Time to take profits in WestJet, Air Canada, RBC says in downgrade

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Inside the Market's roundup of some of today's key analyst actions. We will update this post with more analyst actions later in the market day.

Shares in Air Canada and WestJet Airlines Ltd. have reached their cruising altitude, and investors should now take profits, RBC Dominion Securities said today in downgrading the Canadian airline sector.

RBC analyst Walter Spracklin cited the recent surge in the stock prices in both airlines as a key reason for the downgrade to "sector perform" from "outperform." But he's also worried that the Canadian airline industry is building up capacity too quickly.

"Canada's airline stocks have had a significant rally in the past year, with the share price for Air Canada up 280 per cent, and WestJet up 80 per cent. On the heels of this rally, we expect share prices to consolidate at current levels, as we see weakening data emerging from both a macro and sector specific standpoint," Mr. Spracklin said in a note.

"While we continue to believe that the airline industry is going through a positive secular transformation, we do not expect share price appreciation to be linear. Accordingly, we see a pause in share prices at current levels and we recommend that investors take profits," he added.

He is also growing concerned that the recent ramp up in new capacity is putting airlines' ability to put passengers in seats at risk. WestJet is launching a new subsidiary, and Air Canada is also starting up a new division to serve vacation markets. And then there's Porter's announcement last week of a major expansion to new markets through the acqusition of new Bombardier aircraft.

"As a result, the new capacity growth may put at risk the improvements in load factors and yields that the Canadian airline sector has enjoyed since 2009," said Mr. Spracklin.

Mr. Spracklin also notes sluggish economic growth in the U.S. and Canada isn't working in the airlines' favour.

He's not sounding alarm bells though over all these concerns, noting that airline valuations – while not cheap - "are not overstretched on a historical basis," and both WestJet and Air Canada are trading at a discount to their U.S. countparts based on their enterprise value to earnings.

Targets: Mr. Spracklin has a $4 target on Air Canada and $27 target on WestJet. The Street average is $3.95 and $27.17, respectively.

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Nokia Corp.'s share of the smartphone market is now below 5 per cent, the level required to achieve economies of scale and competitive and reliable component pricing from suppliers, warns RBC Dominion Securities analyst Mark Sue.

But he believes Nokia has been largely headed in the right direction, thanks to its Lumia and Asha smartphones.

"Demand for the new Lumia and Asha smartphones has largely been positive with uptake better than the dire predictions for the platform," Mr. Sue said in a note. "Smartphone units may grow 26 per cent year-over-year in calendar year 2013 with growth driven by emerging markets, where Nokia is well positioned and Nokia is tailoring Lumia/Asha smartphones for features vs. affordability just as smartphone demand shifts to the mid-tier/low-end."

"Most of the demand, however, has been price-stimulated, and while the new Lumia saw a sharp uptick in demand, we've noted in prior similar launches that this is often followed by a rapid fade. Nokia needs to continue to innovate in order to compete more effectively with other players in the smartphone market as Samsung, Apple, Sony, HTC, BlackBerry and others have revamped or are in the process of updating their flagship models."

Target: Mr. Sue cut his price target by 50 cents to $4.50 (U.S.) and reiterated a "sector perform" rating. The average target among analysts is $3.97, according to Bloomberg data.

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Jean Coutu Group Inc. is likely to announce a dividend hike and share buybacks with the proceeds it will raise through the sale announced this week of part of its stake in Rite Aid, said Canaccord Genuity analyst Derek Dley.

Jean Coutu sold 72.5 million shares, leaving it with 106 million, or nearly 12 per cent, of Rite Aid's outstanding shares.

"We anticipate Jean Coutu will continue to reduce its stake in Rite Aid as market conditions permit," said Mr. Dley. "While it is unclear what the company intends to use the proceeds for, given the already pristine balance sheets, we believe the most likely use of proceeds will be an increased dividend and share buybacks."

Target: Mr. Dley raised his price target by $1 to $16 and maintained a "hold" rating. The average target on the Street is $16.

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Merrill Lynch upgraded Yahoo Inc. to "buy" from "neutral," one day after the Internet portal reported better-than-expected earnings but failed to meet Street expectations on revenue.

Analyst Justin Post noted that while Yahoo's core business was still weak, its Asian assets - especially its stake in rapidly growing Chinese e-commerce site Alibaba - point to a higher share price. "Alibaba's potential valuation is fundamental to Yahoo's stock price," he said.

Target: Mr. Post raised his price target to $28 (U.S.) from $25. The average target is $25.22.

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Aecon Group Inc. shares appear fully valued at current levels, said Canaccord Genuity analyst Yuri Lynk, who reduced his 2013 and 2014 earnings estimates and price target for the stock.

Strength in the company's infrastructure division cannot offset weakness in its industrial unit, he pointed out. The industrial segment's first-quarter backlog could drop 39 per cent year-on-year, while the business will find it hard to absorb fixed costs and faces fierce competition, he said.

Target : Mr. Lynk cut his price target to $12 from $13 and rates the stock "hold." The average target is $15.50.

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