RBC upgrades Encana, warns of big dividend cut

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Inside the Market's roundup of some of today's key analyst actions. This post will be updated with more analyst commentary during the trading day.

Encana Corp. has been a frustrating stock for many investors, with its shares down about 12 per cent so far this year, but RBC Dominion Securities believes the company is on the cusp of a sustained turnaround for the better. That could involve, however, a major cut in its dividend next year - possibly by as much as 50 per cent.

RBC analyst Greg Pardy upgraded his rating on Encana today to "outperform" from "sector perform," after concluding that the company "appears to be back on the road to winning again."

"In our view, the catalyst for a share price turnaround will be fuelled in large part by increasing visibility in a strategy focused on heightened financial and operating discipline under the leadership of Encana's new CEO, Doug Suttles, and CFO, Sherri Brillon," he said in a research note. "In this vein, we have renewed confidence that Encana will undertake the restructuring steps necessary to reposition itself for profitable growth."

Encana this past year has faced many challenges, including weak spot natural gas prices, little progress in finding value in its emerging oil and liquids plays, and the transition in its CEO leadership.

That said, its quarterly results have generally exceeded expectations, and Mr. Pardy believes investors have reason for optimism.

"We believe that Encana has some of the best real estate on the block when it comes to natural gas resources and possesses solid execution capability," he said.

"The missing element in the equation has largely revolved around strategic direction. In our opinion, Encana's current share price does not reflect its positive attributes while its current valuation levels make ECA shares attractive."

Mr. Pardy thinks that Encana's efforts to refocus its strategy is nearing completion ahead of its target of year-end 2013. "While it remains on track to implement this plan come 2014, the company may in fact build momentum ahead of next year," he said.

But Mr. Pardy warns Encana's efforts to build a better company may involve a reduction of its dividend - and it could be quite drastic. "Encana's annual common dividend of $0.80 per share maps to a yield of 4.6 per cent, which is head and shoulders above our natural gas-weighted peer group average. We believe an adjustment to Encana's dividend is warranted and have factored in a 50 per cent cut to $0.40 per share in 2014."

The stock is inexpensive from a valuation perspective, he points out. "At current levels, Encana is trading at a debt-adjusted cash flow multiple of 5.9x (a 14.5% discount to our North American gas-weighted peer group average of 6.9x) in 2013 and 6.0x (in line with our peer group average of 6.1x) in 2014," he said.

Encana earlier today signaled a potential sale of dry natural gas assets as it focuses on more-lucrative oil and gas liquids. Read more here.

Target: Mr. Pardy maintained a price target of $22 (U.S.). The average price target among analysts is $20.62, according to Bloomberg data.

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Several analysts are hiking their forecasts for Dollarama Inc. shares after the retailer's better-than-expected earnings report on Wednesdsay.

Desjardins Securities raised its target on Dollarama Inc. to $90 from $78 and maintained a "buy" rating. Raymond James raised its target to $80 from $78 and maintained a "market perform" rating. Canaccord Genuity raised its target to $90 from $81 and reiterated a "buy" rating. CIBC World Markets raised its target to $89 and reiterated a "sector outperformer" rating. Credit Suisse raised its target to $90 from $79 and reiterated an "outperform" rating.

The stock has risen sharply this week in the wake of the earnings, but CIBC's Perry Caicco isn't too concerned about valuations getting too stretched.

"DOL's forward P/E multiple is near its high for calendar 2013, but we believe it is sustainable," he commented in a research note. "Lower multiples are just better buying opportunities, and DOL's EPS growth rate and market position are similar to other long-tenured high multiple Canadian retailers we have seen in the past."

Target: The average target among analysts is $87.50.

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CIBC World Markets analyst Jon Morrison sees more gains ahead in shares of Total Energy Services Inc. after another boost to its capital spending program.

Total announced a $17.2-million increase to its 2013 capital program this week, with the additional spending to be used to add a new heavy-double drilling rig and upgrade its last remaining conventional single drilling rig.

"This is the third increase to Total's 2013 budget and we believe highlights the accelerating opportunities for capital deployment, heading into 2014," Mr. Morrison commented.

Target: Mr. Morrison raised his price target to $19.25 from $18.50 and reiterated a "sector outperformer" rating. The average target is $19.38.

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UBS analyst Steven Milunovich reduced his earnings expectations for Hewlett-Packard Co.'s fiscal 2014, predicting that the disappointment of the third quarter will impact earnings guidance that the company will provide at an analyst meeting on Oct. 9.

"After initial progress in its turnaround, HP is finding the going tougher as reflected in Meg Whitman backing off on the prospect of revenue growth in fiscal 2014," he said. "Recent management changes will take time to have a positive impact."

He now expects flattish earnings per share in fiscal 2014 of $3.55.

Target: Mr. Milunovich cut his price target to $24 (U.S.) from $28 and reiterated a "neutral" rating.  The average target is $25.30.

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Home Capital Group Inc.'s stock price has been on a roller-coaster during 2013. It was driven down initially by the build-up of U.S. short positions, but more recently the stock has rallied to record highs thanks in part to short-covering.

"We estimate that there is still more short covering to come that would drive the price still higher," said Desjardins Securities analyst Michael Goldberg.

Target: Mr. Goldberg maintained a "top pick" rating and $76.50 target.  The average target is $73.

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Lundin Mining Corp. provided updated estimates for its wholly owned mining operations this week that showed copper and zinc reserves growing by 2 per cent and 5 per cent, respectively.

The update had a fairly neutral impact on Raymond James analyst Alex Terentiew's net asset value estimate for Lundin, but he increased his forecast for the stock based on the impact of a depreciated Canadian dollar.

Target: Mr. Terentiew raised his target price to $5 from $4.75 and maintained a "market perform" rating. The average target is $5.53.

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Other analyst actions today include:

Raymond James upgraded Evertz Technologies Ltd. to "outperform" from "market perform" and raised its price target to $17.50 from $16.

Wells Fargo downgraded Travelers Cos. to "market perform" from "outperform" and cut its valuation range to $89-92 from $94-98.

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For more analyst actions, breaking investing news and analysis, follow Darcy Keith on Twitter at @eyeonequities