Eye on Equities

RIM shares sink as analyst warns of weak February sales

The Globe and Mail

A woman walks outside Research in Motion's (RIM) headquarters in Slough, southern England October 13, 2011. (OLIVIA HARRIS/Reuters)

Research In Motion Ltd. shares are under pressure again today, trading just a sliver above an eight-year low of $12.80, as yet another analyst is warning that an uninspiring fourth-quarter report looms.

Canaccord Genuity analyst T. Michael Walkley issued the latest bleak assessment after channel checks suggested another month of weak sales trends at major retailers - despite RIM’s increased marketing efforts.

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“Our February checks indicated weak sell-through trends for RIM’s BlackBerry 7 smartphones, with poor sales trends for the Bold 9900 and Curve 9360 in many markets,” Mr. Walkley said in a research note.

Furthermore, given that RIM did not launch any new smartphones at the Mobile World Congress (MWC) last month, Android- and Windows-powered smartphones are catching up on the attractive features of the BlackBerry devices, he added.

Mr. Walkley warned investors should be braced for disappointing guidance when the company issues fourth-quarter results on March 29.

“While our meetings at MWC indicated RIM significantly increased its subsidies in key smartphone markets during the last two weeks of February, we anticipate weak February quarter results and May quarter guidance versus consensus and maintain our well below consensus estimates for fiscal 2013,” he said.

Last week, Jeffries analyst Peter Misek argued that there is a “greater than 50 per cent chance” that RIM will negatively pre-announce the fourth quarter and is now selling far fewer BlackBerrys than expected. He trimmed his price target to $12 (U.S.) from $15.

Mr. Walkley isn’t quite that pessimistic. He maintained a $15 (U.S.) target and a “hold” rating.

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Lockheed Martin Corp.’s solid dividend will keep the stock’s upward trajectory intact even after the hefty gains of the past six months, said RBC Dominion Securities Inc. analyst Robert Stallard.

Lockheed has already outperformed its U.S. defence sector peers by 14 per cent since hiking its dividend in September 2010 (a second hike arrived one year later; current yield is about 4.5 per cent). According to Mr. Stallard’s valuation calculations, it trades at a 15 per cent premium to peers based on 2012 price-to-earnings forecasts.

While that “mismatch” between Lockheed’s premium valuation and the fundamental challenges it shares with peers had Mr. Stallard earlier warning investors to stay clear of the stock, he now believes its substantial yield will continue to entice investors.

He upgraded Lockheed by two notches, to “outperform” from “underperform.”

“It's not everyday that we do a 'double upgrade', but the continued strong performance of Lockheed Martin has obliged us to reconsider our position,” Mr. Stallard said in a note.

“We think the company's fundamental situation is similar to its defense peers in terms of U.S. Department of Defense budget pressures, margin challenges, pensions etc. - and yet it trades at a 15 per cent premium. The one key difference is the dividend, and Lockheed's peers continue to resist matching its dividend payout strategy. If that remains the case, then we see Lockheed both maintaining its premium, and potentially progressing from here as it still offers a better dividend yield at a discount valuation versus traditional income paying sectors.”

Upside: Mr. Stallard raised his price target to $98 (U.S.) from $82.

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Surge Energy Inc. ended 2011 with strong growth in reserves that are now estimated at about 32 million barrels of oil equivalent, noted CIBC World Markets Inc. analyst Arthur Grayfer. He expects this to further grow in 2012, with future upside also possible from the substantial land position the company has revealed in the Goose River area of western Alberta.

Upside: Mr. Grayfer raised his price target by $2.50 to $13.50 and maintained a “sector outperformer” rating.

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Midas Gold Corp. has outlined an aggressive exploration and development plan for its 100 per cent owned Golden Meadows project in Idaho, which Desjardins Securities Inc. analyst Adam Melnyk believes could become a large-scale gold mine. He expects production to commence in 2018, averaging 419,000 ounces annually, and predicts Midas could attract suitors interested in purchasing the asset.

Upside: Mr. Melnyk maintained his price target of $6.45 and a “buy-speculative” rating.

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TransAlta Corp.’s adjusted fourth-quarter earnings per share of 13 cents were well below expectations and may call into question management’s ability to meet targets going forward, said Canaccord Genuity analyst Juan Plessis. Nevertheless, he believes the negative sentiment surrounding the earnings miss - caused in part by high compensation expenses in the energy trading division - has already been factored into TransAlta’s current share price.

Downside: Mr. Plessis cut his price target by $2 to $23 and maintained a “buy” rating.