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RBC slashes outlook on airlines amid economic mayhem

An Air Canada jet is seen on a runway.

Fred Lum/Fred Lum/THE GLOBE AND MAIL

Citing "the alarming macroeconomic signals" that have been growing by the day, RBC Dominion Securities Inc. has turned more cautious on the Canadian airline industry.

Analyst Walter Spracklin slashed his price targets on both Air Canada and WestJet Airlines Ltd. , after concluding that there is little that's going to stimulate investor sentiment in the sector in the short term.

The action comes just days after both airlines reported solid second-quarter results. Mr. Spracklin applauded WestJet's "strong strategy execution" and "impressive and proactive" management. But while traffic trends appear positive, the surge in economic headwinds throws into question how much longer they can continue to grow, he argued.

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At Air Canada, costs were better than expected and customer demand held up even as fare increases were introduced.

However, "something's gotta give," according to Mr. Spracklin. He sees the current economic deterioration leading to lower demand in the second half of the year.

Downside: Mr. Spracklin downgraded WestJet to "sector perform" from "outperform" and cut his price target by $2 to $14. He maintained a "sector perform" recommendation on Air Canada while cutting his price target by 50 cents to $2.

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Raymond James Ltd. is encouraging investors to add to positions in Cameco Corp. following recent share price weakness. Analyst Bart Jaworski noted that second-quarter earnings last week were largely as expected and the company is poised to realize higher prices for uranium as legacy sales contracts expire.

Upside: Mr. Jaworski reiterated his "outperform" rating, but trimmed his price target to $32.20 from $33.50.

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Manitoba Telecom Services Inc. , which last week reported better-than-expected second-quarter results and increased its guidance for the year, should see substantial stock price gains over the next 12 months, argued TD Newcrest analyst Vince Valentini. His outlook is supported by the "impressive turnaround" at its Allstream unit, as well as the modest possibility of future takeover interest in the company's assets.

Upside: Mr. Valentini raised his price target by $1 to $40 and maintained MTS as a top pick in the sector.

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CIBC World Markets Inc. analyst Paul Lechem has downgraded Emera Inc. after the utility's second-quarter earnings per share came up 5 cents short of consensus and the company trimmed its earnings outlook for the year. "While Emera offers strong long-term growth potential given its investments in (renewable) generation, transmission, and distribution in New England and Maritimes, our lower earnings outlook suggests little upside in short term," he commented.

Downside: Mr. Lechem cut his price target by $3 to $32 and reduced his rating to "sector performer" from "sector outperformer."

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SNC-Lavalin Group Inc.'s stock valuation "is looking increasingly appealing" given the company's significant growth potential in such areas as mining, nuclear and transmission, said CIBC's Mr. Lechem. SNC-Lavalin shares were sold off late last week as the firm reported a big drop in second-quarter earnings, due mostly to weakness in its infrastructure and environment segment. But its guidance is still calling for a strong second half of the year.

Downside: Mr. Lechem cut his price target by $3 to $62 and maintained a "sector outperformer" 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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