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Stage is set for cable firms to outperform telecom: TD

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U.S. cable stocks have enjoyed a healthy recovery over the past six months, and TD Newcrest believes it's a harbinger of what's to come in the Canadian sector.

Despite declines in a key metric known as RGU, or revenue generating unit, U.S. cable valuations have rebounded and benchmark names Comcast and Time Warner Cable are now trading above six times earnings before interest, taxes, depreciation and amortization. That's higher than telecom stocks AT&T and Verizon, TD analyst Vince Valentini points out in a report today.

By comparison, Canadian cable stocks are now trading at lower multiples than BCE Inc. and Telus Corp. - something Mr. Valentini believes won't stick around for long.

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"We expect a relative rally in Canadian cable stocks versus telco stocks over the next six months," he wrote in a semi-annual review of the sector published today.

He pointed to a number of factors, including:

-- Subscriber growth has been better for cablecos than for telcos.

-- Improved EBITDA growth at Shaw Cable in the next two quarters will be reassuring for investors.

-- Wireless substitution of landlines will escalate in coming months and have a more detrimental impact on telecoms.

-- Superior broadband capabilities of cable networks will mean much less need for fresh capital relative to telecoms.

Upside: In the Canadian cable sector, Mr. Valentini believes two firms are worth buying right now: Shaw Communications Inc. , with a $25 price target, and Quebecor Inc. , owner of Vidéotron, with a $42 price target.

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Héroux-Devtek Inc. , which makes products for the aerospace and industrial products sector, is generating historically high margins despite a challenging currency environment, noted TD Newcrest analyst Tim James. "We believe the highest earnings growth rates are behind Héroux-Devtek, but considering the remaining organic growth potential, acquisition-capable balance sheet and low valuation as justifying significantly more upside to the share price," he commented.

Upside: Mr. James hiked his price target by $1.50 to $11.50 and maintained a "buy" rating.

HudBay Minerals Inc. is trading at 0.8 times its net asset value, well below the sector at 1.1 times, largely because of a lack of near-term production growth, said UBS analyst Matt Murphy. But the company has an extensive exploration program that suggests future upside, and in the shorter term, sales should improve as a shipping backlog ends in the second half of this year, he said.

Upside: UBS upgraded the stock to "buy" from "neutral" and maintained a 12-month price target of $18.50.

Related: HudBay profit rises; revenue falls sharply

Canadian Apartment Properties REIT chief financial officer Richard Smith is leaving to pursue another opportunity and will be replaced by Scott Cryer, currently vice-president of financial reporting. While this could be a short-term negative for CAP REIT, Canaccord Genuity analyst Mark Rothschild noted that Mr. Cryer is also known as a strong executive. "We are optimistic that he will maintain the improved financial reporting which was implemented under Mr. Smith," he said.

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Downside: Mr. Rothschild maintained a "hold" rating and $19.10 price target.

TD Newcrest analyst Cherilyn Radbourne has slashed her second-quarter earnings per share forecast for Canadian Pacific Railway Ltd. to 74 cents from 99 cents to reflect the impact of spring flooding on CP's carload volumes. That's now well below the consensus EPS estimate of $1.01, but she's optimistic the railway will bounce back with very strong earnings in the second half of this year.

Downside: Ms. Radbourne cut her price target by $1 to $74.

Related: Prairie flooding prompts CP Rail price target cut

Related: CP boosts quarterly dividend

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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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