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Why investors shouldn't count on an MTS sale of Allstream

With the Conservatives winning a majority in this week's election, increasing the odds that more foreign ownership will be coming to Canada, speculation is resurfacing that Manitoba Telecom Services Inc.'s Allstream business division could be snapped up.

Such a sale could be a boon to shareholders as the company could use the proceeds to buy back stock.

But Desjardins Securities Inc. analyst Maher Yaghi is pouring cold water on the speculation, believing that any sale of Allstream isn't likely in the near future.

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"We believe that any move to liberalize the telecommunications space in Canada will require major changes to both the telecom and broadcasting acts," he said in a note. "In essence, changing those two pieces of legislation will, in our view, open the floodgates to major efforts by many constituencies to implement changes to suit their aims, with potentially significant delays, in the passing of new legislation.

"Until we see a tangible effort by the government to change the law, we remain of the view that it is best to invest in the space based on fundamentals and not on takeover speculation," he said.

Manitoba Telecom reported first-quarter results this week that largely satisfied analysts, with earnings and revenue coming in a little better than expected. Mr. Yaghi noted that Allstream "does appear to be turning a corner following a tough period for the company during the recession."

"Overall, however, we believe the shares are fairly valued."

Upside: Mr. Yaghi raised his price target by $1.50 to $31.50 but affirmed his "hold" recommendation. CIBC World Markets affirmed a "sector performer" rating and $34 price target.

Comstock Resources Inc. saw a strong first quarter, with lower operating expenses and better liquids price realizations, noted Canaccord Genuity analyst John Gerdes. "We laud Comstock's transition toward higher-margin liquids development in the Eagle Ford Shale (in Texas), where the company's latest results suggest improved well performance relative to initial tests, he commented.

Upside: Mr. Gerdes upgraded Comstock to a "buy" from "hold" and raised his price target $9 (U.S.) to $40 per share.

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Imperial Metals Corp.'s Red Chris copper-gold project in British Columbia has secured all permits to come onstream as a 30,000 tonne-per-day operation at the end of 2013. But CIBC World Markets Inc. analyst Ian Parkinson sees potential for an expansion because of recently discovered high-grade resources. "We believe investors are buying the operating assets and Red Chris as permitted, but receiving a likely expansion plus development assets for free," he said.

Upside: Mr. Parkinson initiated coverage of Imperial Metals with a "sector outperformer" rating and $36 price target.

Cott Corp. produced weak first-quarter results, as spiralling commodity costs ate into margins. While the beverage maker is increasing prices, they are insufficient to cover the added costs and 2011 margins will take a hit, commented CIBC World Markets Inc. analyst Perry Caicco.

Downside: Mr. Caicco cut his rating to "sector performer" from "sector outperformer" and trimmed his price target by $1 (U.S.) to $10.

Torstar Corp.'s 35 per cent hike in its dividend wasn't as generous as many investors were expecting and first-quarter results were similarly disappointing. But Canaccord Genuity analyst Aravinda Galappatthige said Wednesday's nearly 10 per cent plunge in Torstar shares was an overreaction, and he is encouraged by strong growth in digital revenues.

Downside: Mr. Galappatthige cut his price target by 10 cents to $16.45. CIBC World Markets analyst Robert Bek cut his price target by 50 cents to $15.

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Follow Darcy Keith on Twitter for more of the latest analyst actions from the Street and exclusive investing news from The Globe and Mail.

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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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