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(Charla Jones/Charla Jones/THE GLOBE AND MAIL)
(Charla Jones/Charla Jones/THE GLOBE AND MAIL)

Eye on Equities

U.S. retail shakeup will spread North: Desjardins Add to ...

The U.S. retailing scene has been whipped into a frenzy, as activist investors and private equity players take a shining to the sector at a time when companies are reviewing their strategies.

And it's only a matter of time before there's a spillover effect in Canada, contends Desjardins Securities Inc. analyst Keith Howlett.

Mr. Howlett notes that some of the most shrewd and battle-tested investors are circling the U.S. retail segment, including Bill Ackman, Steven Roth, Nelson Peltz and Bain Capital. Going-private transactions have already been announced by Gymboree, Jo-Ann Stores and J.Crew, with others rumoured to be in the works. Many other retailers are intensely reviewing their strategies now that they survived the recession, with some repositioning assets or seeking a buyer for the whole company.

Mr. Howlett sees a number of scenarios unfolding in Canada as the landscape changes down south, including renewed activist interest in Canadian retailers, takeovers by U.S. retailers, and more U.S. retailers setting up shop here.

As we noted earlier this week, this country's retailers are looking comparatively cheap next to their U.S. peers, undoubtedly keeping Canada on the radar screen of potential acquirers and investors with deep pockets.

Mr. Howlett's two favourite names in the sector: Dollarama Inc. and Forzani Group Ltd.

"Both have good growth prospects ahead of them. Neither company is significantly affected by the future entry of Target. Both could be potential acquisition targets for U.S. retailers in their respective segments," he said.

Upside: He rates Dollarama as a "buy-average risk," with a price target of $34. "We consider Dollarama to be a classic growth story, with an excellent operational track record and a long runway ahead."

He rates Forzani as a "buy-average risk" with a $24 price target. "While Forzani has had an erratic operational track record, it has been executing consistently upon a solid business plan over the last three years. Valuation is currently modest, reflecting past miscues. This creates the current opportunity," he said.

Trilogy Energy Corp.'s has rallied sharply since the company announced Feb. 9 that its first two wells at the new Montney oil play were successful. While a positive development, investors overreacted and Trilogy shares are now overvalued, said CIBC World Markets Inc. analyst Jeremy Kaliel.

Downside: Mr. Kaliel downgraded the stock to "sector underperformer" from "sector performer" but did raise his price target to $19.50 from $15.

Saputo Inc. has agreed to acquire Fairmount Cheese Holdings Inc. for $270.5-million (U.S.) in cash. Analysts view the transaction positively, as it will expand Saputo's offering in the U.S. specialty cheese segment.

Upside: Desjardins Securities Inc. analyst Martin Landry raised his price target by $1 to $41 while Canaccord Genuity analyst Candice Williams boosted his price target by $2 to $41.

Brocade Communications reported quarterly sales and earnings per share that beat consensus estimates, and the company appears to be turning the corner on key issues, such as sales realignment, federal deferrals and service provider traction, said Canaccord Genuity analyst Paul Mansky.

Upside: Mr. Mansky maintained a "buy" rating and hiked his price target by $1 to $7.50.

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