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Even as uncertainties swirl, RBC upgrades Shoppers

A Shoppers Drug Mart franchise in Toronto.

Ryan Carter/Ryan Carter

Shoppers Drug Mart Corp. will be in the spotlight Thursday as it releases second-quarter results and sheds more light on its search for a new chief executive officer. RBC Dominion Securities analyst Irene Nattel isn't waiting around, upgrading the company to "outperform" from "sector perform" and recommending the stock particularly for investors seeking exposure to more defensive names.

She believes that the current uncertainty facing the company over its leadership, and the negative impact to its bottom line from drug reforms, will soon make way for sustained earnings growth.

Acting CEO David Williams had earlier suggested a decision on the top executive position will be made this summer, though it's not known whether an announcement will be made this week. Knowing who will be in control will remove some of the uncertainty over the stock and the company's medium-term strategy, Ms. Nattel points out.

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Meanwhile, it's now been a year since the adoption of prescription reforms in Ontario, which slashed prices on generic drugs to help reduce public spending. "As of this week's second-quarter earnings release, Shoppers will have cycled past the most severe of the year-to-year impact," said Ms. Nattel.

"Despite the magnitude of the negative impact of the first phase of reform, SC has managed to deliver flat to marginally higher earnings in the quarters subsequent to drug reform, implying that underlying earnings are continuing to grow by low double digits," she said.

Ms. Nattel also likes the company's valuation, pegging it at 14.3 times 2011 estimated earnings per share of $2.85, a slight discount to U.S. industry giant Walgreen Co.

Upside: Ms. Nattel raised her price target by $3 to $47.

Thomson Reuters Corp. shares have been heading south since early May, but TD Newcrest is sticking with its highest recommendation to buy the stock. It says "whisper expectations" - or trader speculation - for second-quarter earnings on July 28 have become very low, setting the stock up for a relief rally. "If the company can communicate that: 1) execution on the integration program remains on track for completion in 2011 and 2) the macro demand environment for its products is soft but still positive, we believe the stock will stabilize and perhaps regain some of its recently lost ground," said analyst Vince Valentini.

Upside: TD Newcrest has a 12-month target price of $50, suggesting a return of nearly 50 per cent.

The weak U.S. housing market caused lumber prices to drop rapidly through late May and they are still down 21 per cent so far this year. While that's not great news for Canfor Corp. , RBC Dominion Securities analyst Paul Quinn believes the company's stock now fully reflects current lumber prices, given its 30 per cent tumble over the last three months.

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Upside: Mr. Quinn upgraded Canfor to "sector perform" from "underperform," and reiterated his price target of $11.

Shares of Norbord Inc. are fully valued at current levels, given little prospect for near-term material improvement in demand for wood panels, said RBC's Mr. Quinn. He downgraded the oriented strand board maker to "sector perform" from "outperform" amid the challenging home construction market and industry overcapacity.

Downside: Mr. Quinn cut his price target by $3 to $14.

Halliburton Co. kicked off earnings season for the industry on a positive note, with profit jumping nearly 54 per cent - better than expected - thanks to the expansion of oil and natural gas drilling in North America. International operations lagged, however, with margins only marginally better than the first quarter and the company dialed back its expectations for significant improvement in 2011, noted Canaccord Genuity analyst Scott Burk.

Upside: Mr. Burk raised his price target to $67 and maintained a "buy" rating.

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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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