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Scotiabank GBM Daily Edge Summary by Himalaya Jain, CFA
Research in Motion (RIM, $9.46, 3-SU, $6.00 target) – Downgrading to 3-Sector Underperform
Sales missed by 23%, EPS loss of US$(0.37) vs US$(0.08) expectation: Revenue of US$2.8B was below our US$3.7 estimate (Street at US$3.2). Device volume of 7.8M was key reason vs our expectations of 9.1M and the Street at 8.7M.
Expect another operating loss in Q2 but cash to be flat: RIM expects to run another operating loss in Q2 but for its US$2.2B cash position to be flat.
The company plans to terminate 5,000 of its 16,500 employees at a cost of US$350M and now expects to ship the first BlackBerry 10 device in Q1 2013 versus Q4 2012.
Reducing recommendation to 3-Sector Underperform: Since last quarter, RIM has lost profitability and further delayed the launch of BB 10, which we view as instrumental to turning its fortunes. Over the next few quarters, the only way we see the shares appreciating is if RIM is taken out, but management does not seem to be pursuing that path.
CP Rail (CP, $72.84, 2-SP, $80.00 target) – Reducing Q2 earnings estimate on weaker volume
We have reduced our Q2/12 EPS est. to $0.81 from $1.02.
The recovery in CP's volumes (post strike) has been slower and leakage to CNR and trucks has also been higher than our earlier expectations. CP's carloads are flat YOY with one week to go in Q2 - we have dropped our carload growth estimate to +0.1% and our Q2 revenue forecast is now reduced to $1.34B - up 6% YOY.
On the expense side, we raised our estimates for fuel expense as fuel efficiency has been coming in lower than our expectations. CP continues to guide to 2%-3% efficiency improvement in 2012, and our forecast is in line with that estimate. Purchased services expense is also raised to $228M. The net impact of these changes was 200 bps increase to our OR forecast, which now stands at 79.8% for Q2.
We are not accounting for Fred Green's severance payments in our revised estimate; however, we are including about $15M in expenses related to the proxy battle.
CP is currently trading at 15.9x NTM EPS, which is at a premium to the North American comp group (13.6x) and, in our opinion, is already discounting the appointment of Mr. Harrison as CEO and the promised improvement in operating ratio. We maintain our 2-SP rating & $80 one-year target.
Shaw Communications (SJR.b, $19.40, 1-SO, $22.00 target) – headline
Financial results were slightly ahead of expectations: EBITDA was $567M vs. our $563M and consensus $565M.
Sequential improvement in Cable financials underscores greater financial discipline this quarter. We expect Cable revenue to decline just $4M from Q3 to Q4, versus $10M from Q2 to Q3.
As competitive intensity in Western Canada stabilizes in F13, combined with product enhancements, we believe single-digit ARPU and sub growth is achievable, supporting ~3% long-term Cable revenue growth and more stable margins relative to F12.
We increased our Cable capex intensity forecast for F13 to 25% to reflect some spillover of DNU to F13. We expect capex intensity to decline to 22% in F14.
Due to lower FCF estimates, our one-year target declines $1 to $22. Based on the expected ROR compared to the rest of our coverage universe, we maintained our 1-SO rating. We believe Shaw's strategy will ultimately result in strong shareholder returns. However, we note that the near-term results will remain somewhat mixed.
Summary of other target price / rating changes
Niko Resources (NKO, $12.25, 3-SU, $30.00 target) – target price reduced from $33.00
Empire Company (EMP.a, $53.87, 2-SP, $60.00 target) – target price increased from $59.00
Outside of earnings related news, I would highlight the following items:
Thompson Creek (TCM) – Thompson Creek reported that it currently expects the previously announced wall slough at the Thompson Creek Mine to have a negative impact on second quarter 2012 production. The Company anticipates production from the Thompson Creek Mine for the second quarter to be approximately 2.5 million pounds of molybdenum. The Company also expects that the slough will have a negative impact on cash
costs of production for the Thompson Creek Mine for the quarter.
Ensign Energy Services (ESI) – Rating reduced to Market Perform from Outperform at FirstEnergy
Trican Well Services (TCW) – Rating increased to Outperform from Market Perform at FirstEnergy
Research in Motion (RIM) – Rating reduced to Underperform at BofA, CIBC, SocGen,
Research in Motion (RIM) – Rating increased to Sector Perform at National Bank
On the economic front, today’s notable releases include:
Canada GDP (May): +2.0% YOY vs. expectation of +1.8%
U.S. and International Market Commentary from Marco Martin
U.S. economic releases today:
8:30 am Personal Income, prior 0.2%, actual 0.2%
8:30 am Personal Spending, prior 0.3%, actual 0.0%
9:45 am Chicago Purchasing Managers, prior 52.7, expected 52.3
9:55 am U. of Michigan Confidence, prior 74.1, expected 74.1
From Bloomberg www.bloomberg.com
Nike Inc. (NKE) tumbled after fourth-quarter profit unexpectedly declined as marketing and labor costs increased. Net income in the quarter ended May 31 declined 7.6 percent to $549 million or $1.17 a share, analysts projected $1.37 a share. Orders for the Nike brand from June to November, excluding currency exchange-rate changes, advanced 12 percent. Analysts projected a gain of 16 percent.
Barclays Plc (BARC-LN) was fined 290 million pounds ($451.4 million), the largest penalties ever imposed by regulators in the U.S. and U.K., after admitting it submitted false London and euro interbank offered rates.
Ford Motor Co. (F) said its pretax operating profit will be “substantially lower” in the second quarter in part because overseas losses tripled from the year’s first three months. Ford will be profitable and have positive operating cash flow in the three months ending June 30, according to a filing yesterday with the U.S. Securities and Exchange Commission. Ford said it expects “strong results” from its North American operations, while pretax losses in Europe, South America and Asia could reach $570 million.
The U.S. Supreme Court affirmed the core of President Barack Obama’s health-care overhaul. The 5-4 ruling yesterday gave Obama an election-year triumph by declaring that Congress had the power to make Americans obtain insurance or pay a penalty.
From CNBC www.cnbc.com
Anheuser-Busch InBev, the world's biggest brewer, said it would swallow the half of Grupo Modelo it does not already own for $20.1 billion in the latest of a string of deals by big brewers looking for growth in emerging markets.
Euro zone leaders agreed on Friday to bend their aid rules to shore up banks and bring down the borrowing costs of stricken members like Italy and Spain, in a sign the bloc is adopting a more flexible approach to solving its two-year old debt crisis.
From S&P Capital IQ
AT&T (T, U$35.39, Hold, Target 36.00) S&P DOWNGRADES OPINION TO HOLD FROM BUY
T shares are up 16% year to date, significantly outperforming the S&P 500 Index.
S&P thinks investors have seen relative appeal in T's stable cash flow generation derived from U.S. operations, and its 5% dividend yield in light of European uncertainty.
S&P expects EPS to grow to $2.43 in '12 and $2.60 in '13, driven by wireless revenue gains and improved efficiency, both ahead of Capital IQ consensus.
However, with the shares trading at a '13 P/E of 13.5X, above the "500" multiple and at the high-end of its recent range, S&P sees limited upside.
S&P keeps their target price at $36.
GOLDMAN SACHS (GS, U$93.49, Buy, Target U$115.00) S&P UPGRADES OPINION TO BUY FROM HOLD
S&P are lowering their 12-month target price to $115 from $130, based on a narrowing risk premium and applying a forward price to net tangible book value of 0.9X, near peers but at the low end of GS' historical average from 2008 through 2011.
S&P are reducing 2012 EPS forecast to $11.50 from $12.50 with weaker trading volumes in select products, but raising 2013's estimate by $0.10 to $13.50, above Capital IQ's $13.03 consensus estimate.
S&P’s buy opinion is based on their expectation of improving capital markets in the second half of 2012 continuing into 2013, with GS gaining share.
QUALCOMM (QCOM, U$54.31, Strong Buy, Target U$81.00) S&P MAINTAINS STRONG BUY OPINION
QCOM announces a new corporate structure that S&P believes will allow the company to better protect its patent portfolio.
S&P do not believe this will alter the way the company operates or reports quarterly earnings.
Despite current concerns about 28 nm chipset shortages, S&P continues to believe that supply will improve throughout the year, particularly in the Dec-Q.
S&P believes that QCOM will continue to build on its LTE lead, particularly in FY 13 Sep.).
S&P maintains ther 12-month target price of $81, based on P/E peer analysis
AFLAC (AFL, U$40.17, Strong Buy, Target U$53.00) S&P KEEPS STRONG BUY OPINION
Following the Supreme Court's decision to uphold the individual insurance requirement at the heart of President Obama's health care reform law, S&P do not expect a material impact on AFL, whose focus is on its insurance business in Japan.
With its rapidly aging population, Japan generated 75% of AFL's 2011 revenues.
S&P sees the Court's decision presenting both opportunities and threats for AFL's smaller US business, but S&P sees efforts by companies to reduce costs continuing to drive demand for AFL's supplemental products.
S&P REITERATES NEUTRAL FUNDAMENTAL OUTLOOK FOR PHARMACEUTICAL SUB-INDUSTRY
S&P views yesterday’s Supreme Court decision upholding the Affordable Care Act (ACA) as positive for the U.S. drug industry, as its planned extension of healthcare coverage for over 30 million presently uninsured Americans should expand the market for drugs and other medical products and services.
According to the Centers for Medicare and Medicaid Services (CMS), drug spending is projected to rise 8.8% in 2014 with ACA, versus a gain of only 4.1% without ACA.
However, S&P’s enthusiasm for the sector is tempered by challenges from patent expirations and austerity pricing in Europe.
Portfolio Advisory Group - ScotiaMcLeod