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Time to buy Caterpillar, BMO urges in upgrade

The CAT logo is seen on the front of a Caterpillar machine on a lot at Milton CAT in North Reading, Massachusetts January 23, 2013.

JESSICA RINALDI/Reuters

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

BMO Nesbitt Burns has upgraded Caterpillar Inc. to "outperform" from "market perform" in the wake of the company's quarterly earnings this week.

Even though profits were below Street estimates, there was little negative reaction in the stock, an indication that "investors now believe the bad news is out and are willing look past the near-term obstacles," said BMO analyst Joel Tiss.

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"We believe promising global developments, strong global liquidity, increased investor optimism, well-defined headwinds," and other factors "could all drive the stock to higher levels," he said.

Upside: Mr. Tiss raised his price target to $130 (U.S.).

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CGI Group Inc. is likely to provide a "positive update" on its acquisition of Logica when the company reports first-quarter earnings on Wednesday, said Cantor Fitzgerald analyst Tom Liston.

Logica's margins must be around 6 per cent for the acquisition to be worthwhile, Mr. Liston wrote in a research note.

"Historically, management has been able to increase EBIT (earnings before interest and taxes) margins with acquisitions from the low single-digits to a blended mid-teens range. We have full confidence that the management team will dramatically improve the profitability of the Logica business; however, it will certainly take longer given the size of the acquisition," he said.

Upside: Mr. Liston rates the stock "buy" and has a $28.50 target price.

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Investors should buy shares in Sierra Wireless Inc. now that the company has sold its AirCard business to NetGear Inc. for $138-million, said RBC Dominion Securities analyst Paul Treiber.

AirCard had "added quarterly volatility, raised competitive threats, and materially weighed on Sierra's blended valuation multiple," commented Mr. Treiber. He noted that the sale price was attractive and the company expects to allocate proceeds to acquisitions and share repurchases.

AirCards are modems used to connect electronic devices such as notebooks to the Internet over 3G and 4G broadband networks.

Upside: Mr. Treiber upgraded Sierra to "outperform" from "sector perform" and raised his price target by $4 to $13.

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Short interest in Bell Aliant Inc. now stands at 5.6 million shares, compared with 2.4 million in October, driven by U.S. hedge funds, said Canaccord Genuity analyst Dvai Ghose, adding that the stock is "not a short, in our view."

The company has unusually high capital spending and trades at a significant premium to its peers, Mr. Ghose pointed out. "We see limited downside risk (or upside potential), and the 7 per cent dividend yield is attractive."

Upside: Mr. Ghose rates the stock "hold" and has a $27 price target.

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Western Energy Services Corp. stock has "lagged considerably" behind its North American counterparts -- yet, the contract driller numbers suggest that it is a top-tier performer, said Raymond James analyst Andrew Bradford.

Western has the highest cash flow per rig among its Canadian peers, returns on equity that are above average, and is priced below historical averages for the contract drilling group, Mr. Bradford said. Investors might be deterred by its debt level, he added, but Western also carries more than $30-million of "highly liquid" securities on its balance sheet that should help allay those fears.

Upside: Mr. Bradford upgraded the stock from "outperform" to "strong buy" and has a $9.75 price target.

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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

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

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