The Globe and Mail
Inside the Market's roundup of some of today's key analyst actions. This post will be updated with more analyst commentary during the trading day.
Canaccord Genuity has downgraded the North American auto and parts sector to "neutral" from "overweight," concerned that the affordability of buying automobiles is deteriorating given the recent jump in oil prices and interest rates.
Analyst Martin Roberge noted that the auto and parts group returned 43 per cent to investors last year and this year is up another 67 per cent. The group now trades at 12 times forward earnings per share, a level at which history suggests outperformance becomes more difficult.
At the same time, "the fundamental backdrop to auto component stocks is changing fast," he warns.
Gasoline prices in the U.S. are up about 10 per cent from this summer's lows, which should dampen demand for new cars and, by extension, auto components. Meanwhile, higher interest rates may make car loans less appealing and can act to slow consumer spending.
He also thinks investors should be concerned with the technical breakdown in share prices of U.S. homebuilders. "The historical peaks in relative price strength of homebuilders shortly precede or coincide with those of Canadian auto and parts makers," he notes. That relationship makes sense, given higher interest rates eventually take their toll on demand in both sectors.
"Valuation has become more demanding while auto affordability is deteriorating and interest-sensitive sectors are struggling," Mr. Roberge wrote in a research note. "Thus, we recommend investors book profits and cut positions in the auto and parts group to neutral."
The auto and parts sector includes Magna International Inc., Linamar Corp., and Martinrea International Inc. in Canada, and Johnson Controls Inc., Delphi Automotive plc, Genuine Parts Co., BorgWarner Inc. and LKQ Corp. in the United states.
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RBC Dominion Securities analyst Steve Arthur continues to see "a supportive environment" for increased vehicle sales in AutoCanada Inc.'s end markets.
"While growing at a slower pace than U.S. sales, Canadian light vehicle sales are solid, up 3.4 per cent year to date," Mr. Arthur said in a note. "Importantly, key markets and brands continue to out perform; industry sales in Alberta are up 7.8 per cent year to date while Chrysler sales are up 7.2 per cent and Volkswagen up 7.1 per cent."
Target: Mr. Arthur raised his price target to $36 from $33 and reiterated a "sector perform" rating. The average target among analysts is $36.25, according to Bloomberg data.
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BMO Nesbitt Burns analyst Andrew Breichmanas has raised his price target for Centerra Gold Inc., describing a plan to restructure the ownership of a mine in the Kyrgyz Republic as a positive step.
The Kumtor gold mine near the Chinese border has been the target of environmental activists and drawn the criticism of Kyrgyzstan, which has said the Toronto-based miner was underpaying government royalties. Centerra had been in talks with the government on an ownership stake.
The plan calls for the state-owned Kyrgyzaltyn JSC to exchange its 32.7 per cent equity interest in Centerra for a 50 per cent interest in a joint venture company that would own the gold project. Centerra would remain operator of the project and get half the seats on the joint venture's board.
The Canadian mining company would also receive $100-million (U.S.) in future cash payments.
"While the new structure would negatively impact (earnings per share) estimates, the shares still appear to trade at a significant discount to peers," Mr. Breichmanas wrote in a research note.
Target: Mr. Breichmanas raised his share price target to $10 (Canadian) with an "outperform (speculative)" rating. The average target is $8.28.
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Raymond James's Kenric Tyghe raised his share price target for Dollarama Inc., but cautioned that the costs of launching new stores will be only partly offset by gains in sales.
Mr. Tyghe, whose second-quarter earnings-per-share estimate of 76 cents (U.S.) is less than consensus, says he expects a modest increase in traffic and average sales at store checkouts. He says his share price target is higher than that of the average U.S. retailer based in part on the relative competitiveness of the Canadian market.
Target: Mr. Tyghe raised his price target to $78 (Canadian) from $75 and maintained a "market perform" rating. The average target is $79.53.
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Credit Suisse analyst Jim Wicklund upgraded National Oilwell Varco Inc. to "outperform" from "neutral," citing his increased confidence in the company's 2013 orders and better margins on its rig technology division.
"With inbound orders of $3.15-billion (U.S.) in the second quarter, and indications for a 'strong' third quarter order rate, 2013 orders should exceed 2012 and alleviate concerns that the book-to-bill ratio with drop below 1:1 in 2013," Mr. Wicklund said. "Issues remain and questions about year-over-year order growth will start-up again sometime next year but with most of the growth, valuation, and margin metrics improving, the stock should take a step-up."
Target: Mr. Wicklund raised his price target to $90 (U.S.) from $82. The average target is $83.38.
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Other analyst actions today include:
Macquarie upgraded ETrade to "outperform" from "neutral" and raised its price target to $19 from $13.50.
Credit Suisse downgraded D.R. Horton to "neutral" from "outperform."
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For more analyst actions, breaking investing news and analysis, follow Darcy Keith on Twitter at @eyeonequities
Darcy Keith
Eric Atkins