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Target's Canadian foray risky, unlikely to meet targets: UBS

Shoppers enter a Target store in Arvada, Colorado February 24, 2009.

© Rick Wilking / Reuters/REUTERS

Inside the Market's roundup of some of today's key analyst actions.

Target Corp.'s expansion in Canada is risky, given how little time the retailer will have to test its format in this country, warns UBS Securities analyst Jason DeRise.

Target plans to open its first 124 Canadian stores by year-end, and by 2017, aims to generate $6-billion (U.S.) in annual sales and $720-million in earnings before interest, taxes, depreciation and amortization.

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That will require a rapid ramp up, notes Mr. DeRise, who expects Target to generate sales of $2-billion, or $265 per share foot, in 2013.

Target will likely make a good first impression with low prices and a high standard of customer service, but then transition to a focus on higher sales per square foot and margins, he believes.

Target's 2017 goal requires higher sales per square foot and 200 basis points more EBITDA margin versus its current U.S. stores. Mr. DeRise sees a "low probability" of Target achieving this.

Target: Mr. DeRise set a price target of $75 (U.S.) and a "neutral" rating. The average Street target is $72.16, according to Bloomberg data.

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Duke Energy Corp. should be a core holding for utility investors and deserves a premium valuation next to peers due to its above-average earnings growth, high yield, and stable, constructive regulatory environments, said RBC Dominion Securities analyst Shelby Tucker.

He upgraded the stock to "outperform" from "sector perform," on the expectations of "several potential catalysts over the next three to 12 months that should enable Duke Energy to catch up to its most defensive brethren."

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"First, it might receive a decision in Ohio for higher capacity payments for the next three years; our model does not include this. Second, Indiana should pass a bill that will reduce regulatory lag. Third, Duke could soon reach a settlement in North Carolina. And fourth, resolving who will succeed Jim Rogers at the helm before year-end should remove a source of uncertainty for investors," he said.

Target: Mr. Tucker raised his price target to $78 (U.S) from $74. The average target is $72.80.

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Suncor Energy Inc. may be preparing to increase its dividend substantially, given the planned sale of its natural gas assets, said Raymond James analyst Justin Bouchard.

"In our view, the key question is why sell the assets now? The sale price of $24,000 per flowing barrel is by no means a great price. Perhaps Suncor has a fundamentally bearish long-term view on gas prices in Canada – and in that context, $24,000 per flowing barrel is in fact a good price. Or rather, and probably more likely, is that the cash infusion is ear-marked for some specific purpose," he wrote in a research note.

The company faces a possible reassessment of derivative contracts that could result in a $600-million payment to tax authorities. Suncor also committed to "growth projects," such as Fort Hills and Firebag in Alberta, he said. "We've previously stated that we believe Suncor should materially boost its dividend (i.e., a 100 per cent increase would be more in-line with its Canadian peer group) and moderate its growth objectives – particularly as they relate to oil sands mining projects. We continue to believe that Fort Hills is going to proceed, but in our view, this asset sale increases the likelihood of a potential dividend increase and also increases the likelihood of a larger increase."

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Suncor currently has an annual dividend of 52 cents a share, yielding 1.8 per cent, according to Globe Investor data.

Target: Mr. Bouchard rates Suncor "outperform" and has a $38 (Canadian) price target on the stock. The average price target among analysts is $41.62, according to Bloomberg data.

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Rogers Communications Inc. stock has risen too quickly, considering market conditions, said Canaccord Genuity analyst Dvai Ghose.

"While wireless fundamentals are improving and cable margins have been solid, the market may be ignoring subscriber pressure. In our view, the 14 per cent year-to-date appreciation in RCI shares and the 48 per cent appreciation since mid-2012 are excessive," he wrote in a research note.

"While wireless fundamentals and regulatory risk are improving and cable margins have been strong, the market may be ignoring very weak wireless postpaid net additions, aggressive promos from Fido and accelerating loss of basic cable subscribers. We would switch to Telus for better fundamentals and BCE for valuation."

Target: Mr. Ghose rates the stock "hold" and has a $50 price target. The average target on the Street is $51.50.

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Gildan Activewear Inc.'s shares are fairly valued at current levels, said Desjardins Securities analyst Chase Bethel.

Gildan is a "dynamic manufacturer and marketer of basic garments, with a well‐laid foundation on which it can continue to grow earnings at a double-digit rate over the medium term," the analyst said. The company's "excellent financial position" means it will likely have a a net cash position of about $80-million (U.S.) at the end of 2013.

"Given our current forecasts and expectation for limited multiple expansion, we recommend that investors wait for an entry point that would yield a double-digit potential return in the mid‐teens."

Target: Desjardins has a target price of $43 on the stock and rates it "hold." The average target is $41.35.

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For more analyst actions, breaking investing news and analysis, follow Darcy Keith on Twitter at @eyeonequities

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Investment Editor

Darcy Keith is The Globe and Mail's Investment Editor. He has been a business journalist since 1992 and joined the Report on Business in 2010 from Yahoo! Canada, where he was the senior editor of finance. More

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