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RBC jumps aboard the Netflix upgrade train

The Netflix sign on is shown on an iPad in Encinitas, California, April 19,2013. Netflix Inc reported on April 22, 2013 a first-quarter profit that beat Wall Street expectations as the dominant video rental service added new streaming subscribers in the United States.

MIKE BLAKE/REUTERS

RBC Dominion Securities analyst Mark Mahaney boosted his target on Netflix Inc. after the video rental giant reported a stronger-than-expected first-quarter profit helped by its growing streaming-subscriber base.

"We continue to believe that Netflix has achieved a level of sustainable scale, growth and profitability that isn't currently reflected in its stock price," Mr. Mahaney in a report released Tuesday.

Netflix seems to be successfully addressing whether it can grow its U.S. streaming subscriber base substantially, he said. "It appears to be on the path to add approximately 5 million subscribers per year for the foreseeable future."

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The company also appears to be able to grow its U.S. streaming business profitably "given five consecutive quarters of material quarter-over-quarter margin expansion," he added. "And management comments about declining willingness to pay for non-exclusive, bulk content suggests greater negotiating leverage."

It's still hard to prove whether the company can successfully grow outside the United States, but "a 7 million international subscriber base suggests a positive answer," Mr. Mahaney noted.

On Monday, Netflix announced an adjusted earnings per share of 31 cents for the latest quarter, topping Wall Street analysts' average forecasts of 19 cents per share. It signed up 2 million customers for its U.S. streaming service, and 1 million outside the country. The latest figures were helped by the release of House of Cards, a political drama starring Kevin Spacey.

Target: The analyst, who has an "outperform" rating on Netflix, raised his target by $40 (U.S.) a share to $250. The average Street target is $187.46 a share, according to Bloomberg data.

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Western Energy Services Corp. is likely to miss expectations when it reports earnings next week, said Raymond James analyst Andrew Bradford.

"We expect investors will be torn between what we expect will be a sub-consensus first quarter for Western, and the potential for additional contracts for the Montney, Horn River, and Duvernay plays," he wrote in a research note. "Our recommendation is for investors to buy this stock, but tactically, we'd recommend buying after the numbers come out on May 1."

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Mr. Bradford expects earnings before interest, taxes, depreciation and amortization to be $36-million (Canadian), lower than a consensus forecast of $40-million.

Target : Mr. Bradford downgraded the stock from "strong buy" to "outperform" and has a $9.25 price target. The average Street target is $10.10 a share.

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Canadian National Railway Corp. is likely to show better earnings for the rest of the year, after a disappointing first quarter, said Canaccord Genuity analyst David Tyerman.

"Winter costs were the main problem as very cold and snowy weather negatively impacted CN's operating ratio," he said. "We do not read much into the relatively weak first-quarter results, given the severity of the winter weather. The company is strengthening sections of its system to provide more resilience in the future, suggesting less impact in future tough winters."

"We expect results to normalize for the rest of the year, and management maintained earnings per share growth guidance of high single-digits, and free cash of $800-900 million in 2013."

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Target: Mr. Tyerman raised his price target to $102 from C$101 and rates the stock "hold." The average Street target is $100.94 a share.

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There are no clear catalysts for fertilizer producer Potash Corp., but "potash fundamentals and prices have bottomed, and we expect Potash to gain a disproportionate share of a 2013 global potash shipment rebound," said BMO Nesbitt Burns analyst Joel Jackson.

Target: The analyst, who rates Potash with "outperform" rating, cut his target by $2 (U.S.) a share to $47. The average Street target is $46.21 a share.

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Texas Instruments Inc. has become a "steady as she goes cash flow story," according to Doug Freedman of RBC Capital Markets. He warns the company's R&D cut "reflects a lack of commitment to invest, even in higher performance markets, with little ambition to move its core business to the leading edge."

Target: Mr. Freedman bumped his price target for the shares up to $35 (U.S.) from $30. The average Street target is $34.91 a share.

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About the Authors
Deputy head of Audience

Sonali Verma is deputy head of audience at the Globe and Mail. She is a business journalist with more than 20 years of experience, mainly in digital media.She was previously the Globe and Mail’s senior editor in charge of audience engagement, overseeing its homepages as well as social media operations. More

Ian McGugan is a reporter with The Globe and Mail's Report on Business and has been writing about investing, economics and business for more than 20 years. He joined the Globe and Mail in 2010. He has been executive editor of Canadian Business magazine and founding editor of MoneySense magazine. More

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