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Canaccord's new view: Buy RBC, not Scotiabank

Canaccord Genuity analyst Mario Mendonca isn't impressed with what Bank of Nova Scotia had to say last week in reporting fiscal fourth-quarter results. He today downgraded the bank to a "hold" from "buy," and cut his price target by $5 to $58.

Scotiabank's earnings and revenues for the quarter weren't far off expectations. But Mr. Mendonca was taken off guard by some of the bank's forward-looking comments.

"Despite pointing to improving operating leverage, stable PCLs (provision for credit losses), solid commercial loan growth, 'reaping the benefits' of international acquisitions and investments, and finally the $1.9-billion decline in common equity, the bank reduced its earnings per share growth guidance to 5 to 10 per cent (from 7-12 per cent), and the return on equity guidance to 15-18 per cent from 16-20 per cent," Mr. Mendonca said in a research note.

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He was also surprised by the bank's comment that it is not ruling out raising common equity in the months head, and is disappointed that it's not being more aggressive in hiking its dividend.

Furthermore, he's concerned with comments from the bank that it may resume higher spending once it becomes confident it can meet its earnings per share guidance.

Mr. Medonca suggests investors would be better served by Royal Bank of Canada , which he upgraded to "buy" from "hold" while raising his price target by $3 to $58. RBC's earnings last week weren't far off expectations, with soft capital markets revenue offset by solid other income and net interest income.

"The increase in our target price reflects the increase in our EPS estimate, and also the move from valuing the stock using a 3 per cent discount to the group to a target multiple that is modestly higher than the group average of 12.0x. While we continue to believe that RY's overweight to capital markets (particularly trading) constrains the bank's multiple, given the recent decline in capital markets' earnings and trading revenue generally (lowering the relative contribution to total earnings), the strong showing in domestic retail, the considerable improvement in domestic commercial loan growth, and particularly management's comments about driving better operating leverage, we do not believe a discount multiple is appropriate."

CIBC World Market Inc.'s Robert Sedran also revised his outlook on the two banks today, raising his target on Royal Bank by $3 to $54, and cutting his target on Scotiabank by $1 to $57. But he continues to rate RBC as a "sector performer" and Scotiabank as a "sector outperformer."


West Fraser Co. Ltd. is fully valued at current levels given little prospect for a near-term material improvement in demand for wood products, said RBC Dominion Securities Inc. analyst Paul C. Quinn. He downgraded the stock to "sector perform" form "outperform," noting that the seasonal strength in the sector during the fall has largely run its course.

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Upside: Mr. Quinn has a $49 price target.


Gran Tierra Energy released a drilling update, reporting two dry holes in Colombia, with a third well still drilling. But Raymond James Ltd. analyst Rafi Khouri says investors shouldn't be deterred, believing they are only paying for existing discoveries at the no-debt company. "Anytime investors are offered free exposure to exploration upside potential from a company such as Gran Tierra (no debt, cash flowing, high netbacks and cash in the bank), we strongly urge further adding to positions," said Mr. Khouri.

Upside: Mr. Khouri maintained a "strong buy" rating and $10.50 price target.


While Nexen Inc. has faced many challenges over the past few years, the stock is trading "at an absurdly low valuation," commented CIBC World Markets Inc. analyst Andrew Potter. During a recent investor day, he believes the company put forward a credible plan to increase production at its troubled Long Lake oil sands upgrader and "was fairly convincing" about improved reliability at the Buzzard field in the North Sea. He notes that the market values of the Syncrude oil sands operation and Horn River shale gas project alone account for Nexen's current market cap, "implying little to no value for the other 80 per cent of its production base."

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Upside: Mr. Potter maintained a "sector outperformer" rating and $25 price target.

Related: Nexen quietly underwent strategic review

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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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