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Credit Suisse upgrades CP Rail, predicts 20% rise in stock price

A Canadian Pacific locomotive sits parked as another hauls rail cars through the main CP yard in Calgary in this file photo.

Jeff McIntosh/The Canadian Press

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.

Credit Suisse analyst Allison Landry upgraded shares of Canadian Pacific Railway Ltd. to "outperform" from "neutral," contending that the market is under-appreciating the company's potential to boost revenues.

She now sees more than 20 per cent upside to the stock over the next year.

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"Although CP is largely a 'cost story,' we believe that the company is also well positioned to generate solid gains on the top line," Ms. Landry said in a research note. "Specifically, CP stands to benefit from 1) secular tailwinds related to evolving supply chains/logistics within North American energy markets; 2) improvement in core pricing gains; and 3) a new revenue stream that should arise from a lower cost business model."

She now thinks the railway should be able to bring its operating ratio down to 63 per cent by 2016, thanks to revenue opportunities in crude oil transportation and in the fracking energy business, as well as improved pricing.

That would place the operating ratio at the low end of CP's 63 per cent to 67 per cent targeted range. The lower the operating ratio, which compares operating expenses to sales, the better.

Target: Ms. Landry raised her price target to $144 (U.S.) from $139. The average analyst target is $130.37, according to Bloomberg data.


Target Corp.'s arrival in Canada is "the swing factor" for its share price and the retailer's second-quarter results are signalling caution in the near term, said UBS analyst John DeRise as he slashed his price target on the stock.

"Target is attempting to rapidly expand and test along the way, which we believed would lead to depressed profits for longer than consensus assumed," he said.

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And indeed, Target said Wednesday that weaker-than-expected sales at its Canadian stores mean it will likely stay in the red in this country until at least 2015.

Target still believes it can generate earnings per share of 80 cents in 2017 from its Canadian operations, but Mr. DeRise doesn't see it happening until 2019.

Target: Mr. DeRise cut his price target to $66 (U.S.) from $73. The average target is $70.81.


The stock of electronics retailer Best Buy Co. Inc. has more than doubled since the start of the year, but Michael Lasser, an analyst at UBS, doesn't think the stock will climb much higher over the next 12 months.

Neverthless, Mr. Lasser did raise his price target after the consumer electronics retailer posted better-than-predicted second-quarter earnings results.

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The results were all the more impressive given that many other electronics retailers were struggling with weak consumer spending over the period, he noted.

Target: Mr. Lasser raised his price target to $35 (U.S.) from $31 but maintained his "neutral" rating. The average price target is $37.21.


The pending sale of Vanguard Health Systems Inc. to Tenet Healthcare Corp. has RBC Dominion Securities analyst Frank Morgan lowering his rating and raising his price target for the company.

Vanguard, which posted weak second-quarter results that nonetheless were slightly better than consensus estimates, wasn't the only hospital provider to have a tough three months. The weakness was an industry-wide trend, said Mr. Morgan.

The company took a hit on charges during the quarter, with $7.9-million (U.S.) in expenses related to the Tenet acquisition and $5.2-million of severance costs related to the restructuring of its Detroit  operations.

However, it did pick up $14.6-million from the sale of a portion of its lab business in Illinois in June.

"We believe shares of Vanguard will trade near the pending cash purchase price of $21 in the Tenet transaction, which is expected to close by year-end," said Mr. Morgan.

Target: Mr. Morgan cut his rating on Vanguard to "sector perform" from "outperform" but raised his price target to $21 from $16. The average price target is $20.67.


Higher interest rates in the next year could be a boon for Exelis Inc. says RBC Dominion Securities analyst Robert Stallard.

Higher rates could cut the defence contractors $2-billion (U.S.) pension liability in half, and provide a nice tailwind for the company's stock heading into 2014, said Mr. Stallard.

"Since the spin-out from ITT Corp. in 2011, the share price has been significantly correlated to the 10-year benchmark, and if interest rates increase as forecasted, we think this trend will likely continue," he said.

But while rising interest rates would be good news for the company, potential cuts in the U.S. defence budget are a hanging question mark.

"Exelis could see multiple expansions if some of the uncertainty around the defense budget is eliminated, which has traditionally served as a re-entry point for investors following a defense budget downcycle," said Mr. Stallard.

"While the outlook for defense overall remains murky, Exelis is likely closer to the bottom than the top in terms of revenues and earnings," he added.

Target: Mr. Stallard raised his price target for Exelis to $18 (U.S.) from $15 and changed his rating to "outperform" from "sector perform." The average price target is $16.63.


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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