Author: Eric Lam

Much like the last quarter, Potash Corporation of Saskatchewan beat expectations in its first quarter results while providing more conservative guidance. The whole thing has left Fai Lee, analyst with RBC Dominion Securities, with a sense of deja vu.

For the first quarter, PotashCorp reported earnings-per-share of $1.55, better than Mr. Lee's $1.36 forecast. The company's guidance had been between 70¢ and $1 at the time it reported its fourth quarter results, but raised them to between $1.30 and $1.50 six weeks later.

"The transitional nature of this year does make forecasting quite
difficult and adopting a conservative approach is prudent in our view,"
he said in a note.

As a result, Mr. Lee has cut his 2010 EPS forecast to $5 from $6.21, reflecting a slower pace of potash price appreciation through the year, along with higher phosphate production costs and lower nitrogen pricing. He is however maintaining his 2011 EPS estimate of $8.51.

"While predicting the exact timing and magnitude can be difficult particularly during transitional market conditions, we continue to expect potash prices to appreciate over time," Mr. Lee said.

He maintains an outperform rating for PotashCorp and a $150 price target.

Eric Lam 

News that Hewlett-Packard Co. had agreed Wednesday afternoon to buy Palm Inc. for US$5.70 a share came just in time for the struggling company, analysts said Thursday.

Peter Misek, analyst with Canaccord Adams, said in a note Thursday he is "very positive" on the move, worth US$1.2-billion in total, calling for investors to tender their shares.

"We have always been of the opinion that Palm would not survive as a standalone entity and that its troubles would only accelerate as carriers and suppliers increasingly question the company's solvency," he said. "We view HP's bid as the 'white knight' for palm stakeholders."

However, in morning trading shares in Palm jumped almost 25% to US$5.74 a share, beyond HP's initial offer.

Rod Hall, analyst with J.P. Morgan, noted there was potential for counterbids that may drive the price higher, but remained neutral on Palm.

"We see this as a good exit for Palm investors. Indications for revenues between US$90-million and $100-million in new guidance suggest the company would have needed to raise cash soon," he said in a note to clients. "It seems clear Palm's products are not getting traction in key channels."

HP's offer of US$5.70 a share in cash implies a 23% premium to Wednesday's closing price for Palm, a "final positive testament to the WebOS platform that Palm created," he said.

Not to say this is the end for Palm though, as HP plans to use its relationships with carriers worldwide to help push Palm products. It also ensured it can use Palm's WebOS on its tablets and slate devices.

"We see a reinvigorated Palm as a significant threat to other smartphone platforms, though this will take time," Mr. Misek said.

 Eric Lam

If any of you out there were ever concerned about how strongly the people at UBS believed in their analysis, they've now got at least one list you won't need to worry about: the research group released Monday a new lineup of its six "highest conviction" ideas.

"Key Calls represent the highest conviction ideas of UBS analysts, strategists, and product managers," George Vasic, strategist, said in a note introducing the list. "The list includes our best ideas from each of the major TSX sectors."

However, Mr. Vasic warned that because the picks are not weighted to the TSX they should not be considered a portfolio.

The list includes four non-resource picks, based on mid-cycle potential earnings in 2011 to move beyond short term issues.

Here they are, in no particular order:

• Bank of Nova Scotia, Buy, price target $58
• Barrick Gold Corp., Buy, price target $50
• Canadian Tire Corp., Buy, price target $63
• Onex Corp., Buy, price target $36
• Quebecor Inc., Buy, price target $39
• Suncor Energy Inc., Buy, price target $47

Eric Lam

With demand for copper rising around the world and many of the major miners producing short of guidance, it looks like there will be a shortage of the metal in 2010, a note from Octagon Capital said Friday.

Hendrik Visagie, analyst with Octagon, said China will continue to import copper from North America despite reports to the contrary.

"In the West, copper demand has been improving as countries begin to recover from the 2008 liquidity crisis. In China, despite forecasts that it will import less copper this year due to a perceived over-stocking of copper last year, high imports of copper from the West persist," he said in a note.

To wit, while China imported 747,000 tonnes of copper in the first quarter of 2010, down 12,000 tonnes from 2009, that was offset by a 329,000-tonne increase in imports of copper concentrate, to 1,741,000 tonnes. Assuming that the average grade is 30%, that works out to a net increase of 86,700 tonnes of copper, he said.

"With lower mine production, there will be lower copper smelter production," Mr. Visagie said. "As a result, we believe copper will slide into deficit this year, not surplus."

Mr. Visagie forecasts copper to average $3.40 a pound in 2010. In the first quarter, the average price was $3.30 a pound, and so far this quarter the price has been $3.48 a pound. "We expect there is still upside potential," he said.

Eric Lam

Several market commentators feel the 40% year-over-year run-up in U.S. equities is a bearish indicator. As a result, they are telling investors to brace for a pullback.

However, stock market research firm Birinyi Associates has crunched some numbers that suggest otherwise.

Since 1918, the Dow Jones Industrial Average has seen 20 periods where the index has risen 40% from the previous year. On average, from the beginning of each of these periods the market is higher 68% of the time one month, three months and six months later, Birinyi noted. One year later, it is up 89% of the time.

Jonathan Ratner

Once the gold standard among profitable automakers, Toyota Motor Corp. has fallen on hard times in recent months, and now credit rating agency Moody's Investors Service has joined the chorus of negativity.

Tadashi Usui, a Japanese analyst with Moody's in Tokyo, downgraded the credit rating for Toyota and its subsidiaries on Wednesday night to Aa2 from Aa1, with a "negative" ratings outlook.

"The ratings action reflects the ongoing low level of profitability evident at Toyota, and which we expect to continue for an extended period, Mr. Usui said in the report. "Moreover, its product quality and recall challenges — largely centred in the United States — have created significant uncertainty over whether it can maintain the pricing power it has historically achieved over its rivals."

And with global auto sales expected to be sluggish in 2010, along with persistent overcapacity, Toyota's profit margins could remain well below "what is appropriate for its rating level until 2012 at the earliest and possibly beyond," he said.

Mr. Usui is also concerned about future litigation costs related to the product recalls.

However, the fact that Toyota is Japan's largest automaker — and likely to remain so — means there will be government and banking support if it really needed it.

"This assumption has lifted its rating by one notch from what it would be otherwise," he said.

The highest rating available with Moody's is Aaa, while Aa (and its relative 1,2 and 3 qualifiers) is still considered high quality.

Eric Lam

U.S. equity index futures are lower this morning. S&P 500 futures are down 8 points in pre-opening trade. Index futures are responding to a Eurostat report showing that the debt to GDP ratios by European nations have increased again. The debt to GDP ratio by Greece is particularly of concern. The Euro is under pressure this morning and is testing support just below 133.

Weakness in the Euro has boosted the U.S. Dollar. Commodities priced in U.S. Dollars including crude oil, gold, silver and copper are trading slightly lower.

Economic news released at 8:30 AM EDT did not impact equity indices significantly. Consensus for March Producer Prices was a gain of 0.5% versus a decline of 0.6% in February. Actual was a gain of 0.7%. Consensus for PPI ex food and energy was an increase of 0.1% versus an increase of 0.1% in February. Actual was a gain of 0.1%. Also, weekly jobless claims rose 24,000 to 456,000.

A large volume of first quarter earnings reports were released overnight. Prominent reporting companies included EBay, Amgen, Qualcomm, Starbucks, Verizon, Pepsico, Union Pacific and Philip Morris. Most reported higher than expected earnings. Most quickly came under profit taking pressures following news.

Nokia was a notable exception. It reported less than consensus first quarter results. The stock fell 11% in overnight trade.

Century Tel announced a friendly share exchange offer to acquire Qwest Communications. Qwest Communications gained 13% on the news.

Boeing added 1% after Credit Suisse upgraded the stock from Neutral to Outperform.

Dupont was unchanged after Soleil upgraded the stock from Hold to Buy.
Nabors added 1% after CLSA upgraded the stock from Under Perform to Outperform.

Starbucks added 1.5% after Jesup & Lamont upgraded the stock from Hold to Buy. Target was raised from $25 to $32. 

Don Vialoux, chartered market technician, is the author of a free
daily report on equity markets, sectors, commodities, equities and
Exchange-Traded Funds. For more visit Don Vialoux's Web site

U.S. equity index futures are higher this morning. S&P 500 futures are up 4 points in pre-opening trade.

According to Bloomberg, the Bank of Canada pledged to maintain is overnight lending rate at 0.25% until July. The Bank of Canada also raised its expectations for Canada’s GDP growth in 2010 from 2.9% to 3.7%. The Canadian Dollar gained 0.50 cents U.S. on the news.

First quarter earnings reports released overnight mostly showed higher than consensus earnings. Companies, that reported higher than expected earnings, included IBM, Goldman Sachs, Johnson & Johnson, United Health, Coca Cola, AK Steel and State Street. However, responses to reports were mixed unless earnings were substantially higher than consensus. Goldman Sachs and United Health are trading higher. Johnson & Johnson was unchanged. Coca Cola, State Street, AK Steel and IBM are trading lower.

Northern Trust fell 5% after reporting less than consensus first quarter results.

Apache added 1% after Macquarie upgraded the stock from Neutral to Outperform.

Commodity prices are slightly higher on modest weakness in the U.S. Dollar. Crude oil, gold, silver and copper tacked on small gains.

Don Vialoux, chartered market technician, is the author of a free
daily report on equity markets, sectors, commodities, equities and
Exchange-Traded Funds. For more visit Don Vialoux's Web site

Nokia Corp. is scheduled to release its first quarter results on Thursday, but Gus Papageorgiou with Scotia Capital is not expecting anything other than an "unremarkable" quarter for the cell phone maker.

Instead, the company looks to be in a bit of a holding pattern until the second half of the year, when it rolls out new products and software.

"We have become incrementally more positive ono Nokia after stronger than expected fourth quarter results but we do not expect any significant upside catalysts until later in the year," he said in a note. "Additionally, the valuation is not terribly attractive."

For the quarter, Mr. Papageorgiou expects 9.5-billion euros in revenue and EPS of 0.13 euros, slightly more negative compared with consensus 9.7-billion euros and 0.14 euros respectively.

"From a trading perspective we would rather wait until after the quarter to own Nokia. At this stage we believe the good news of a handset recovery is factored in," he said. "We believe the second half success of the new Symbian OS and accompanying devices will dictate the share price as we move through 2010."

As well, once the company pays out its dividend there wil likely be a sell off, he said.

Mr. Papageorgiou maintains a Sector Perform rating and one-year target price of US$18 for Nokia.

Eric Lam

Most conversations about smartphones these days seem to start and end with either Apple's iPhone or Research in Motion's BlackBerry. But in case anybody has forgotten, old guard phone makers such as Sony Ericsson are still around.

Mark Sue, analyst with RBC Capital Markets, took a look at the first quarter 2010 results of Sony Ericsson (a joint venture between Sony and LM Ericsson Telephone Co.) and found some reason for optimism.

"Sony Ericsson lost quite a bit of market share during the March quarter in terms of units but sold these lower units at higher prices helping this struggling venture to turn a profit," Mr. Sue said in a note.

During the quarter, the company shipped 10.5 million devices, far short of Mr. Sue's forecast of 14 million and consensus 13.1 million units. However, Sony Ericsson actually returned to profitability for the first time in almost two years, earning 21-million euros.

The rebound comes on the heels of a "much-needed" restructuring and new product portfolio, including some new smartphones, he said.

"Despite the unit share loss in the mid-to-low end, Sony Ericsson is enjoying a promising reception for its Xperia X10 and Vivaz smartphones," Mr. Sue said. "Similar to Motorola, HTC and others Sony Ericsson is making a big bet on Android."

It's enough to pull the struggling joint Japanese-Swedish venture into a tie with Motorola for fifth with about 3.8% market share, trailing Nokia, Samsung, LG and Research in Motion, he said.

Mr. Sue maintains a Sector Perform rating with a price target of US$12 for LM Ericson, listed on the NASDAQ.

Eric Lam

It only took a day for analysts to come up with a nickname for the giant floating cloud of ashy disaster billowing from an Icelandic volcano that has grounded planes across Europe and cost airlines around the world as much as US$1-billion: Ash Thursday.

That said, if you ask Ben Cherniavsky with Raymond James, now is as good a time as any to buy back into the airline industry.

"This may seem like an inauspicious time for us to be turning more bullish on the airline sector. However, this is exactly what we have elected to do and are upgrading our ratings and target price today for both Air Canada and WestJet," he said in a note. "Without being dismissive of the obvious problems that Ash Thursday will cause, we do not view this development as significant — or permanent — enough to derail the global recovery for the airlines."

Mr. Cherniavsky raises Air Canada to Strong Buy from Outperform and WestJet to Outperform from Market Perform.WestJet to

For Air Canada, improvements in cargo traffic (up 27% globally in February), business travel (8% increase in travel budgets for 2010), and travel to emerging markets (traffic to the Pacific up 25% year to date) have all helped build momentum for the Air Canada brand.

"Many of these observations build on favourable industry trends that have been underway for some time," he said.

As for WestJet, Mr. Cherniavsky actually downgraded the stock to Market Perform last September because of concerns over the company's code-sharing negotiations, and also that there was still too much capacity in the domestic market. However, those concerns have been alleviated.

First, the appointment of Gregg Saretsky as the new chief executive is good news due to his experience dealing with the "intricacies" of code-sharing with other airlines.

As well, the unexpectedly strong Canadian economy and soaring loonie have both given WestJet a boost as its expenses are in U.S. dollars.

"We still prefer to take a balanced view of all the opportunities and threats facing WestJet as its business strategy continues to evolve and macro variables constantly change," he said.

Eric Lam

 

 

 

 

Mega Brands Inc. may have managed to avoid creditor protection with its recent recapitalization plans, but analysts are not buying into a recovery for the embattled toy maker.

Anthony Zicha, analyst with Scotia Capital, dropped his coverage of the company on Monday, citing concerns about the viability of the company's business model.

"In the past three years, the company has lost significant shelf space at major retailers and, in our opinion, has failed to make significant incremental innovations to existing product lines," he said in the note. "Furthermore, reputational risk still remains high."

To wit, Mega reported a 2009 fourth-quarter loss of 60 cents a share, almost double Mr. Zicha's forecasted loss of 33 cents a share.

On Monday, credit rating agency Moody's lowered its probability of default rating for Mega to a D from Caa3 after the company completed its debt-financing plan on March 30th.

"The recapitalization transaction … is viewed as a distressed exchange which is considered a default under Moody's definition," the report said.

And just last week, Benoit Caron with National Bank Financial also dropped coverage.

A quick check on Bloomberg shows Gerrick Johnson with BMO Capital is the last analyst on the Mega Brands beat as of Tuesday. However, the BMO Capital Web site also said that Mr. Johnson is currently "restricted from issuing research on Mega Brands for legal and regulatory reasons."

Eric Lam

U.S. equity index futures are lower this morning. S&P 500 futures are down 5 points in pre-opening trade. Futures are responding to strength in the U.S. Dollar.  Commodities priced in U.S. Dollars including gold, silver, copper and crude oil are trading lower.

The Canadian Dollar briefly touched “par” with the U.S. Dollar early this morning, but was unable to sustain that level when the U.S. Dollar strengthened.

Massey Energy fell 6% following news that an explosion at one of its coal mines killed 25 workers.

JP Morgan and Raymond James launched coverage on the oil services sector. Both gave a favourable rating on Schlumberger and Halliburton. In addition, Raymond James initiated Weatherford with a Strong Buy rating.

Pulte Homes and KB Homes fell 3% after Credit Suisse downgraded several stocks in the U.S. home building industry.

Cree Inc. was initiated with an Outperform rating by JMP Securities.

Disney was upgraded from Hold to Buy by Soleil. Target was raised from $30 to $42. ‘Tis the season for Disney to move higher!

Don Vialoux, chartered market technician, is the author of a free
daily report on equity markets, sectors, commodities, equities and
Exchange-Traded Funds. For more visit Don Vialoux's Web site

With Apple Inc. reporting boffo sales of about 300,000 iPads on its first day on store shelves this past Saturday alone, analysts are already lining up to praise the computing giant.

Peter Misek, analyst with Canaccord Adams, raised his price target on Apple to US$300 from US$250, a 20% increase.

"We conducted a survey of 30 Best Buy and Apple Stores across the United States. Our survey and channel checks indicated widespread sell-outs at Best Buy stores, however Apple stores appeared to have more stock and thus continued to have inventory," he said in a note.

Mr. Misek estimates about 700,000 iPads have been sold so far, including 500,000 on pre-order. He now figures iPad shipments to stores will hit 3.7 million and 11.3 million (from 1.2 million and 3.5 million respectively) in 2010 and 2011.

Apple's other product streams also got a boost during the survey. Mr. Misek now estimates iPhone sales to hit 35.2 million (34.9 million) and 54.9 million (52.3 million) in 2010 and 2011, while Mac computers climb to 4.3 million (3.9 million) and 4.7 million (4.1 million) in the same periods.

As well, analysts at JPMorgan raised their price target for Apple to US$305 from US$240,
while Kaufman Brothers increased it to US$295 from US$253 and Thomas Weisel
Partners lifted its price target to US$280 from US$270, according to Reuters.

Latest data from Bloomberg shows that of 44 analysts covering Apple, 40 have Buy ratings for the company, while the rest have Holds.  

Eric Lam

When you've had as much success as Research In Motion Ltd. has had in the past few years, the only downside is it gets much harder to impress people. Shares in RIM dropped 5% on the Nasdaq on Wednesday despite the company setting a record for new BlackBerry users and posting otherwise sterling fourth-quarter numbers.

Company shares continued to take a pummeling Thursday morning, down 5.5% or $4.22 to $71.03 on the Toronto Stock Exchange just after the opening bell.

Here's what analysts have to say about RIM's results:

Phillip Huang, UBS, maintain neutral rating, raise price target to US$75 (US$72)

Although the quarter disappointed relative to heightened expectations (even when accounting for inventory adjustment), we believe guidance was within higher expectations (Consensus estimates likely to rise). However, gross margins are expected to decline through the year (new product mix) & ASP guide was weaker than expected. Although we believe RIM shares could trade up into the analyst day (expectations for new device, web browser, etc), there are, in our view, enough uncertainties that limit earnings visibility med/long term, incl. a new iPhone in June, int’l seasonality in Aug, competition impact on ASP/mgns (we believe operators are taking fewer units across more vendors/models except for hero products, which may make hero bidding more competitive), success of its new higher ASP products (Storm 2 disappointed), & the impact of a CDMA iPhone in cal 2011.

Goldman Sachs downgrades to sell from neutral

Concerns RIM will not be able to keep up with the application-friendly platforms of Google's Android and Apple's iPhone as e-mail no longer appears to be the dominant market driver. (link) 

Mike Abramsky, RBC Capital Markets, maintains top pick — above average risk, price target US$120

Mixed Q4 results show strong momentum, but sustain near term uncertainty over RIM's future. Q4 EPS was $1.27, inline with $1.28 street (RBC $1.29) on strong margins (45.7% vs 43.5% guidance); however Q4 rev at $4.1B missed street/RBC/guidance ($4.35B/$4.3B $4.2-4.4B) on light 10.5M shipments (vs 11.2M guidance/RBC). Sub adds beat at 4.9M (RBC 4.6M). Strong Q1 momentum, healthy
margins and expected pending catalysts (WES, product launches, updated browser) reaffirm our 2010 Top Pick thesis. However, the mixed Q4 results sustain near-term uncertainty, keeping RIM a 'show me' story for now (and valuation rangebound), pending: a) recovering NA momentum; b) sustained margins and ASPs; c) compelling software, apps, handsets that narrow competitive gaps. RIM's WES (end April) may be the next catalyst.

Rod Hall, J.P.Morgan, maintain overweight

Unit shipments for Q4 were a touch short at 10.5m vs. our below-Street 10.9m unit forecast. RIMM flagged an inventory adjustment as a key driver. Q4 revenues totaled $4.1 billion (-2.1% Q/Q, -16.1% Y/Y) versus our forecast and consensus of $4.3 billion. RIMM now expects Q1FY11 revenues to grow 7% Q/Q to $4.35b versus our $4.40b estimate and the Street’s $4.33b. FYQ1 unit shipments are expected to range between 11.2m and 11.8m; we were modeling 11.2m. New subscriber activations are expected to land between 4.9m and 5.2m, beating our 4.8m estimate (Street=4.5m). Gross margins are expected to be 44.5%; we were modeling only 43.0%. EPS guidance is expected to total $1.31-$1.38, 11% higher than our $1.21 estimate for Q1.

Peter Misek, Canaccord Adams, maintain buy recommendation, target price US$100

While at first blush shipments in the quarter appear light, we expect this to be the result of a one-time inventory adjustment at carrier partners. More importantly, we believe RIM will continue to demonstrate strong device shipments and robust margins. As such, we are raising our Q1/F11 and full FY11 estimates to reflect management’s guidance and very strong momentum in activations. For FQ1, our revenue estimate becomes US$4.4 billion from US$4.3 billion and our GAAP EPS moves up to US$1.36 from US$1.26. For the full year F11, our revenue and EPS estimates become US$19.7 billion and US$6.07, up from US$19.2 billion and US$5.83 respectively. We continue to be impressed with RIM’s execution and anticipate strong top-line growth in the coming quarters driven by new products, further gains in international markets and a resurgence in corporate IT spending.

Steven Li, Raymond James, maintain market perform rating, raise target to US$82 (US$80)

With its two largest customers (Verizon (VZ‐NYSE) and AT&T (T‐NYSE)) accounting for 40%+ of its revenues, we remain mindful that competitor launches can create market share shifts at specific customers in the short‐term and/or pricing pressure.  We once again saw some of that manifest itself through an inventory correction at one of its large customers that hurt units, ASP and net adds. While rumours have been circulating for quite some time with respect to a CDMA iPhone on Verizon’s network, the Wall Street Journal recently printed an article highlighting a CDMA iPhone set for production launch. We view the international sales growth profile as a positive, however, North America remains RIM’s most important market and therefore the slowing net adds bears watching. RIM has been successful in holding its gross margins despite the drop in ASP but we fear more ASP declines could potentially come at the expense of margins. We remain neutral on RIM’s share but would revisit on a share price pullback. 

Tim Long, BMO Capital Markets, maintain outperform, raise target to US$92 (US$88), EPS to US$5.50 (US$5.40)

RIM reported February-quarter results that had some real surprises. On the positive side, gross margins and new subscriber additions were outstanding. This was fully offset by lower units and ASP. Management pointed to an inventory work-down at a major carrier hurting units and ASPs, which we suspect the Street will view skeptically. Likes: subscriptions, margins, international sales, operating expenses. Dislikes: Unit sales, ASPs.

Jim Suva, Citigroup Global Markets, maintain sell rating, raise target to US$55 (US$52)

Maintain non-consensus Sell rating as we see Sandboxing, Promotion Commotion & BYOD as future headwinds. We simply don’t want to be owners of RIMM shares when Verizon gets the iPhone, which we believe is 4QCY10 or 1QCY11. We see risk to 2H ASPs as the competitive environment intensifies.  Our target price slightly increases from $52 to $55 on lower taxes, slightly higher sales, slightly higher EPS & rolling forward our valuation methodology by one quarter.

Eric Lam

U.S. equity index futures are higher this morning. S&P 500 futures are up 3 points in pre-opening trade. Futures responded to news that European leaders and the International Monetary Fund have agreed to a financial arrangement to bail out Greece. The Euro has rallied on the news and the U.S. Dollar has weakened. Commodities priced in U.S. Dollars including crude oil, gold, copper, silver and platinum are trading slightly higher.

Index futures did not respond significantly to the final revised fourth quarter Gross Domestic Product report released at 8:30 AM EDT. Consensus was annualized growth at 5.9%, unchanged from previous estimates. Actual was growth at a 5.6% rate.

More evidence that world economies are on the road to recovery! The Nikkei Average broke above resistance at 10,982.10 to reach an 18 month high at 10,996. Next intermediate upside potential is to 12,200.

Evidence of economic growth also surfaced in Canada. General Motors Canada announced plans to rehire 670 workers in order to expand production.

Research in Motion gained 2% after JP Morgan upgraded the stock from Neutral to Overweight. Target price is $84.

Nokia added 3% after JP Morgan upgraded the stock from Neutral to Overweight.

Coach added 2% after JP Morgan upgraded the stock from Neutral to Overweight.

Apple added 1% after Credit Suisse raised its target to $300.

Radio Shack added 6% and  is expected to open near a 52 week high on news that the company is up for sale.

TD Newcrest downgraded Biovail from an Action List Buy to a Buy.

Don Vialoux, chartered market technician, is the author of a free
daily report on equity markets, sectors, commodities, equities and
Exchange-Traded Funds. For more visit Don Vialoux's Web site

Royal Bank of Canada is likely to take advantage of its relative strong valuation to make a U.S. acquisition, says Michael Goldberg, an analyst at Desjardins Securities.

According to Mr. Goldberg, the current industry landscape "provides a historic opportunity" for all the Canadian banks to expand south of the border, but Royal is the most likely to make a move.

"The potential for Royal Bank to make a strategic acquisition looms increasingly large," he said in a note to clients today. "Of potential candidates, we believe that BB&T, Regions Financial and SunTrust would make the most strategic sense."

All three are major banks operating in the US southeast.

In the wake of the financial crisis the shares of the Canadian banks have regained virtually all the ground they lost and are now close to historic highs. As well, the value of the Canadian dollar has moved up, adding to their buying power at a time when US banks are still struggling to stay profitable.

But Royal is the most likely to open its wallet because of the need to strengthen its struggling US operation.

"We expect investor attention to increasingly focus on these possibilities—a potential near-term negative but longer-term positive for Royal, and positive for the potential targets," Mr. Goldberg said.

Despite their relative advantages, the Canadian banks have so far avoided major acquisitions, citing uncertainty over the regulatory environment and continuing industry turmoil, especially in the U.S. and Europe.

Yesterday Gord Nixon, chief executive of Royal Bank, told Bloomberg News that that he will consider all options to fix the ailing US operation.

"Everything is on the table," Mr. Nixon said.

John Greenwood

Liberal promises to control healthcare spending in the Ontario budget on Thursday have left UBS analyst Vishal Shreedhar scratching his head at the implications.

In its budget, the Ontario government declared it aims to reduce generic drug prices and support pharmacies in rural and underserved areas, as well as the expansion of clinical services provided by pharmacists. These could be beneficial for major drug chains such as Shoppers Drug Mart Corp., but Mr. Shreedhar lamented the lack of details.

"No clear answers, just questions," he said in a note Friday. "The media states that the government could reduce the price of generic drugs by 'banning' professional allowances. To us, the meaning of this statement is not clear — will the economics be eliminated, or will Ontario move towards a commercial terms model?"

The budget is largely a "restatement of prior positions" that investors were already well aware of, he said.

"The real question is what are the economics of the changes and how will they manifest?" he asked.

Mr. Shreedhar expects more clarity on these issues soon, and said Shoppers can handle "reasonable" legislative changes.

He maintains a Buy rating and $49 price target for Shoppers Drug Mart.

Eric Lam