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UBS upgrades GM, sees Japan as the 'catalyst' to a stock rally

The auto parts inventory shortage spurred by the Japanese crisis could become General Motors Co.'s biggest opportunity since its rebirth to climb back to auto maker supremacy, according to a report today from UBS.

With supplies of some foreign-built automobiles - including the Honda Civic - already facing delays, UBS analyst Colin Langan believes GM has an opportunity to grab a nice extra slice of market share - and send its stock well above the IPO offering price of $33 (U.S.). Ford and GM have suggested their production schedules should remain intact despite the woes faced by their Japanese counterparts.

Mr. Langan predicts the supply disruptions will result in a shortfall of 730,000 Japanese vehicle. About 500,000 of this shortfall will linger into 2012 as consumers wait to purchase specific brands. But he predicts the remaining 230,000 vehicles will be sales lost to competitors - and GM will be the biggest beneficiary.

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"This latter piece is where the GM opportunity lies, with as much as 110 basis points of additional market share gains in 2011 and 65,000 units of incremental volume," Mr. Langan said in a note. He expects these gains - along with improving underlying demand - will boost 2011 earnings per share by 60 cents.

"While we have been cautious on GM to date, we now view the Japan situation as the catalyst we've been looking for to carry GM through its weak launch period," he wrote.

GM reports its first-quarter results on Thursday and the Street is forecast earnings per share of 93 cents, though UBS is expecting $1.09 because of a more favourable view of volume growth in North America.

The U.S. government still owns 33 per cent of GM and there are rumblings a sale may not be that far out. While this would likely dilute GM shares, Mr. Langan also sees benefits to GM's longer-term valuation, given "the removal of an unnatural owner."

Upside: Mr. Langan upgraded GM to a "buy" from "neutral" and raised his 12-month stock target price by $7 to $42.

Comparable store sales plunged 9.2 per cent at Sears Canada Inc. in the first quarter, with the retailer now expected to post a loss of 20 to 40 cents per share, according to Desjardins Securities Inc. analyst Keith Howlett. The poor sales and profit trends reflect "weak overall discretionary retail sales in Canada and ongoing market share erosion at Sears Canada," he said.

Downside: Mr. Howlett reiterated his "hold-above average risk" rating and $20 price target.

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Now that Teva Pharmaceutical's $6.8-billion offer for Cephalon has trumped Valeant Pharmaceuticals International Inc. bid, the Canadian drug maker is moving on to other opportunities. Canaccord Genuity analyst Neil Maruoka is optimistic, particularly given the company's potential blockbuster Potiga epilepsy drug, which could see approval in the U.S. this year. He also believes it will continue to look at acquisitions, albeit on a smaller scale.

Upside: Mr. Maruoka maintained a "buy" rating and set a price target - previously under review - at $54 (U.S.)

Related: Valeant bows out of Cephalon bidding

EastCoal Inc. , which expects to start coal production from its Verticalnaya anthracite mine in early 2012, is on the fast track to play a significant role in reviving the Donbass coal basin in the Ukraine, said Clarus Securities Inc. analyst Mike Bandrowski. "A superior management team with a proven track record suggests this fully permitted, near-term coal producer is ready to take off," he said.

Upside: Mr. Bandrowski initiated coverage with a "buy" recommendation and a target price of $2.25 a share.

Crew Energy Inc. has agreed to acquire private firm Caltex Energy, which has heavy oil assets in the Lloydminster area of Saskatchewan, for $633-million. "With a new focus area for oil development, the company is expected to be able to deliver measured oil production growth," said Raymond James Ltd. analyst Luc Mageau.

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Upside: Mr. Mageau upgraded Crew to "outperform" and maintained a $21.50 target price.

Related: Crew Energy acquires Caltex for $622-million


Follow Darcy Keith on Twitter for more of the latest analyst actions from the Street and exclusive investing news from The Globe and Mail.

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