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Exterior of the Royal Bank Plaza towers at the corner of Bay St. and Wellington St. West in Toronto on April 17, 2014.

Fred Lum/The Globe and Mail

Inside the Market's roundup of some of today's key analyst actions. This file will be updated during the trading day.

BMO Nesbitt Burns analyst Sohrab Movahedi has issued a fresh, bullish outlook for the Canadian banking sector that suggests there's more upside yet to come for investors even after the impressive gains of the past year.

In reiterating his "outperform" rating on the sector, Mr. Movahedi said the banks should continue to deliver strong earnings growth, low credit losses, and resilient domestic loan growth into next year.

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"With higher and better quality capital levels, profitability driven by improving Return on Assets (not leverage), steady to improving fundamentals, and favourable 'technicals' (i.e., relative yield, foreign funds flow, etc.), Canadian bank valuations could remain above their historical levels for the next year or so," Mr. Movahedi said in a note. "Furthermore, there could be valuation upside. In a period of cyclically low credit costs, persistently low rates, and continuing slow growth, we believe Canadian banks are likely to remain compelling investment alternatives."

Canadian banks have posted total returns of about 33 per cent in the last 12 months, about 7 per cent higher than the overall Canadian market. The forward price to earnings of the Canadian bank index has gone to 12.1 times from 10.4 times a year ago - a rise of 16 per cent.

Mr. Movahedi notes that the current environment is reminiscent of the 2005-06 period, when trading revenue, just like now, accounted for about 8 per cent of industry revenue, and lower credit costs were a tailwind to earnings.

"As a matter of fact, the bank index traded at an average forward PE multiple of 12.4x between January 2005 and December 2006 (trading as high as 13.0x). This suggests to us that the Canadian bank index could continue to trade at or above current forward multiples in the next six to 12 months," he said.

He also notes that Canadian mutual fund net sales are up 22 per cent over the past 12 months, and there's also been considerable foreign investor interest in Canadian banks. That could be due to investors seeking income and yield, which bodes well for Canadian bank stocks.

Meanwhile, a Canadian housing calamity - which some were warning of just a year ago - has not transpired. And consumer credit growth, which is dominated by residential mortgage credit, has remain resilient.

"The Canadian banks remain very well capitalized by global standards, the industry has a long-term track record of profitability and shareholder returns, and the operating environment in Canada, where the banks tend to derive about 50 per cent of their earnings, has been solid if not spectacular," he said.

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Furthermore, if the current low rate environment persists, the relative dividend yield of the Canadian banks compared to the Canadian 10-year bond yield will continue to look very attractive, he said.


Several analysts have raised their price targets on Royal Bank of Canada - albeit modestly - following its better-than-expected earnings report on Friday.

Royal reported cash operating earnings per share of $1.64 (Canadian), ahead of the consensus estimate of $1.56, helped by exceptionally strong trading results, as well as continued low credit costs. The bank also increased its quarterly dividend by 6 per cent.

Desjardins Securities raised its price target on Royal Bank to $89 (Canadian) from $88 while maintaining a "buy" rating. CIBC World Markets raised its price target to $86 from $85 and reiterated a "sector performer" rating. BMO Nesbitt Burns raised its target to $82 and reiterated a "market perform" rating. Credit Suisse raised its price target to $95 (Canadian) from $92 and maintained an "outperform" rating. National Bank Financial raised its target to $86 from $82 and maintained an "outperform" rating.

The average analyst 12-month price target is now $84.44, according to the latest Bloomberg data.

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Desjardins analyst Doug Young cautioned investors that the earnings beat was not as wide as the headline number suggested, once the outsized trading gains and reserve adjustments at its insurance operations are factored out.

But he still recommends investors purchase more shares. "Our buy rating is predicated on four main themes," he commented. "First, Royal has the strongest asset management franchise, in our view, and this division has demonstrated earnings leverage over the past two quarters. Second, it has the largest Canadian personal and commercial banking operation, which provides it with scale benefits. Third, we are forecasting a 12 per cent dividend increase in fiscal year 2014 and a 9 per cent increase in fiscal year 2015, the second fastest increase among the banks. Fourth, with its CET1 ratio of 9.49 per cent, we believe the bank could pursue stock buybacks. While its larger capital markets business could result in lumpier earnings from quarter to quarter, management appears confident that further client penetration could result in additional near-term revenue growth opportunities."


Improvements on both the demand and supply sides have dramatically raised the outlook for United States Steel Corp., said Nathan Littlewood, an analyst at Credit Suisse.

Mr. Littlewood doubled his price target on U.S. Steel's shares to $50 (U.S.) from $25 and upgraded the stock to "outperform" from "underperform."

"The stars are currently aligning," Mr. Littlewood said. "The company's raw material cost advantages as well as privileged steel price environment should position U.S. Steel as one of the most profitable steel makers in the world."

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Demand for steel has been strong, while domestic steel mill outages has kept domestic supply tight, meaning that prices have been much stronger than anticipated, the analyst said.

Meanwhile, petitioning on trade cases by U.S. steel producers has changed the industry outlook. "Global over-capacity and China's slowdown haven't gone away, but effective trade barriers force us to spend more time concentrating on the domestic market and less time on the global market," Mr. Littlewood said.

While U.S. Steel has struggled in the past to spin its superior assets into profits, the company could be on the brink of a transformational change, Mr. Littlewood said. "Success could mean a multibillion-dollar earnings opportunity.

The analyst consensus price target over the next year is $35.19 (U.S.), according to Thomson Reuters data.


Raymond James Ltd. analyst Steven Li says there's a lot to like about Descartes Systems Group Inc.

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The logistics technology company sports an enviable track record of a 21 per cent compounded annual growth rate in adjusted EBITDA over the last five years, with a 29 per cent adjusted EBITDA margin.

"We believe Descartes is poised to benefit from solid organic growth in its markets, which combined with its M&A strategy, should sustain adjusted EBITDA growth between 15 per cent - 20 per cent CAGR for the next few years," he says.

Mr. Li maintains his "outperform" rating and $17.50 (U.S.) target price. The analyst consensus price target is $16.70, according to Thomson Reuters.


Credit Suisse analyst Seth Sigman is raising his estimates for Foot Locker Inc. after the company reported one of the best quarters in recent memory.

"Foot Locker delivered better-than-expected Q2 results, again showing the benefits from healthy product trends, its own merchandising and system initiatives, and international growth," said Mr. Sigman. He raised his estimate for 2014 to $3.46 from $3.30 and for 2015 to $3.83 from $3.75 to reflect this quarter's performance.

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He explains that Foot Locker's second quarter saw upside to sales and margins, good flow through, share buybacks, and progress on multiple strategic fronts, all contributing to the 40 per cent earnings per share growth.

Mr. Sigman maintains his "outperform" rating and raised his target price to $57 (U.S.) from $56. The analyst consensus price target is $56.53, according to Thomson Reuters.


In other analyst actions:

A handful of analysts have hiked their price targets on Tim Hortons in the wake of news of a potential merger with Burger King Worldwide, bringing the average target to $73.94 (Canadian), up from $71.13 as of Friday.

Merrill Lynch upgraded Burger King Worldwide to "buy" from "underperform" and raised its price target to $38 (U.S.) from $23. Analyst Andrew Charles said significant upside exists for the new publicly traded company assuming that the Tim Hortons brand is expanded internationally through Burger King's international master franchise agreements, which include several emerging markets, according to

RBC Dominion Securities raised its price target on SNC-Lavalin to $66 (Canadian) from $60 and maintained an "outperform" rating.

Credit Suisse downgraded Steel Dynamics to "neutral" from "outperform" and maintained a $23 (U.S.) price target.

CBOE Holdings was raised to "outperform" from "market perform" at Raymond James. The 12-month target price is $60 (U.S.) per share.

Spark Energy was initiated with a "buy" rating at Wunderlich. The 12-month target price is $20 per share. Stifel also started coverage with a "buy" rating and $20 price target, and Robert Baird initiated coverage with an "outperform" rating and $20 price target.

WPX Energy was upgraded to "sector outperform" from "sector perform" at Howard Weil, with a 12-month target price of $32.

With files from Bloomberg

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