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Don't buy on the dip in SNC-Lavalin: National Bank

SNC-Lavalin Group Inc. shares remain huddled near three-year lows after plunging last week on news that the company has launched an investigation into $35-million in mysterious payments and is bracing for disappointing 2011 earnings.

The 20 per cent plunge in the construction and engineering firm's stock last week has ignited speculation whether this could be a rare opportunity to buy on the cheap what had been a reliable dividend-paying stock.

National Bank Financial analyst Trevor Johnson doesn't think it is - but he's also suggesting investors who already own the stock should sit tight.

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Despite the company's compelling fundamentals, including sizeable cash holdings, minimal debt and a growing backlog of work, there are just too many unknowns right now, he argues.

He points out that last week's announcement poses several questions: where is the unaccounted $35-million, and if the expense is questionable, what does it mean for SNC's future business? Will there be more unexpected costs after it took a $23-million charge in the fourth quarter related to its operations in Libya? Could SNC encounter problems with its auditors? And, most important, how will the company's reputation weather this storm?

"At this stage we can do little but speculate until management provides an update later this month, but our fundamental view is that these incidents will be contained and SNC will be able to get back on track in 2012," Mr. Johnson said in a research note. "The company is too large, connected, well-penetrated and diversified, and its work too valuable for its share price to erode much more meaningfully than we have seen already."

He also notes valuation is currently compelling. He estimates that it's trading at just seven to nine times forward price-to-earnings and 6.7 times enterprise value/EBITDA for its core engineering and construction portfolio.

Given the "competing mix of opportunities and headwinds," he initiated coverage with a "sector perform" rating and $45 price target. "For investors already owning SNC we suggest holding on; for those on the sidelines we recommend staying put until management can provide more colour."

The company, which has delayed reporting its financial results, has launched an accounting probe into the $35-million in undocumented payments the company booked last year.

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Barclays Capital analyst Ben Reitzes has raised his financial forecasts on Apple Inc. as he turned more upbeat on the outlook for the iPhone 4S. According to his research, sales in the calendar first quarter benefited from "international rollouts, pent-up demand and overall excitement around the unmatched Apple ecosystem," which includes apps and its latest operating system.

"By the calendar 2012 second half, we believe momentum can get even stronger with the launch of the iPhone 5," he said. He predicts the new iPhone will be launched in late September and feature a new design, a faster processor and 4G LTE capabilities.

Mr. Reitzes expects profit of $43.98 (U.S.) a share in the 2012 fiscal year, up from his previous forecast of $42.52. For fiscal 2013, he predicts $50 a share, up from $48.46.

Upside: Mr. Reitzes raised his price target to $710 from $630 and maintained an "overweight" rating.

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Supremex Inc. shares have had a great run since the company reported surprisingly strong earnings two weeks ago, with the stock up more than 40 per cent. National Bank Financial analyst Adam Shine thinks the shares may be in overbought territory, however, given his negative growth forecast for the envelope manufacturer. "In the absence of an imminent takeover of the company, which we're not aware of, Supremex shares seem to have gotten ahead of themselves," he said.

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Downside: Mr. Shine downgraded Supremex to "underperform" from "sector perform," but nudged up his price target by 25 cents to $2.

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In light of solid fourth-quarter earnings and continued contract wins, Desjardins Securities Inc. analyst Pierre Lacroix has upgraded engineering firm Aecon Group Inc. to a "buy" from "hold." "We believe the stock could have further upside as the company delivers steady margin expansion in Q4 2011 and 2012, and new contract awards give investors confidence in ARE's ability to execute consistently and efficiently," he said.

Upside: Mr. Lacroix raised his target by $2 to $14.50.

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Foraco International SA reported "a solid end to a very impressive 2011," noted Beacon Securities Ltd. analyst Michael Mills, with fourth-quarter revenue growing 46 per cent. Business conditions remain very strong, with its backlog rising 45 per cent from a year earlier to $418-million, and the company's future results should be bolstered by an agreement to acquire a controlling stake in Brazilian driller Servitec, he said.

Upside: Mr. Mills raised his price target to $6.15 from $5.25 and maintained a "buy" rating.

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Follow Darcy Keith on Twitter or Stocktwits for the latest analyst actions and exclusive investing news, actionable trading ideas & analysis.

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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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