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The Open Text building in Waterloo, Ont. (Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail)
The Open Text building in Waterloo, Ont. (Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail)

Eye on Equities

RBC downgrades Open Text as 'speed bumps' loom Add to ...

A shakeup in the top ranks of Open Text Corp. has RBC Dominion Securities analyst Paul Treiber turning more cautious on the software provider, warning investors of “speed bumps” to come.

With new CEO Mark Barrenechea at the helm, Open Text is accelerating its move outside the core enterprise content management market. Last year, it acquired Global 360 and Metastorm to expand into the business process management software market. Meanwhile, Open Text has made several changes to its management team and sales force, according to Mr. Treiber.

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“While Open Text’s strategy appears a good one for the long-term, ‘speed bumps’ such as management changes and sales channel adjustments may disrupt on Open Text’s near-term sales momentum,” Mr. Treiber said.

“The long-term impact of Open Text’s management and salesforce changes may be positive, but direct sales is the engine of an enterprise software company, and there is limited visibility that these changes won’t dampen license sales momentum over the next one to two quarters,” he added.

Mr. Treiber expects year-over-year organic growth at the company to slow to 5 per cent in the second half of fiscal 2012, from an estimated 9 per cent in the first half. He now expects adjusted earnings per share for fiscal 2012 to come in at $4.75, down from his earlier forecast of $4.80. For fiscal 2013, he reduced his earnings expectations to $5.20 a share from $5.80.

Upside: Mr. Treiber downgraded his rating on Open Text to “sector perform” from “outperform” while reducing his price target by $10 to $65 (U.S.).

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NYSE Euronext Inc. reported earnings that missed Street forecasts, but RBC Dominion Securities analyst Peter K. Lenardos believes the key culprits -- a weak trading environment and lacklustre capital raising activity -- are already reflected in the share price.

“We maintain our sector perform rating as we do not envision either outperformance or underperformance until market sentiment solidifies in either the bull or bear camp,” he said.

He also thinks that further share price weakness could spark merger and acquisition speculation. “Thus, we view the downside as limited, the upside as possible but unlikely in the near-term, and believe the share price correction is largely complete.”

Downside: Mr. Lenardos cut his price target by $3 to $25.

Read More: NYSE profit hit by weak trading, failed merger

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Edleun Group Inc. shares have been on a steady decline since last summer, possibly because investors had set expectations too unrealistically high as the company began to consolidate childcare centres in Canada, said Dundee Securities analyst Brad Cutsey. He suggests investors now buy the “well capitalized and professionally run service provider,” given that Canada is prime for such a player to consolidate underperforming childcare centres and apply “a proven professional platform to increase financial performance and quality of service provided.”

Upside: Mr. Cutsey initiated coverage with a $1.25 price target.

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CIBC World Markets analyst Mark Kennedy has downgraded Canfor Pulp Products Inc. to “sector performer” as he adopted a more cautious outlook on pulp markets. He reduced his forecasts for the commodity for this year and next to reflect concerns over excess capacity growth in Latin America. On the positive side, he notes that Canfor’s balance sheet “is strong and is expected to remain so.”

Upside: Mr. Kennedy maintained a $15 price target.

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The resource exploration boom in Canada’s North and new business launches drove good revenue growth in the latest quarter at Discovery Air Inc. , but margins were very weak amid start-up costs for new business initiatives, noted Canaccord Genuity analyst Chris Bowes. “Management indicated that the costs would be ongoing, but would eventually result in higher offsetting revenues,” he said. “In the absence of any clarity on the timing of these revenues, we have taken a more conservative stance.”

Upside: Mr. Bowes slashed his price target by $3 to $5.25 but maintained a “buy” rating.

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