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Eye on Equities

UBS hikes outlook for Canadian railways Add to ...

Canada's top two rail carriers are already reaping the benefit of the economic recovery and analysts at UBS Securities Canada Inc. are optimistic they can surpass the peak transportation volumes seen during the last economic cycle within just a few years.

In a research report today, UBS noted that volumes rebounded aggressively in the first half of this year - albeit from unusually depressed levels of a year ago. Year-over-year comparisons will become more "challenging," going forward for Canadian Pacific Railway Ltd. and Canadian National Railway Co. , but stable growth can be expected.

"We believe that both Canadian Class I rails can achieve prior cycle peak volumes by 2012/13, and surpass them thereafter," UBS analysts Tasneem Azim and Rick Paterson said in the report. Aiding in the turnaround is strong demand for Canadian bulk commodities thanks to growth in emerging markets.

Upside: UBS upgraded CP to a "buy" from "neutral" and raised its price target to $73.00 from $66.50. It maintained its "neutral" rating on CN Rail, but hiked the price target by $2 to $72.00.

Copper prices

Given strong physical demand and tightening market conditions, CIBC World Markets Inc. has raised its long-term copper price forecast by 40 cents to $2.40 (U.S.) per pound. The action, in addition to raising its Canadian dollar assumptions, has prompted revisions in its earnings estimates for copper miners.

Upside: CIBC upgraded Inmet Mining Corp. to "Sector Outperformer" from "Sector Performer", but downgraded HudBay Minerals Inc. a notch to "Sector Performer."

CSX Corp. 's third-quarter adjusted earnings per share of $1.11 (U.S.) was ahead of consensus estimates and the rail and logistics services stock is attractively valued providing there is a modest, continuing economic recovery, said TD Newcrest analyst Cherilyn Radbourne. TD suggested, however, that the robust quarter may not provide a sufficient catalyst to carry the stock higher near-term given its recent strength.

Upside: Ms. Radbourne raised her price target by $3 to $72.00 (U.S.) and continues to rate the stock as a buy.

Telus Corp. shares have shot up 31 per cent since March 19, compared with the four other telecos in Canada gaining only an average of five per cent, noted TD Newcrest analysts Vince Valentini and Eli Papakirykos. "Consequently, on an absolute basis, we believe gains for the stock will be more modest in the next six months than they have been in the past six months," the analysts said in a note.

Downside: TD Newcrest downgraded the stock to a "Buy" rating from "Action List Buy," but said it continues to prefer the stock over its peers and maintained a 12-month target price of $50.00.

Colossus Minerals Inc. 's Serra Pelada project in Brazil has unique high-grade gold and platinum group metals mineralization, is on track to begin production in 2012, and has seen recent exploration success to potentially expand the resource, said Canaccord Genuity analyst Nicholas Campbell. "For these reasons, we view Colossus Minerals as a likely takeover target," he said.

Upside: Mr. Campbell hiked his target price 60 cents to $11.60 and continues to recommend the stock as a "speculative buy."

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