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Time is running out for Sears Canada, warns analyst

With Sears Canada Inc. reporting yet another poor quarter, Desjardins Securities Inc. analyst Keith Howlett is sounding the alarm that time is running out for the retailer to turn its struggling business around.

Earnings per share of 36 cents were less than half of both actual year-ago levels and Mr. Howlett's forecasts. Same-store sales dropped 7.4 per cent, the 13th consecutive quarter of declines, and margins continue to wither away.

Management is trying to revive the chain and has been cutting jobs, de-cluttering stores and making other moves to attract more customers in a market that only keeps getting more competitive. Last week, it announced it is cutting prices on more than 5,000 items.

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President and CEO Calvin McDonald said Wednesday that the stabilization of Sears Canada has begun, which should "create a foundation for returning the business to historical performance levels."

But Mr. Howlett, one of the few analysts to cover the stock, warns the company better pick up the pace.

"It appears to us, barring a successful and rapid operating turnaround in 2012, that the end game for Sears Canada's shareholders will occur before the end of 2013," he said in a research note today.

He thinks that unless its performance meaningfully improves, Sears Holdings may bid for the minority shares of Sears Canada - or, alternatively, Sears Canada will offload and monetize at least a portion of its leases - similar to what Hudson's Bay did with its Zellers division.

"Based on the Target purchase of under-market leases from Zellers (Hudson's Bay Company), Sears Canada's leases in top shopping malls across Canada may have more value if sold to another large-format retailer than the value of the declining cash flow currently being generated by Sears Canada's total retail business," he said.

He stressed that these scenarios are only speculation. Sears management has not communicated in detail to investors its plans to turn the business around.

But he added "the present reality is very poor, and operating results are deteriorating, with Target soon to arrive. The shares are only for steel-nerved, patient investors willing to wait for value to surface."

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Downside: Mr. Howlett cut his price target by 50 cents to $13 and downgraded his rating to "hold-speculative" from "hold-above average risk."


Frontier Rare Earths Ltd. has released a preliminary economic assessment of its Zandkopsdrift deposit in South Africa, with capital expenditures expected to reach $1.1-billion. This was substantially higher than CIBC World Markets Inc. analyst Matthew Gibson's forecasts, mostly due to a more expensive separation plant and the addition of a sulfuric acid plant.

Downside: Mr. Gibson cut his price target by $1.10 to $4.90 but reiterated a "sector outperformer-speculative" rating.


Yamana Gold Inc. , which reported slightly higher-than-expected fourth-quarter earnings on Wednesday as well as an 11 per cent boost in its overall reserves, is one of Canaccord Genuity's favourite stocks of 2012. Analyst Steven Butler believes the company's shares "continue to offer growth at a reasonable price," with a price-to-cash flow ratio based of 8.8 times based on 2013 estimates, vs. the peer group average of 9.1 times. It also now yields about 1.3 per cent after a 10 per cent hike in its dividend.

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Upside: Mr. Butler raised his target by $2 to $25 (U.S.) and maintained a "buy" rating.


Enerflex Ltd. reported fourth-quarter results that were in line with consensus expectations, but Raymond James Ltd. analyst Andrew Bradford is tempering his view on the natural gas and power generation supplier as margins came up short. While long-term growth strategies and the possibility of a dividend increase could bolster Enerflex's stock, the stock has already risen sharply and the natural gas market remains depressed. "On balance, we still think that Enerflex shares should be bought, but we are lowering our rating to 'outperform' from 'strong buy,' " he said.

Downside: Mr. Bradford cut his price target by 50 cents to $15.


Now that Constellation Software Inc. has completed a strategic review, shares should rise based on a renewed focus on its core business, a faster pace of acquisitions, and further penetration into existing and new markets, said RBC Dominion Securities Inc. analyst Mike Abramsky. He maintained an "outperform" recommendation based on its resilient business model and solid growth.

Upside: Mr. Abramsky raised his price target to $115 from $88.

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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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