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Analysts warn Best Buy is no buy for investors

The entrance to a Best Buy store in New York.

Shannon Stapleton/Reuters/Shannon Stapleton

These are some of the key analyst actions on Bay Street today.

Best Buy Co. Inc. shares hit nine-year lows today, on top of a 10 per cent plunge on Monday, after the company's latest quarterly earnings did little to persuade investors it's a stock with much of a future.

At least one analyst is already downsizing his forecasts for the company's shares.

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RBC analyst Scot Ciccarelli cut his price target by $2 to $19 (U.S.) while reiterating a "sector perform-average risk" rating. That's the equivalent of a hold rating and he's far from alone. Of 22 analysts who follow the stock, 20 rate it as a hold, according to Thomson/First Call data. Only one rates it as a buy and one as an underperform. The median price target is $21 (U.S.).

"More lowlights than highlights," said Mr. Ciccarelli in summing up Best Buy's latest earnings report.

Net income, when excluding restructuring charges, was 20 cents a share, well below analyst expectations for 31 cents. Meanwhile, the company suspended its profit outlook and share buybacks for the year.

In an action that didn't win a lot of accolades from the Street, Best Buy appointed a new CEO Monday, Hubert Joly, who will take over the role left vacant when Brian Dunn abruptly departed due to an ethics probe. The company is also fending off takeover interest from its founder and largest shareholder, Richard Schulze.

It adds up to quite a mess, said Mr. Ciccarelli.

"Best Buy's challenges, namely Internet cannibalization and a weak product cycle, are daunting enough and the attempts by Richard Schulze to buy the company along with another leadership change are simply magnifying the current difficulties," he said.

"It is clear to us that the company needs to make sweeping changes to its business model and should be focused on cutting costs, reducing unproductive square footage and focusing on building a pipeline of exclusive products," Mr. Ciccarelli added. "Near-term, we believe the stock will trade on the market's perception of the buyout likelihood, but fundamentally, we would continue to avoid BBY shares."

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Speculation over the buyout may be helping Best Buy out a bit today. After sinking more than 10 per cent this morning, the stock has recovered somewhat, last trading down 3.5 per cent at $17.51.

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Enerplus Corp.

Raymond James analyst Kristopher Zack upgraded Enerplus Corp. to "outperform" from "market perform" after the oil and gas producer announced it is selling its shares in private firm Laricina Energy Ltd. The deal will raise $141-million to pay down debt. "We believe that today's sale provides the company with increased flexibility regarding how to best monetize other non-core assets," he said.

Upside: Mr. Zack maintained a price target of $18.

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Pure Energy Services Ltd.

Pure Energy Services Ltd. shareholders should vote in favour of FMC Technologies Inc.'s $11 per share all-cash takeover offer, urged Raymond James analyst Andrew Bradford. The bid represents a 40 per cent premium to Pure's trading price prior to the bid announcement. "While a competing bid is certainly possible, a meaningfully higher bid is, in our view, a low probability event," he said.

Upside: Mr. Bradford raised his price target by $1.50 to $11 while lowering his rating to "market perform" from "outperform."

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Franco-Nevada Corp.

CIBC World Markets analyst Cosmos Chiu is feeling upbeat on Franco-Nevada Corp. after the company reached a deal to acquire a big chunk of future gold and silver production from Inmet Mining Corp.'s Cobre Panama copper mine. He expects it to be a long-term partnership that could evolve over time and see Franco-Nevada help Inmet achieve its production goals.

Upside: Mr. Chiu raised his price target by $3 to $58 and maintained a "sector outperform" rating.

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Urban Outfitters Inc.

Urban Outfitters Inc. reported better-than-expected earnings as sales momentum accelerated in the second quarter. Canaccord Genuity analyst Laura Champine notes that recent store checks uncovered better fashion trends as well. "We still see some questionable colours and patterns, particularly at Anthropologie, but the overall impression is much improved," she said.

Upside: Ms. Champine jacked up her price target to $38 (U.S.) from $26 but maintained a "hold" rating.

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About the Author
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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