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Canadian bank stocks ‘remain under-appreciated': BMO

A Scotiabank location in Toronto.

Deborah Baic/The Globe and Mail

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.

Canadians are deep into debt and the housing market is slowing, but investors shouldn't assume that will translate into a poor outlook for Canadian bank stocks, says BMO Nesbitt Burns.

When looking at the total returns offered by the banks, including dividends, BMO believes that they actually "remain under-appreciated."

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"We believe that Canadian banks can deliver solid 5-7 per cent earnings per share and dividend growth in a slow growth environment," BMO analysts led by Tom MacKinnon said in a research note today.

The banks begin revealing their fiscal second-quarter results later this week. BMO thinks they should have another solid quarter in terms of domestic consumer credit performance.

"We continue to believe that the best predictors of consumer credit losses will likely be employment data and the unemployment rate," it said. "Clearly there has been a slowdown in employment data, but the unemployment rate remains steady. This is not surprising given the expectations of relatively modest GDP growth over the next 6–12 months."

He forecasts provisions for credit losses in the Canadian banking businesses to be $1.10-billion in the second quarter, higher than an unusually low $1-billion in the first quarter of 2013 but in line with the $1.15-billion a year ago.

Target: Of the major Canadian banks, BMO is most bullish on the Bank of Nova Scotia, with a $67 price target and an "outperform" rating. The average price target among analysts on Scotiabank is $65.18, according to Bloomberg data.

BMO also has "outperform" ratings on Canadian Imperial Bank of Commerce (with a target of $89), Toronto Dominion Bank (target $90), and Canadian Western Bank (target $32) .


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Shares of Saks Inc. are up 15 per cent at midday to just under $16 amid reports that the luxury retailer is reviewing its strategic options, including a possible sale. UBS analyst Michael Binetti is offering a guess as to how much the company could fetch.

He thinks a private buyer could pay $16 (U.S.) a share, which would translate into 8.5 times EBITDA (earnings before interest, taxes, depreciation and amortization). That would be slightly below the 10 times multiple paid for Neiman Marcus in 2005, a peer that has superior sales per foot and margin metrics.

Mr. Binetti thinks the review is well timed. "Management has been making the right decisions lately (closing bad stores, boosting e-commerce investment, launching"

But he remains doubtful that Saks will be able to get to its 8 per cent long-term EBIT margin target due to ongoing legacy real estate issues and rising costs of shipping and rewards programs.

Target: Mr. Binetti raised his price target to $16.60 from $11.50 to reflect the potential deal. He maintained a "neutral" rating. The average price target is $13.88.


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RBC Dominion Securities analyst Irene Nattel is turning more confident on the outlook for Loblaw Cos. Ltd., noting early signs of sustainable improvement in the retail grocery business as well as the outperformance lately of consumer staples stocks.

Loblaw has had a difficult few years, as it implemented new IT and supply chain initiatives and the overall retail sector has been struggling.

"However, first-quarter results released at the beginning of May suggest that the investment in fresh/customer selling proposition is paying off. With improving visibility and sustainability of earnings growth, we believe Loblaw is poised for a multiple re-rating on the core retail business," Ms. Nattel said in a research note.

She raised her target price-to-earnings multiple from 13 times to 15 times, which is in line with where the stock has traded at over the last 30 years.

"Furthermore, we believe Loblaw's recent 9 per cent dividend increase to 96 cents annually, equivalent to a payout of 39 per cent 2012 earnings per share, highlights management confidence in the sustainability of the recent same-store sales and earnings improvements," she said.

Target: Ms. Nattel raised her price target – which does not reflect the planned real estate investment trust – to $44 from $39, and reiterated an "outperform" rating. The average price target is $48.75.


It's time for investors to take a breather in buying shares of Enerflex Ltd., which is trading near record highs, said Raymond James analyst Andrew Bradford.

He downgraded the largest natural gas compression player in the Canadian market to "market perform" from "outperform."

Recent attention given to the bullish outlook for the Canadian liquefied natural gas market has been driving recent gains in the stock. "However, it's not obvious to us that the size of the prize is sufficiently weighty to offset the 'elephant in the room,' which we perceive to be structurally flat bookings and declining backlogs in the southern U.S. and International markets," said Mr. Bradford.

Target: Mr. Bradford maintained a $14 price target. The average price target is $14.75.


Williams Cos. Inc.'s 20 per cent compounded annual growth rate in its dividend not only appears sound through 2015, but the high level of its overall business development activity, matched with its improving financial flexibility, suggests further boosts to the payout in 2016, said BMO Nesbitt Burns analyst Carl Kirst.

"Coupled with the broad market theme of lower for longer interest rates, we continue to view WMB as a core holding for long-term investors," said Mr. Kirst.

Target: Mr. Kirst reiterated a $41 (U.S.) price target and an "outperform" rating. The average price target is $40.55.

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

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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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