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Air Canada passengers wait to purchase tickets at Toronto's Pearson airport in 2008. (MIKE CASSESE/Mike Cassese/Reuters)
Air Canada passengers wait to purchase tickets at Toronto's Pearson airport in 2008. (MIKE CASSESE/Mike Cassese/Reuters)

Eye on Equities

UBS slashes price targets on Air Canada, Alcoa Add to ...

UBS has slashed its price target on Air Canada , citing a number of concerns ranging from labour negotiations, its ballooning pension deficit and the troubles it's encountering in launching a low-cost carrier.

"Despite the 70 per cent pullback in AC.B’s share price year-to-date and 20 per cent in the last month, we choose to remain on the sidelines and thus maintain our 'neutral' rating," UBS analyst Hilda Maraachlian said in a note. "We will consider being more constructive on the name when uncertainties surrounding labour negotiations, LCC (low-cost carrier) and pension are resolved."

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Ms. Maraachlian said there is considerable downside risk from the labour negotiations with several of its unions, expecting the unionized workforce to demand material increases in wages and benefits. "Further, the stiff opposition that AC.B is facing from the unions regarding launching an LCC could potentially hinder AC.B’s plans."

She also expects the carrier's pension deficit, which currently stands at $2.1-billion, to grow by another $1.6-billion in 2012. "The overhang of such a large financial liability puts AC.B under significant financial risk," she added.

Downside: UBS cut its price target by 40 cents to $1.10 (Canadian).

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The fourth-quarter earnings season kicks off in just three weeks - and it may not give investors much reason to keep the holiday cheer flowing into the New Year.

The European debt crisis and a still sluggish U.S. economy are tempering expectations for profit growth. The impact of the shaky macro conditions could be on display when Dow component Alcoa Inc. kicks things off with its latest quarterly results on Jan. 9.

UBS analyst Brian MacArthur today lowered his expectations for Alcoa’s earnings per share for the fourth quarter to only a penny. That’s a fraction of the 15 cents the aluminum giant earned in the third quarter, and also well below the current analyst consensus of 7 cents.

A key reason is the fall in the value of aluminum. The LME aluminum price has averaged about 97 cents in the fourth quarter, down nearly 12 per cent from the third, Mr. MacArthur points out in a note. At the same time, Alcoa has been hit with inflation in raw material costs.

Mr. MacArthur expects continuing productivity improvements to bolster alumina and primary aluminum production at Alcoa, which will help offset the lower prices and higher input costs. Similarly, relatively robust aerospace and auto demand will offset some of the weakness being seen in European markets and a seasonal decline in beverage packaging.

Nevertheless, he revised his 2011 earnings per share estimate to 72 cents from 78 cents, and his 2012 forecast to 62 cents from 78 cents, to reflect “lower realized pricing, foreign exchange rates to date, rising costs and the weaker macroeconomic outlook.”

Downside: Mr. MacArthur cut his price target by $2 (U.S.) to $9.50. He maintained a “neutral” rating.

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UBS's Mr. MacArthur has also lowered his earnings per share estimates for Agnico-Eagle Mines Ltd. for 2011 through 2013, citing his expectations for higher operating costs at several mines. Agnico-Eagle expects 2011 production of 1.01 million ounces at a cash cost of $575 an ounce, and he believes “it is critical” for the company to hit its operational targets to regain credibility after several recent negative revisions.

Downside: Mr. MacArthur cut his price target by $5 (U.S.) to $54 and maintained a “buy” rating.

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United Natural Foods has grown substantially over the last 12 months as it integrated acquisitions and added food giant Safeway as a new customer, but the shares have been flat, noted Canaccord Genuity analyst Scott Van Winkle. He upgraded the stock to a “buy,” commenting that “we believe that strong internal growth and sequentially improving margins can deliver some positive momentum to the shares.”

Upside: Mr. Van Winkle raised his price target by $1 to $45 (U.S.).

Raymond James Ltd. analyst Daryl Swetlishoff has upgraded Mercer International Inc. to “outperform” from “market perform,” citing its “inexpensive valuation” and expectations for improving northern bleached softwood kraft pulp prices during the first quarter of 2012. While about 60 per cent of Mercer’s sales are shipped within Europe, more than half of that is shipped to Germany, the most stable of the euro zone countries, he noted.

Upside: Mr. Swetlishoff maintained a price target of $8 (U.S.).

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As a result of continued weakness in commodity prices and an uncertain U.S. economic outlook, CIBC World Markets Inc. analyst Michael Willemse cut his earnings estimates for Progressive Waste Solutions Ltd. . “While BIN's U.S. South operations appear to be relatively stable, weakness at the U.S. Northeast operations suggests pricing pressure is likely to continue,” he commented.

Downside: Mr. Willemse trimmed his price target by $2 to $25 (U.S.) and maintained a “sector performer” rating.

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