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Netflix shares down sharply after analyst downgrade

The stock market is enjoying one of its best days in recent memory, but not Netflix Inc. , which has seen relentless selling this fall amid a botched attempt to raise prices and split up its business units. Shares of the company are down more than 6 per cent in mid-afternoon trading.

The catalyst appears to be a fresh analyst downgrade, this one from Wedbush's Michael Pachter, who now rates the stock as "underperform" instead of "neutral." This comes in the footsteps of several Wall Street analysts cutting their price targets on Netflix last week after the company warned of a loss for 2012. It had previously said it anticipates a loss only in the first quarter of 2012, but it has become more cautious as customers left the company.

Mr. Pachter, in a research note today, said he is particularly concerned by the company's "growth at all costs business model."

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"In our view, the company's business model was broken when it raised prices for its hybrid customers, and continued customer defections will require it to invest ever increasing amounts on marketing," he was quoted by Forbes and StreetInsider as saying. "We estimate that Netflix will spend $800-million [U.S.]on streaming content in 2011, and expect streaming content costs to rise to at least $1.7-billion in 2012, partially offset by approximately $200-million in DVD and postage savings."

"Netflix management is willing to incur losses for all of 2012 in order to chase international expansion; we think that international subscribers will generate losses for the foreseeable future at a time when the company has alienated its most profitable domestic customers with its sharp price increases, further challenging its profitability."

Downside: Mr. Pachter maintained a $45 price target.

Corning Inc. released a disappointing fourth-quarter earnings pre-announcement that indicated lower-than-expected LCD glass volumes and accelerated price declines amid sluggish consumer demand, noted Brigantine Advisors analyst Darice Liu. While Ms. Liu sees consumer woes continuing for the next three to six months, she recommends buying the stock, given Corning "is a robust company building on its core competencies to increase its revenue opportunities."

Upside: Ms. Liu maintained an $18 price target.

Orbite Aluminae Inc. has released a preliminary economic assessment of its planned metallurgical-grade alumina plant in Quebec. Jennings Capital Inc. analyst Ken Chernin called the results "very positive," with the potential to process rare earth metals helping to drive "exceptional economics."

Upside: Mr. Chernin raised his price target by $3.50 to $11.50 and maintained a "speculative buy" rating.

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National Bank Financial analyst Nikhil Thadani is feeling upbeat about MacDonald Dettwiler and Associates Ltd. after taking a tour of its recently expanded facility in Montreal. The plant has sufficient capacity for additional work, which he said could be on the horizon, including contracts in emerging markets and for Russian satellites.

Upside: Mr. Thadani maintained an "outperform" rating and $55 price target.

Reliable Energy Ltd. reported third-quarter production that was below expectations, but lower-than-anticipated costs helped to support cash flow and the company increased its production rate guidance for the end of the year, noted Acumen Capital analyst David Doig. He continues to rate the stock as a "speculative buy," noting that he raised his cash flow estimates for this year and for 2012 because of a more favourable view on costs.

Upside: Mr. Doig has a 12-month target of 40 cents.

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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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