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Customers head in and out of a Canadian Tire store location in Scarborough, Ont.
Customers head in and out of a Canadian Tire store location in Scarborough, Ont.

Eye on Equities

RBC: Time for investors to warm up to Canadian Tire Add to ...

As a grumpy and determined Old Man Winter returned with a vengeance across Canada the past few months, Canadians were sent scrambling for everything from snow shovels to antifreeze.

That should mean good news for Canadian Tire Corp. , which reports its fourth-quarter results on Thursday. RBC Dominion Securities Inc. analyst Irene Nattel expects the retailer to post a 27 per cent increase in earnings per share from operations, to $1.63, which is better than the current consensus estimate of $1.55.

Posting year-over-year growth won't be all that difficult, considering that the fourth quarter of 2009 was a particularly weak one due to unseasonably warm weather. The company's financial services division also performed poorly last year as the impact of the recession lingered.

Ms. Nattel believes Canadian Tire is likely to announce a share buyback in conjunction with the earnings next week. There shouldn't be a problem paying for it, contends Ms. Nattel, who forecasts free cash flow of about $385-million in both 2011 and 2012. Also supporting her theory is that management has already stated that acquisitions are somewhat unlikely.

Canadian Tire shares are currently trading at 11.9 times forward earnings per share, at the lower end of her forecast price-to-earnings range.

Upside: Ms. Nattel rates the stock as an "outperform" and has a $76 price target. According to Zacks Investment Research, six analysts rate the stock as either a "strong buy" or "buy", four as a "hold" and only one rate it as a "sell."

Regulated child-care spaces across the country are in short supply and more mothers are entering the work force. It adds up to a promising future for the child-care market, and there's a new way to invest in it: Edleun Group Inc. . The company began operations in May, 2010, and owns and operates 20 child-care centres in Alberta. It aims to rapidly expand by acquiring and improving existing child-care centres and developing new ones, and eventually hopes to expand into British Columbia and Ontario.

Desjardins Securities Inc. analyst Jeff Roberts sees this as a "a rare opportunity for investors to acquire a unique and highly accretive consolidation play in the Canadian child care market." Bolstering his confidence is that company management is already quite experienced in operating high-quality child-care centres and consolidating different facilities.

The child-care market in Canada is highly fragmented and Mr. Roberts expects the company to acquire 130 existing child care centres, largely from "mom and pop" operators, over the next two years, as well as developing eight greenfield centres.

He also believes Edleun may become a takeover target, perhaps by a large U.S. operator, once it bulks up in size.

Upside: Mr. Roberts initiated coverage with a "buy-above average risk" rating a $1.75 price target. He said the share price could move significantly higher than that over the next few years.

Exco Technologies Ltd. enjoyed significant growth in revenues and a doubling of earnings in its fiscal first quarter, thanks in part to a pick-up in global automotive production volumes. The company has now seen seven consecutive quarters of earnings improvement and Canaccord Genuity analyst David Tyerman said its price-to-earnings ratio of 10.2 times based on 2011 estimates "seems quite attractive given the company's strong growth prospects."

Upside: Mr. Tyerman raised his price target by 50 cents to $5.

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