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RBC upgrades Corus to 'top pick' ahead of OWN launch

Advertising markets are on the rebound and merger and acquisition activity in the television and radio sector is picking up steam. It's a favourable backdrop for media companies, and one firm in Canada, Corus Entertainment Inc. , can also boast something else: it's got Oprah.

Despite this, shares in Corus - owner of specialty TV networks and radio stations across Canada - have had a rough start to 2011. RBC Dominion Securities Inc. analyst Drew McReynolds even argues they've become "mispriced." He upgraded the stock to "top pick" from "outperform," calling the company one of RBC's three best ideas in the sector, along with Torstar and Thomson Reuters.

"We believe the recent pullback in the shares provides attractive upside for investors, particularly on a risk-adjusted basis given a healthy balance sheet, solid free cash flow generation and revenue mix/momentum," Mr. McReynolds said in a research note.

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He notes the fundamentals look solid, as management provided a robust outlook for the second quarter and for the remainder of this year, while expressing greater confidence in the ad outlook. Meanwhile, the launch of the Oprah Winfrey Network (OWN) in March should boost sentiment and "materially benefit" television results over the next two to three years, said Mr. McReynolds. There's also the possibility of an eventual takeover by Shaw Communications, the company Corus was born from.

The risks? A renewed economic slowdown could lead to a pullback in ad spending, radio audiences could erode because of competing platforms, and television programming costs could substantially rise. According to Zacks Investment Research, four analysts rate the stock as either a "strong buy" or "buy" and four rate it as a "hold."

Upside: Mr. McReynolds has a price target of $27.

Cogeco Inc. has become the second-largest radio broadcaster in Quebec after closing a deal to acquire 11 stations in the province from Corus. "By more than tripling the number of radio stations owned, we believe Cogeco will be able to leverage its understanding of the Quebec market and drive solid growth for the radio unit, realizing increased synergies," said CIBC World Markets Inc. analyst Robert Bek.

Upside: Mr. Bek raised his price target by $5 to $39.

Related: Cogeco reports mixed earnings, stable growth

Palm oil prices appear poised to rise, as production from Indonesia and Malaysia - which together produce 91 per cent of world supply - is flatlining at a time when demand is continuing to go up, said Wellington West Capital Markets Inc. analyst Greg Colman. This should benefit Feronia Inc. , which is improving the efficiency of a plantation in the Democratic Republic of the Congo and is trading well below its peers based on its enterprise value to EBITDA ratio, he said.

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Upside: Mr. Colman initiated coverage with a "speculative buy" recommendation and a 12-month price target of $1.40.

Héroux-Devtek Inc. reported "great" third-quarter results, with EBITDA margins reaching a historically high 16.5 per cent, said TD Newcrest analyst Tim James. He believes there's potential for additional margin expansion, and expects a recovery in the overall civil aerospace cycle will drive future revenue growth.

Upside: Mr. James hiked his price target on Héroux-Devtek, TD Newcrest's top pick in the Canadian aerospace sector, by $1 to $10.

Related: Héroux-Devtek profit jumps

Domtar Corp.'s fourth-quarter earnings fell short of expectations due to unplanned downtime, but TD Newcrest analyst Sean Steuart likes the company's plans for its balance sheet. While cyclical earnings likely peaked during the third quarter of last year, free cash flow potential over the next two years remains robust and, unless there are acquisitions, management has pledged to return the majority of surplus cash flow to shareholders through continued share buybacks or dividend hikes, he said.

Upside: Mr. Steuart hiked his price target by $10 (U.S.) to $110.

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Related: Pulp rebound bulks up Domtar profit

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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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