Author: Eric Lam

Fiscal 2010 was a tough year for Bombardier Inc. and its aerospace division, with business jet deliveries down 25%. And if its aircraft delivery guidance bears out fiscal 2011 will be a tough one too, with another expected 15% decline.

Even so, Steve Hansen and Ben Cherniavsky with Raymond James are still confident about Bombardier's long-term prospects, raising the target price for the company to $6.25 from $5.25 with an Outperform rating.

"Bombardier Aerospace's delivery guidance is a sobering reminder that aerospace manufacturers continue to grapple with residual side-effects stemming from the global economic downturn," the pair said in a note Tuesday. "Notwithstanding these near-term headwinds, we continue to remain optimistic about Bombardier's prospects."

Fourth-quarter deliveries and net orders exceeded their expectations, while possible C-Series orders will be a positive catalyst. Mr. Hansen and Mr. Cherniavsky also see improvements in airline profitability and business jet utilization as the global economy recovers and credit markets return to strength.

Bombardier Transportation also remains strong, thanks to a growing demand for public transport around the world, the pair said.

Eric Lam 

As if Canada's Olympic athletes don't already have enough pressure on them to bring home the gold in Vancouver next week, it turns out the fate of our country's very economy is in the balance.

Alright, that's a bit of a stretch, but HSBC equity analyst Douglas Rowat took a look at home market performance over the past 12 Olympic Games and found that markets traded higher 58% of the time with an average return of 0.9%.

"If you believe in spurious correlations, pay attention to what the Canadian market does during the Vancouver games, it could have bearing on how we do for the rest of the year," Mr. Rowat said in a recent note to clients, with tongue planted firmly in cheek.

Mr. Rowat's analysis does not factor in Olympic success — we've never won a gold medal on home soil — but it is not much of a stretch to suggest Canadians will feel better about themselves if we win at least one gold medal, especially in that team game we play on ice. You know, the one with sticks (no, not curling).

Now, the last time we hosted the Olympics (Calgary, back in 1988) the market rose 3.2% and outperformed the S&P 500 (+2%) so imagine what would happen if we actually won anything.

"It could also be that the good Olympic feeling keeps the market momentum going for months afterwards," he said. 

Mr. Rowat found that host countries gained 14.8% on the market in the year after an Olympics. The Canadian market rallied 12.7% after Calgary as well.

Oh, and in case you needed any other evidence that we Canucks take our hockey personally, the S&P/TSX Composite traded down the day after the men's hockey team got bounced out of Turin by Russia in the quarters, but traded up for three days in a row after the men's and women's teams triumphed in Salt Lake City in 2002. No pressure eh?

Now imagine what a Stanley Cup win for the Maple Leafs would do for Canada.

Eric Lam

For reasons that remain unfathomable to this writer, the idea of a top 10 list remains an item of fascination for both analysts and readers alike. So without further ado, here's the top 10 major trends and themes for the Canadian telecommunications industry in 2010, courtesy of Phillip Huang and the good folks at UBS.

1. The Canadian market is ripe for wireless substitution: Only about 8% of Canadian households have completely wireless phone service, compared with about 20% in the United States. This should change with more unlimited voice plans, with BCE Inc. at the greatest risk as it has the most residential lines.

2. Acceleration in wireless data penetration: Data penetration growth will accelerate to 7%-10% this year on faster connection speeds and cheaper data plans.

3. Increasing prominence for prepaid service: Entry of new wireless players will be a catalyst for more attractive prepaid plans.

4. Declining wireless margins: Margins are expected to contract for the three incumbents (Rogers, Telus, BCE), driven by their focus on smartphones and the growing mix of lower revenue subscribers.

5. New entrants face presure to consolidate: Going up against the big three will not be easy for new wireless players, so consolidation might happen sooner rather than later. Shaw is also in a good position to acquire spectrum from new entrants.

6. TV competition ramping up: Look for more competition in urban markets this year, as both BCE and Telus shift their attention to new technologies.

7. Enterprise to recover in 2010: Look for a return to growth as the economy recovers.

8. Cost reductions to continue: Growth is slownig and margins are contracting, so there will be cost cutting in 2010.

9. More stable capital spending: Incumbents Bell and Telus have spent significant amounts in the past two years to build HSPA networks for 3G phones, and with those projects nearing completion there will likely be less capital spending this year.

10. Greater focus on returning capital: Rogers is expected to have the most rapid dividend growth and share repurchase program over the next few years.

Quebecor is Mr. Huang's industry top pick, while Rogers, Telus and Cogeco Cable have Outperform ratings. He is neutral on BCE, Bell Aliant, and MTS Allstream.

Eric Lam 

Brazilian airliner TAM recently spun out its frequent flyer program, renamed Multiplus, which began trading on the BOVESPA (Brazilian stock exchange) on Friday. And based on the valuation a surprising winner coming out of this appears to be Groupe Aeroplan Inc.

Kenric Tyghe, analyst with Raymond James, said while there are differences between the Brazilian and Canadian markets, he is confident in the strength of the customer loyalty business.

"Where previously we were cautious on both the magnitude and timing of the economic recovery, we are now cautiously optimistic that the recovery in consumption expenditre in Canada will be stronger than is currently widely expected," he said in a note to clients. "Our previous 8.5x EBITDA mutliple in the context of the IPO pricing and recent macro data points appears to conservtive."

The Multiplus IPO raised US$390.7-million on R$16 share.

"The valuation reflects a combination of a scarcity premium for publicly traded loyalty programs," he said.

In any case, Mr. Tyghe sees a 9.5x target mutliple, factoring in the Multiplus valuation, positive consumer data, and upward swings in Canadian GDP. This raises his target to $15 from $13, while maintaining an Outperform rating on Aeroplan.

Eric Lam 

Chinese equity markets have been trending down lately, but it is not because of anything so mundane as monetary policy wrangling or a U.S. dollar rally. Rather, it is likely because of Chinese New Year, the most important — and longest — Chinese holiday.

Martin Roberge, strategist with Dundee Capital Markets, said the Chinese stock market has declined 8.8% so far in the 30 days before the Chinese New Year, while the S&P 500 and S&P/TSX Composite have slid 5.2% and 6.5% respectively.

Mr. Roberge further crunched the numbers and found what he calls the "Chinese New Year Effect": since 1996, the Chinese stock market has declined on average 3.7% in the 30 days before the happy day and increased on average 1.8% in the 30 days after. The S&P 500 has trended down 1% prior and down 0.2% after the new year, while the TSX Composite averages up 1.6% before and -0.3% in the 30 days after. 

"Chinese investors tend to flee the equity market ahead of the retail and manufacturing slowdown," he said in a note to clients. "The stock market bottoms about 10 trading days before the New Year day and then resumes its ascension. It usually takes about 50 days for the Chinese equity market to revisit its January highs."

Chinese New Year festivities last for 15 days, while most businesses
close for about a week. The Chinese calendar is based on the lunar
cycle, so the official holiday falls on a different day each year. 

This year, Chinese New Year coincides with Valentine's Day, on Feb. 14. But don't worry about the markets on that particular day: it's a Sunday.

Eric Lam

An Israeli competitor appears to have taken a chunk out of DragonWave Inc.'s business with U.S. high-speed Internet provider Clearwire Corp.

Ceragon Networks Ltd., a wireless Internet technology provider based in Tel Aviv, picked up total revenues of US$53.4-million in their fourth quarter, Kris Thompson with National Bank Financial said in a note. 

"We believe Clearwire was a 10% customer for Ceragon in the fourth quarter, however, Ceragon did not suggest this level of revenue should be expected in subsequent quarters," he said.

While Ceragon expects 2010 revenues in the the range of US$239-million to US$248-million, the company sees the Asia-Pacific market as its primary revenue driver.

As for DragonWave, Ceragon may be considered an "important competitor" but Mr. Thompson maintains an Outperform rating and C$17 target price for the well-regarded Canadian company.

"Ceragon does not appear to be a major threat to displace DragonWave at Clearwire over the near-term," he said. "The main investor concern is and should be customer concentration with Clearwire."

Eric Lam

Just because Australian natural resource giant BHP Billiton picked up a junior producer in Athabasca Potash Inc. for a healthy $341-million last week unfortunately does not mean every Saskatchewanian potash miner suddenly becomes a takeover target, a new note from Scotia Capital says.

"The recent acquisition of Athabasca Potash by BHP was unique due to the potential synergies that the Burr project offers BHP's Jansen project," Ben Isaacson, analyst with Scotia, said in a note.

The Burr and Jansen projects are adjacent to each other, giving BHP some 14,000 square kilometres of exploration ground in Saskatchewan.

This is bad news for, say, Western Potash Corp., which Mr. Isaacson does not expect will be taken over by BHP or anybody else in the near future.

"We believe there is a low likelihood of Western Potash being acquired due to its limited progress to date relative to its peers," he said.

In any case, Mr. Isaacson and others await resource estimates on the company's Milestone project in Saskatchewan and Russell project in Manitoba, both of which remain in the development stage.

Mr. Isaacson maintains a Sector Perform rating and 80 cents target price for Western Potash.

Eric Lam 

As if Yellow Pages Income Fund didn't have enough to worry about, what with the dearth of advertising revenue and competition from online directories, it now looks like even its distributions will have to be cut when the fund switches to a corporation in 2011.

Paul Steep, analyst with Scotia Capital, figures Yellow Pages will have to slash its distributions to 67 cents a unit from the current 80 cents a unit when it makes the switch next year.

"This reduced distribution should provide the firm with greater financial flexibility to invest in its online intitiatives," he said in a note Wednesday. "Our view is that given the significant yield at which Yellow Pages's units are trading, the potential ffor a distribution is already reflected in the current price."

For Mr. Steep, the two major reasons for this cut are higher interest costs associated with refinancing in 2009 and ongoing ad revenue pressure related to the recession.

The fund currently trades at a yield of 15.1%, one of the higher yields on the TSX. Investors will likely be looking for a yield between 9% and 11% in 2011, which is comparable to others in similar straits as Yellow Pages — low revenue growth, secular changes impacting core business, an above-average dividend yield, he said.

"We forecast that Yellow Pages's quarterly results are likely to reflect further declines in printed directory revenue in the fourth quarter and the first half of 2010," he said.

The results should trough some time in 2010 though, as online revenues should continue to grow. 

Mr. Steep rates Yellow Pages a Sector Perform with a target price of $5.75. He suggests a price of less than $5 a unit is a good entry level and more than $6.25 a good exit level. He also has a lack of confidence in the distribution after 2011, citing the continued decline of print media and print directories in the face of online competition.

Eric Lam

Sometimes, it doesn't pay to be ahead of the game.

Brad Humphrey with Raymond James Equity Research initiated coverage of Montreal-based Osisko Mining Corp. Wednesday with a Market Perform rating and $10.10 target price, largely because the company is already well into the development process of its prized primary asset, the 100% owned Canadian Malartic gold mine in northern Quebec.

"We typically favour those precious metal companies that offer attractive growth profiles, boast quality assets and have strong management teams," Mr. Humphrey said in a note to clients. "Osisko is currently in construction mode an thus an analysis across such metrics is somewhat more challenging."

Of course, Mr. Humphrey does not fault Osisko for doing such a good job developing the gold project, which has great potential.

Expected to enter production in the second half of 2011, Mr. Humphrey forecasts eventual output of more than 600,000 ounces a year at a cost of US$365 an ounce over a 15-year life span.

The conservative stance is instead predicated on the company's stock valuation, which has already largely factored in the mine's value. And a dearth of other news will likely keep Osisko's share price flat for a while.

"With the company in the construction stage for the next 12 or so months followed by commissioning, the company could be entering a period of relatively quiet news flow," he said. "We believe further upside in the share price is farily limited until the project progresses to production and executes according to design."

Larger producers may also wait for the mine to enter full ramp-up mode, reducing start up risks, before launching a takeover offer.

Eric Lam 

Investors may be worried that recently announced Chinese lending restrictions will put a damper on global growth, but there is actually little chance of that happening as the country's banks likely need to accelerate their loans to meet even reduced 2010 targets, a new note says.

Stéfane Marion, analyst with National Bank Financial Group, said in a note to clients that while the Chinese government has told its banks to keep 2010 loans to less than 7.5 trillion Yuan (about US$1.1-trillion) in 2010, down from 9.5 trillion Yuan in 2009, it is still more than double the lending levels in 2008.

"The other thing to keep in mind is that in order to achieve the 2010 loan target, the six-month cumulative sum of new loans must actually accelerate significantly from its December 2009 level of 2.2 trillion Yuan," the note said. The 2009 levels ended up so high because most of the loans came in the first half of the year. "As such, we do not view China's 2010 loan target as being a significant drag."

National Bank also agrees with the newest IMF projection of 4% global GDP growth in 2010, up from 3.1%.

Eric Lam

Analysts covering Apple Inc. have settled into a bit of a routine when forecasting earnings reports for the tech giant.

Cleve Rueckert with Birinyi Associates Inc. said in a note to clients Monday that the stock has beaten expectations in every report since 2003, and it rarely guides above the market consensus.

"For these two reasons Apple trading after an earnings report depends more on growth prospects and its product pipeline," he said.

However, Apple's latest earnings results this afternoon are clouded by the fact the company is expected to debut its top-secret tablet technology on Wednesday. In 2007, Apple launched the iPhone ahead of its earnings report, so it will be interesting to see how the dynamics play out here.

Also of interest, other big tech stocks such as IBM and Google are down between 6% and 7% since their latest reports, Mr. Rueckert noted. 

Eric Lam