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Rona president and CEO Robert Dutton (Graham Hughes/The Canadian Press)
Rona president and CEO Robert Dutton (Graham Hughes/The Canadian Press)

Eye on Equities

'Doing it right' may take time at Rona Add to ...

Rona Inc. reported less than stellar third-quarter results on Wednesday, with sales falling slightly year-over-year and earnings per share coming in below estimates. A fickle consumer, anxious about the job picture and a wobbling housing market, was largely blamed.

Don't count on a quick turnaround. Most analysts suggest challenging times lie ahead for the hardware and home improvement retailer, and Rona itself noted that economic growth is expected to come at a slower pace than previously anticipated. But several analysts suggest the stock could still be a good long-term hold.

Desjardins Securities analyst Keith Howlett notes that the home improvement sector appears to be "over-stored" with product, primarily due to network expansion by Home Depot and Lowe's. When that overcapacity will be worked off, and the timing of a rebound in consumer confidence, is hard to predict, he said.

Mr. Howlett reduced his rating on the stock to "hold" from "buy" and cut his price target to $14.50 from $17. That's still above today's trading price, and Mr. Howlett contended that the company is well-managed, with a solid balance sheet. Also, "it should benefit from improved demand and/or reduced capacity at such time as they occur," he said. His best guess is that it will take nine to 12 months before there is a noticeable improvement in industry conditions.

Canaccord Genuity analysts Candice Williams and Derek Dley appeared a little more positive on the home retailer, maintaining their "buy" rating and $17 price target. "While third-quarter results were slightly weaker than anticipated, with Rona's shares currently trading at 10.2 times our 2011 EPS estimate, we believe that the weakness in the Canadian housing market is reflected in the share price and recommend the name for more patient investors," they wrote in a note to clients.

TD Newcrest analyst Jessy Hayem maintained his "buy" recommendation but cut his target price by $1 to $16. As Mr. Hayem sees it, results will stay weak through the first quarter of fiscal 2011, but the current trading price is a compelling entry point for those with a longer-term horizon.

Shares in Fortress Paper Ltd. have surged more than fourfold in the past year, but analysts at Jennings Capital Inc. believe shareholders could still see more returns. Given current strong prices for dissolving pulp, which is used to manufacture rayon, the company could post diluted earnings per share of $11 in fiscal 2012. Jennings forecasts diluted EPS of $1.55 in fiscal 2011. The company also has a number of growth opportunities in each of its three operating segments, analysts Russell Stanley and Marc Charbin said.

Upside: Jennings Capital raised its 12-month price target by $10 to $60 and maintained its "buy" recommendation.

Earning power is modestly improving at Great-West Lifeco Inc. , but remains too low for a resumption of dividend growth before 2012, Desjardins Securities analyst Michael Goldberg said following the insurer's third-quarter results. The shares appear relatively fully priced and are likely to go sideways in the near term, he said.

Downside: Mr. Goldberg cut his price target by $1 to $28.50 and lowered his rating to "hold-average risk" from "buy-average risk."

Baytex Energy Trust is seeing positive results from a second steam-injection pilot project at its Seal property in northern Alberta, noted Canaccord Genuity analyst Kyle Preston. This should significantly enhance the recovery of the heavy oil resource at Seal and contribute to Baytex's growth profile for many years to come, he said.

Upside: Mr. Preston maintained his "buy" rating and raised his price target to $45 from $41, and expressed confidence the company "will deliver consistent growth and sustainable dividends over the long term."

CAE Inc. should see a 31.4 per cent jump in military operation sales in the second half of fiscal 2011 compared to the first half of the year, said CIBC World Markets Inc. analyst Michael Willemse. As well, a higher level of market activity should mean an improvement in the company's civil training segment, he said.

Upside: Mr. Willemse increased his earnings estimates for the stock and raised his price target by $1 to $13.

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