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Laurentian downgraded as revenue sources raise concern

Laurentian Bank of Canada's first-quarter headline earnings beat the Street, but analysts aren't issuing many words of praise as they dig a little deeper into the balance sheet.

While the bank appears to be on track to meet its fiscal year earnings-per-share objective of $4.80 to $5.40, some of the key income statement lines offered up surprise.

Desjardins Securities Inc. analyst Michael Goldberg, pointing out a change in the bank's revenue mix, suggested that Laurentian underperformed on several fronts.

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"Despite strong loan growth, particularly year-over-year, Laurentian was not able to generate higher net interest revenue due to continuing net interest margin pressure," he said.

Meanwhile, the company saw higher securitization income during the quarter, which, in his view, is a sign of lower earnings quality. Securitization income of $8.9-million was up from $600,000 last quarter, rising to levels not seen since the financial downturn.

Operating profit was also a concern, declining 1 per cent year over year.

Mr. Goldberg suggested the balance sheet turned out quite different than he had expected after the company's Jan. 20 investor day presentation.

"While its fiscal year 2011 and medium-term objectives have not changed, incongruities in the latest results from the investor day message raise questions about earnings quality that point to sideways performance in the near term," he said.

CIBC World Markets Inc. analyst Robert Sedran echoed a similar sentiment: "Reconstructing our estimates was particularly challenging after such a quarter. In fact, LB is the only bank for which our fiscal 2012 estimate did not move higher," Mr. Sedran said.

Downside: Mr. Goldberg downgraded the stock to "hold-above average risk" from "buy", but increased his target price to $57.50 from $53. Mr. Sedran maintained a "sector performer" rating and $57 price target, choosing not to downgrade the stock given that it already trades at a peer-group low multiple.

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Cervus Equipment Corp. has enjoyed solid revenue growth for two quarters in a row and - in its most recent quarter - a noticeable improvement in margins, noted Canaccord Genuity analyst Neal Gilmer. "Based on an improved outlook, we believe Cervus will provide solid earnings growth over our investment horizon," he said.

Upside: Mr. Gilmer upgraded Cervus to a "buy" from "hold" and raised his price target to $19 from $13.25.

Canaccord Genuity's latest sales checks indicate continued market share losses for Research In Motion Ltd. in the high-end North America smart phone market, offset by strong international sales. While RIM's fourth-quarter, which ended Feb. 26, likely "tracked well versus its guidance," the shift to lower-end smart phones and increased competition for its upcoming PlayBook tablet signal investors should be cautious, said Canaccord Genuity analyst T. Michael Walkley.

Upside: Mr. Walkely maintained his "hold" rating and $67 price target.

Aecon Group Inc. reported "encouraging" fourth-quarter results and "near-term opportunities abound" in transportation infrastructure and industrial markets, said Canaccord Genuity analyst Yuri Lynk. He likes the company's increased leverage to growing oil sands operations given recent acquisitions of a top mechanical sub-contractor in Alberta and a heavy equipment business.

Upside: Mr. Lynk upgraded the stock to "buy" from "hold" and raised his price target to $13 from $11.25.

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China is improving health-care services to rural areas and China Health Labs & Diagnostics Ltd. "is very well-positioned to supply this effort over the coming years," said Clarus Securities Inc. analyst Kelvin Cheung. Demand for its proprietary products is gaining momentum and the company has "strong, influential customers" with the government in health care, he said.

Upside: Mr. Cheung initiated coverage of the stock with a "buy" rating and $3.60 12-month price target.

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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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