IT and infrastructure services, for undisclosed terms. The deal will help Cogeco widen its market focus and better serve the medium and large business market, but CIBC World Markets Inc. analyst Robert Bek commented that it should not be material to the company’s valuation.

Upside: Mr. Bek rates Cogeco as a “sector outperformer” with a price target of $46.

Inflationary pressures from increased labour, fuel, energy and consumable costs are beginning to creep into the cost structure at Mercator Minerals Ltd. , warned Peter Campbell, analyst with Jennings Capital Inc. Operating costs for both copper and especially molybdenum were considerably higher in the first quarter from last year, he noted.

Downside: Mr. Campbell cut his price target by $1 to $4.

Com Dev International Ltd. shares have suffered from the fall-out related to underperforming contracts, but management is introducing tighter bidding processes to safeguard future earnings, commented CIBC World Markets Inc. analyst Stephanie Price. The company continues to see its exactEarth unit, which provides satellite data services, as a major opportunity, but Ms. Price expects benefits mostly in 2012 and beyond.

Upside: Ms. Price has a $3 price target for Com Dev and rates the stock as a “sector performer.”

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