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Slim blades, attached to the RBC Centre's first 10 floors, reduce glare while allowing in maximum daylight. (J.P. MOCZULSKI)
Slim blades, attached to the RBC Centre's first 10 floors, reduce glare while allowing in maximum daylight. (J.P. MOCZULSKI)

Eye on Equities

Analysts scale back expectations for RBC shares Add to ...

Analysts have now digested Royal Bank of Canada’s third-quarter results from Friday and clearly aren’t impressed, with some taking a knife to their 12-month price targets.

The bank reported a loss in the quarter as it took a hefty charge on the sale of its U.S. retail bank and endured soft trading revenues in its capital markets division. The lacklustre trading figures are a particular concern for analysts, as it’s a key factor driving the bank’s earnings growth relative to its peers.

Since the first quarter of 2010, RBC’s year-over-year earnings growth has consistently been lower than the group average, except for the first quarter of 2011, noted Canaccord Genuity analyst Mario Mendonca. He expects this to be the case again in the current quarter.

While RBC’s Canadian banking earnings were up 12 per cent year-over year, Mr. Mendonca points out expenses are also growing at a brisk pace, and it “has not, at least recently, shown a solid commitment to expense control.”

Desjardins Securities Inc. analyst Michael Goldberg said RBC has now become a “show-me” stock.

“We believe Royal is now in reposition mode as it realigns following the sale of RBC Bank, considers what to do with the proceeds and repositions its capital markets business toward more stable, fee-oriented investment banking revenue from trading while curtailing expense growth to mitigate competitive pressures in Canadian banking,” Mr. Goldberg said in a note.

“Although the stock price reacted negatively to third-quarter results, it may continue to be pressured and, for the near term at least, go sideways in relative terms as trading revenue forecasts for the fourth quarter, and for fiscal 2012, are reduced.”

Downside: Canaccord cut its price target by $3 to $55, while Desjardins cut its target by $2 to $58. Both have a “hold” rating on RBC shares. The median price target of 16 analysts tracked by Capital IQ is $57.25.

Raymond James Ltd. analyst Rafi Khouri is recommending investors stay clear of buying Niko Resources Ltd. , given that its Asian-focused exploration program may take a while to bear fruit. “While the company has, in our view, an impressive exploration portfolio, we believe that the current share price does not yet correctly account for the long drilling/development time horizons and the high risk profile of their asset base,” Mr. Khouri said.

Upside: Mr. Khouri cut his price target by $6 to $49 and reiterated his “underperform” rating.

Suroco Energy Inc. “might be small, it might be non-sexy, but it sure can grow production,” commented Raymond James’s Mr. Khouri. The company with operations focused in South America boosted production by about 30 per cent in the second quarter from the previous three-month period, to 1,011 barrels per day of oil equivalent.

Upside: Mr. Khouri trimmed his price target by 10 cents to $1.50, but reiterated his “outperform” rating.

Canadian Pacific Railway Ltd.’s intermodal volumes are down more than 10 per cent so far in the third quarter and it may take some time to make up for weather-related lost shipments, said Canaccord Genuity analyst David Tyerman. “We are now modelling higher mid- and long-term costs due to higher fuel cost and depreciation assumptions, partially offset by lower labour and other cost estimates,” he added.

Downside: Mr. Tyerman cut his price target by $5 to $66 but reiterated his “buy” rating.

Despite waning grain availability and continued low coal shipments, “demand keeps chugging along” for the services of Canadian National Railway Co. , said Canaccord’s Mr. Tyerman, with carload volumes up 4.1 per cent in the first seven weeks of the third quarter. “We continue to believe that CNR is an excellent stock for investors looking for the potential for rock solid performance and good growth prospects,” he said.

Upside: Mr. Tyerman maintained a “buy” rating and $84 price target.

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