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Shaw's cable price discounting has analysts worried

Even though Shaw Communications Inc.'s Friday reported earnings per share that were a penny higher than consensus expectations when excluding one-time items, analysts aren't applauding.

While the company is adding and retaining a fairly robust number of cable subscribers, it's achieving this through aggressive price discounting - and that's taking its toll. Shaw cut its 2012 cash flow outlook to $450-million from $550-million, now expecting a marginal decline in its cable operating income before amortization.

"Shaw is in worse shape than we thought," commented Canaccord Genuity analyst Dvai Ghose, who's among the most bearish on the stock.

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He notes that Shaw Cable hiked prices to consumers significantly in March, just as its current fiscal third quarter began. While that could aid financials for the second half of its fiscal year, it also suggests the strong subscriber results in the second quarter won't last.

In Mr. Ghose's view, Shaw's stock price is being propped up by takeover speculation and its handsome yield of almost 5 per cent. That may keep shares supported to above fair market value over the medium term, he maintains, but he's doubtful that an attractive takeover offer will materialize. "As [Rogers Communications]is the only obvious acquirer, we wonder why it would pay a significant premium, even if the Shaws want to sell," he said.

Mr. Ghose reiterated his "sell" rating and $18 price target.

CIBC World Markets Inc. analyst Robert Bek is more upbeat. He trimmed his price target only by $1 to $23 and maintained a "sector outperformer" rating.

"Competitive pressures should continue to play out over the next little while, resulting in lower EBITDA margins for Shaw," he said in a research note. "But while competitive threats exist, the stock remains well supported with yield and end-game options."


Although operational challenges at North American Energy Partners are expected to linger in the short term, its current share price already reflects this, said CIBC World Markets Inc. analyst Jeff Fetterly. He upgraded the stock to "sector performer" from "sector underperformer," noting the recent amendment of its credit agreement has doused concerns about its financial flexibility.

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Upside: Mr. Fetterly maintained a $5.50 price target.


CIBC World Markets Inc. analyst Jeff Fetterly upgraded Secure Energy Services Inc. to "sector outperformer," noting that it's now trading at a more modest premium to North American peers. "In our view, Secure provides one of the most attractive combinations of management strength, quality and magnitude of growth opportunities and attractive business model," he said.

Upside: Mr. Fetterly trimmed his price target by $1 to $10.50


Bankers Petroleum Ltd. reported disappointing results at its Ardenica exploration well on block "F" in Albania, with no hydrocarbons being found. While the company expects to drill another exploration well on the same block in the fourth quarter, there's now "greater risk" associated with the company's thermal steam project in the country, said UBS analyst George Toriola.

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Upside: Mr. Toriola cut his price target by $2 to $5 and maintained a "buy" rating.


With about $12-billion in sales, Metro Inc. is smaller than its Canadian publicly traded peers and is tiny compared to new grocery entrants Wal-Mart and Target. This means less buying power with suppliers and a reduced ability to absorb the impact of competitors' pricing actions, warns M Partners analyst Michael Krestell. "Additionally, we believe that Metro's lack of geographic diversification vs. its peers contributes to a higher level of risk, as reduced profitability in one region are less easily offset by gains in another," he said.

Downside: Mr. Krestell reiterated his "sell" rating and $39 price target.

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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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