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Analyst actions send AOL surging, Cliff Natural Resources plunging

Inside the Market's roundup of some of today's key analyst actions

AOL Inc., a stock that had been largely treading water since last fall, catapulted higher in trading today with the assistance of an upgrade from Barclays analyst Anthony DiClemente.

Mr. DiClemente believes profit at the U.S.-based global Internet company will grow faster than analysts' estimates with the help of cost-cutting and modest revenue growth. He upgraded the stock to "overweight" from "equal weight."

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He thinks earnings before interest, taxes, depreciation and amortization will rise 34 per cent this year to $441-million. That compares to the average analyst estimate of 30 per cent growth, according to Bloomberg.

Target: Mr. DiClemente raised his price target to $44 (U.S.) from $38. The average price target among analysts is $41.79, according to Bloomberg data.

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Shares of Cliffs Natural Resources Inc. were sent into a tailspin today after two analysts drastically slashed their price targets on the coal and iron ore producer.

Its shares had already been one of the worst performers within the S&P 500 index this year, with a loss of more than 50 per cent; at midday today, it was down about 15 per cent.

Morgan Stanley analyst Even Kurtz downgraded Cliffs Natural Resources Inc. to "underweight" over concerns about a deteriorating U.S. iron ore market. Noting that Cliff's iron ore business accounts for about 60 per cent of its earnings, he warned that new supplies of the metal in the Great Lakes region in the second half of this year will hurt pricing power.

"We believe Cliffs' key U.S. iron ore business will be halved in coming years as new Great Lakes supply cuts into volumes and pricing," Benzinga.com quoted Mr. Kurtz as saying.

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Credit Suisse analyst Nathan Littlewood also believes a looming surplus of material will occur in the region, and warned that Cliffs may need to consider "drastic solutions" to shore up its balance sheet in the next 12 months. That may include selling iron ore assets in the Asia-Pacific region, or a multibillion-dollar equity offering, Reuters quoted Mr. Littlewood as saying.

"Major reform is required if this business is to survive the next commodities cycle, in our view," he said.

Target: Morgan Stanley lowered its target to $14 from $36. Credit Suisse cut its target to $10 from $30. The average price target on the Street is $31.38.

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Rona Inc. has an experienced and successful retail executive taking over as CEO in April, but Desjardins Securities analyst Keith Howlett remains nervous about the company given its strategy to focus on smaller stores in urban locations and are sized between big-box home improvement retailers and hardware stores.

"The concept is built upon high-touch service and more conenient location, being easier to shop, with store inventory being supplemented online," noted Mr. Howlett in a research note. "Our concern is whether there is enough 'white space' between big-box warehouses and hardware stories for the urban proimity store to flourish. The only other company pursuing a similar strategy is Orchard Supply, on which the jury is still out."

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Target: Mr. Howlett maintained a "hold" rating and price target of $12. The average price target is $11.18.

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MacDonald Dettwiler and Associates Ltd.'s recent $288-million equity issue may limit the stock's upside over the next year, but the satellite technology company still holds a lot of promise to investors, said RBC Dominion Securities analyst Steve Arthur.

Demand for satellite data continues to grow, largely driven by increased appetite for broadband, video and communications infrastructure, he said. Meanwhile, government opportunities are growing despite near-term budget uncertainties, as their needs for satellite data is on the upswing, he said.

"We see multiple drivers of earnings growth in coming years, supported by leading positions in key global market segments, incremental order opportunities in the U.S. and International markets, and a strong order backlog," he said.

Target: Mr. Arthur cut his price target to $78 (Canadian) from $81 and reiterated an "outperform" rating. The average target on the Street is $76.34.

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Several analysts have trimmed their price targets on AuRico Gold Inc. after the company this week revealed a $127-million writedown on its El Chanate project in Mexico as it reported quarterly results.

The company maintained 2013 production guidance of 70,000 to 80,000 ounces of gold at El Chanate, but raised its cost guidance.

"Although AuRico's 2012 financial results and cash costs were broadly in line with expectations and the ramp-up at Young-Davidson remains on track, we are concerned about the lack of reserve replenishment at El Chanate," commented Desjardins Securities analyst Adam Melnyk.

Target: Desjardins cut its target to $8 from $8.50 and reiterated a "hold" rating. RBC Dominion Securities cut his price target to $8 from $9 and affirmed a "sector perform" rating. The average price target is $8.69.

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

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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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