Tom Slee updates Manulife notes, Rogers Communications, Gildan Activewear, and S
Manulife Financial 4.67% Notes Originally recommended on Jan. 26/09 (IWB #2924) at $98. Trading recently at $103.50.
It's no secret that our once staid Canadian bond market is now hopelessly overheated. Investors have been snapping up new issues regardless of price and pouring money into the bond funds. The so-called flight to safety has turned into a stampede. As a result, we have a serious bond bubble and there is bound to be a sharp correction which could come sooner than expected.
For example, the Chinese are already diverting part of their trade surpluses into euros. That could undermine the U.S. Treasury bill market and send all fixed-income prices tumbling.
My feeling, therefore, is that income investors should shorten term and overweight in government issues. That will reduce the now significant downside risk. At the same time, because yield spreads are tight, the realignment is not too expensive.
More specifically, I am recommending that members consider selling their Bank of Montreal 4.87% Notes due April 22, 2015, recently trading at $108, and their Manulife 4.67% Notes due March 28, 2013, recently priced at $103.50. So that there is no misunderstanding, both issues are safe. Their principal repayments and interest distributions are secure. However, the market prices are vulnerable.
Action now: The Bank of Montreal 4.87% Notes and Manulife 4.67% Notes due March 28, 2013 are both Sells.
Rogers Communications (TSX: RCI.B, NYSE: RCI)
Originally recommended on April 23/07 (IWB #2716) at C$42.10, US$37.41. Closed Friday at C$37.15, US$36.49.
Rogers shocked investors with its disappointing third-quarter earnings. The company reported a profit of $370 million (64c a share), down 19% from 79c a share in 2009 and well below the 79c a share that analysts were expecting. It's obvious that the new competition is taking a toll. Average revenue per user has declined and more customers are switching to other carriers. The stock promptly sold off by 8%.
My reaction is mixed. To start with, the numbers are not nearly as bad as they seem. If you adjust for all non-recurring items, third-quarter profit was 83c a share, which was flat year-over-year. Wireless added 125,000 new subscribers. Internet revenues were up 8% as 27,000 new customers were added. So there were bright spots despite a spluttering economy.
On the other hand, net income and free cash flow dropped sharply. It was a far cry from the double-digit growth that we have come to expect from Rogers. Even more important, the increased competition from BCE and Telus with their upgraded networks as well as from new players, such as Wind Mobile, is here to stay.
What it all says is that the telecommunications industry is unfolding as anticipated and we have to come to terms with the new reality. Competition is going to be fierce but Rogers remains the best of the bunch in a major growth sector. The company's balance sheet remains strong and earnings of about $3.10 a share are expected this year, followed by $3.25 or more in 2011.
Action now: Rogers remains a Buy with a target of $43. I have set a $32 revisit level.
Gildan Activewear (TSX, NYSE: GIL)
Originally recommended on July 14/08 (IWB #2825) at C$22.62, US$22.58. Closed Friday at C$28.70, US$28.22.
Gildan Activewear turned in an excellent third quarter, racking up a profit of 50c a share (the company reports in U.S. funds). This was up substantially from 32c last year and in line with the consensus forecast. It was an impressive performance considering downtime at the Dominican Republic plant and unusual transportation and duty costs. Without these, earnings would have been close to 60c. Gildan is one of the very few companies in these bleak times that is unable to keep up with demand.
Perhaps the most encouraging thing about GIL is its top-line growth. Total third-quarter sales jumped 28% due mainly to increased U.S. wholesaler market share. A more favourable product mix also helped. Shipments in international and other screen print markets jumped 60% compared to the third quarter of 2009. As a matter of fact, management believes that the numbers would have been even better if inventory damage due to the Haitian earthquake had not resulted in lost sales. Gildan expects to receive insurance settlements amounting to about 7c a share later this year.
Looking ahead, sock sales are expected to increase by as much as 25% in 2011, while activewear shipments are growing about 15%. Given the tighter controls in place, this should generate earnings of approximately $1.75 a share in 2010 with an increase to the $2.20 range next year. My only concerns are U.S. consumer confidence and the company's ability to offset rising cotton and chemical costs with higher prices.
Action now: Gildan is a Buy with an increased target of C$38. I will revisit the stock if it dips to C$25.
Stantec Inc. (TSX, NYSE: STN)
Originally recommended on Aug. 28/06 (IWB #2632) at C$20.48, US$18.45. Closed Friday at C$27.27, US$26.73.
Stantec appears to have weathered the economic downturn and reported solid third-quarter earnings. Adjusted profit came in at 57c a share compared to 55c in 2009 and well above the 53c some analysts were looking for. Gross revenues were up slightly while costs fell. As a result, the company seems set to earn about $2.10 a share this year and $2.25 or more in 2011.
There are, however, a couple of question marks. Growth is now being acquisition driven. STN completed six new deals in the third quarter alone. While this bolsters the top line and diversifies the company's business base, some stronger organic growth would be welcome. The high Canadian dollar remains another problem and could continue to dampen the numbers in 2011.
A much more serious concern is the decisive Republican victory in the U.S. November elections. This has cast doubt over a lot of the stimulus package that includes infrastructure spending. Any cut-backs could adversely affect Stantec's American operations that already account for about 40% of total revenues.
My feeling, though, is that Canadian business, now expected to do well, should pick up any slack. It also remains to be seen how determined the Republicans are to cut projects that provide employment within their own constituencies. Management remains optimistic and has changed the corporate guidance from stable to modest growth.
Action now: Stantec remains a Buy with an unchanged target of $35. I will revisit the stock if it drops to $24.
Manulife Financial 4.67% Notes Originally recommended on Jan. 26/09 (IWB #2924) at $98. Trading recently at $103.50.
It's no secret that our once staid Canadian bond market is now hopelessly overheated. Investors have been snapping up new issues regardless of price and pouring money into the bond funds. The so-called flight to safety has turned into a stampede. As a result, we have a serious bond bubble and there is bound to be a sharp correction which could come sooner than expected.
For example, the Chinese are already diverting part of their trade surpluses into euros. That could undermine the U.S. Treasury bill market and send all fixed-income prices tumbling.
My feeling, therefore, is that income investors should shorten term and overweight in government issues. That will reduce the now significant downside risk. At the same time, because yield spreads are tight, the realignment is not too expensive.
More specifically, I am recommending that members consider selling their Bank of Montreal 4.87% Notes due April 22, 2015, recently trading at $108, and their Manulife 4.67% Notes due March 28, 2013, recently priced at $103.50. So that there is no misunderstanding, both issues are safe. Their principal repayments and interest distributions are secure. However, the market prices are vulnerable.
Action now: The Bank of Montreal 4.87% Notes and Manulife 4.67% Notes due March 28, 2013 are both Sells.
Rogers Communications (TSX: RCI.B, NYSE: RCI)
Originally recommended on April 23/07 (IWB #2716) at C$42.10, US$37.41. Closed Friday at C$37.15, US$36.49.
Rogers shocked investors with its disappointing third-quarter earnings. The company reported a profit of $370 million (64c a share), down 19% from 79c a share in 2009 and well below the 79c a share that analysts were expecting. It's obvious that the new competition is taking a toll. Average revenue per user has declined and more customers are switching to other carriers. The stock promptly sold off by 8%.
My reaction is mixed. To start with, the numbers are not nearly as bad as they seem. If you adjust for all non-recurring items, third-quarter profit was 83c a share, which was flat year-over-year. Wireless added 125,000 new subscribers. Internet revenues were up 8% as 27,000 new customers were added. So there were bright spots despite a spluttering economy.
On the other hand, net income and free cash flow dropped sharply. It was a far cry from the double-digit growth that we have come to expect from Rogers. Even more important, the increased competition from BCE and Telus with their upgraded networks as well as from new players, such as Wind Mobile, is here to stay.
What it all says is that the telecommunications industry is unfolding as anticipated and we have to come to terms with the new reality. Competition is going to be fierce but Rogers remains the best of the bunch in a major growth sector. The company's balance sheet remains strong and earnings of about $3.10 a share are expected this year, followed by $3.25 or more in 2011.
Action now: Rogers remains a Buy with a target of $43. I have set a $32 revisit level.
Gildan Activewear (TSX, NYSE: GIL)
Originally recommended on July 14/08 (IWB #2825) at C$22.62, US$22.58. Closed Friday at C$28.70, US$28.22.
Gildan Activewear turned in an excellent third quarter, racking up a profit of 50c a share (the company reports in U.S. funds). This was up substantially from 32c last year and in line with the consensus forecast. It was an impressive performance considering downtime at the Dominican Republic plant and unusual transportation and duty costs. Without these, earnings would have been close to 60c. Gildan is one of the very few companies in these bleak times that is unable to keep up with demand.
Perhaps the most encouraging thing about GIL is its top-line growth. Total third-quarter sales jumped 28% due mainly to increased U.S. wholesaler market share. A more favourable product mix also helped. Shipments in international and other screen print markets jumped 60% compared to the third quarter of 2009. As a matter of fact, management believes that the numbers would have been even better if inventory damage due to the Haitian earthquake had not resulted in lost sales. Gildan expects to receive insurance settlements amounting to about 7c a share later this year.
Looking ahead, sock sales are expected to increase by as much as 25% in 2011, while activewear shipments are growing about 15%. Given the tighter controls in place, this should generate earnings of approximately $1.75 a share in 2010 with an increase to the $2.20 range next year. My only concerns are U.S. consumer confidence and the company's ability to offset rising cotton and chemical costs with higher prices.
Action now: Gildan is a Buy with an increased target of C$38. I will revisit the stock if it dips to C$25.
Stantec Inc. (TSX, NYSE: STN)
Originally recommended on Aug. 28/06 (IWB #2632) at C$20.48, US$18.45. Closed Friday at C$27.27, US$26.73.
Stantec appears to have weathered the economic downturn and reported solid third-quarter earnings. Adjusted profit came in at 57c a share compared to 55c in 2009 and well above the 53c some analysts were looking for. Gross revenues were up slightly while costs fell. As a result, the company seems set to earn about $2.10 a share this year and $2.25 or more in 2011.
There are, however, a couple of question marks. Growth is now being acquisition driven. STN completed six new deals in the third quarter alone. While this bolsters the top line and diversifies the company's business base, some stronger organic growth would be welcome. The high Canadian dollar remains another problem and could continue to dampen the numbers in 2011.
A much more serious concern is the decisive Republican victory in the U.S. November elections. This has cast doubt over a lot of the stimulus package that includes infrastructure spending. Any cut-backs could adversely affect Stantec's American operations that already account for about 40% of total revenues.
My feeling, though, is that Canadian business, now expected to do well, should pick up any slack. It also remains to be seen how determined the Republicans are to cut projects that provide employment within their own constituencies. Management remains optimistic and has changed the corporate guidance from stable to modest growth.
Action now: Stantec remains a Buy with an unchanged target of $35. I will revisit the stock if it drops to $24.
