Market Updates on RIMM, ARF,SC, RUS: Breakout Stocks for March 31, 2010
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Russel Metals Inc. (RUS-TSX)
Armtec Infrastructure Income Fund (ARF.UN-TSX)
Shoppers Drug Mart (SC-TSX) Rating: BUY
Research In Motion Ltd. (RIM – TSX / RIMM – NASDAQ)
Russel Metals Inc. (RUS-TSX) Rating: BUY Target Price: $25.00 Potential Total Return: 30.0%
Current Price: $20.10 Market Cap: $1.1 billion
We increase our target price from $21.50 to $25.00. The dividend of $1.00 a share (a 5% dividend yield) is safe and we look for the shares to rise from the current $20.00 to $25.00 for a total return of 30%. Fundamentals continue to improve. Steel prices peaked in the third quarter of 2008 at over US$1,000 a tonne. Steel price bottomed in the second quarter of 2009 at US$400. To arrive at a normal ratio, either Russel Metals stock goes up (implying a lower dividend yield) or ten-year bond rates goes up.
1) To have the Russel Metals dividend yield equal to the ten-year bond yield (longer-term average of one) implies Russel stock increases to $28.50. The Russel dividend of $1.00 and a $28.50 stock price equals the current bond yield 3.5%.
2) To reach parity, bond yields move from 3.5% to 5.0%. We do not see this large increase in bond yields as a likely event as the economy is still weak.
3) We assume bond yield increases from 3.5% to 4.0% and the stock of Russel to increase to $25.00. At $25.00 with a $1.00 dividend the stock will yield 4.0%.This assumes no increases in the Russel dividend.
We are increasing our target price from $21.50 to $25.00. This implies a return of 30% from the current stock price of $20.00 (25% in capital appreciation and a 5.0% dividend yield). We see the chance of a dividend reduction as remote as steel price increases have held and likely to increase. Longer-term ratio is 1.0% i.e. bond yields equal dividend yield of Russel Metals. Russel has $360 million in cash and $341 million in debt. The yearly obligation to pay the $1.00 dividend is $60 million or $15 million a quarter. High stock price for Russel stock is $34.00 Low stock price for Russel stock $9.90 Current $20.00
We see more good news and upside risk for Russel as opposed to downside/bad news for the company.
We feel investors are still looking at where the stock has come from (low of $9.90) rather than looking at where it can go (2008 high of $34.00). The stock may not reach $34, but $25.00 is very realistic. BUY Russel (RUS-TSX).
A Weak Finish to 2009 and a Slow Start to 2010 Disappoint Investors Fiscal 2009 results released on March 19th were below expectations and management acknowledged that this trend has continued in the seasonally small first quarter. Q4 2009 was essentially flat, with the prior year in terms of revenues and EBITDA. Distributable cash per unit declined to $0.62 from $0.67. The disappointment was in the Con-Force division where, despite two sizeable acquisitions made last summer, revenues were slightly below the prior year. This reflected the completion of major contracts in Q3 2009 and the absence of new replacement projects. The division recently won two major contracts in the Toronto area (York Durham sewer system ($26.9 million) and an extension of the Toronto Subway into York Region ($43.0 million) but these will not start until Q2 and Q3 of this year. The new contracts will continue throughout 2011. The rest of the business remained relatively buoyant and in fact the Armtec division recorded a 6.6% increase in sales in Q4 which was a reversal of the declining trend which existed throughout the previous two quarters.
Exclusive of a $6.5 million reorganization charge, distributable cash rose to a record $3.16 per unit in 2009, up from $2.93 in 2008. Given the slow start to the year in the Con-Force division, combined with rising raw material costs which will pressure margins, we now expect distributable cash to decline to $2.82 per unit this year. The annualized distribution of $2.16 represents a payout ratio of only 77% of forecast 2010 distributable cash. Details of Armtec’s plans to convert to a corporate structure and possible acquisitions will likely be revealed at the AGM on June 24, 2010. We assume that the operating results will be modestly stronger in 2011 than 2010 and assuming a 30% tax rate, distributable cash is forecast at $2.30 per share. A 75% payout would result in a dividend of around $1.70 per share. This is below our previous expectation of $1.85 per share.
Armtec Infrastructure Income Fund (ARF.UN-TSX)
Rating: BUY Target Price: $23.00 Potential Return: 17.3%
Current Price: $21.30 Market Cap: $430 million
We are lowering our target price to $23.00 from $27.50.
Assuming a dividend of $1.70 per share in 2011 the dividend yield on the new target price would be 7.4%, which may be considered overly conservative. The indicated total return from the current price is 17%.
We are maintaining a BUY rating although we realize that with the recent disappointment and the prospect of a weak Q1 2010 a period of consolidation is likely before a recovery is established. Ontario Budget Acknowledges Difficulties in Establishing New Pricing Structure Included in the recent Ontario provincial budget document was a confirmation by the government of its plans to reduce the costs of the Ontario Drug Benefit Plan by reducing the price it pays for generic drugs. This is consistent with the message it has employed in the ongoing discussions with other pharmaceutical industry participants since last summer. The difficulty in developing a satisfactory system appears to hinge on how to reduce prices paid for generic drugs and not undermine the financial viability of drug stores, particularly the smaller independents. Unfortunately the resolution of this situation does not appear imminent.
Shoppers’ is well positioned to adapt to whatever changes are made but they will likely adversely affect its profitability over the near term. Accordingly, the share price is likely to remain constrained at under $45.00 until this is resolved. Given the underlying strength and longer-term growth potential we are maintaining our BUY rating and $48.00 target price.
Shoppers Drug Mart (SC-TSX) Rating: BUY Target Price: $48.00 Potential Return: 12.0%
Current Price: $43.68 Market Cap: $9.6 billion
Research In Motion Ltd. (RIM – TSX / RIMM – NASDAQ) Rating: BUY Target Price: US$98.00 Potential Return: 29.5%
Current Price: US$75.70 Market Cap: US$42.2 billion
RIM is due to report Q4 f2010. The Street is looking for revenue of $4.31 billion (+22.7% Y/Y) and EPS of $1.28 (+42.2% Y/Y). Gross margin is projected to improve to 43.3% from 40.0% a year ago and is expected to be guided to stay in the low-40% range for the next several quarters. Strong international sales of the new Curve (8520) and the Bold 2 (8700) should help drive a 42.7% Y/Y increase in handset units to 11.1 million. Increased focus on consumer oriented handsets should result, however, in a lower Average Selling Price (ASP) of $319 versus $371 a year ago. Despite having a lower ASP, growing unit sales are expected to have resulted in an increase in economies of scale within RIM, which in turn, should deliver both a better gross and operating margin, growing +330 basis points and +190 basis points Y/Y, respectively.
Demand for smartphones continues to increase and is forecast to make up nearly half of all mobile phone sales by the end of next year (please see graph below).
RIM appears to have made the correct decision in expanding its focus from the enterprise segment to the consumer segment, which in Q3 f2010 made up 80% of RIM’s total sales. With the launch of consumer oriented phones in 2006, ASPs have fallen but market share has continued to rise (please see graph below). The launch of the Pearl Flip in 2008 further expanded RIMs reach into the consumer market. With increased market share, cost structures improve as do sales of highly profitable BlackBerry apps, helping to mitigate the negative impact of lower ASPs. RIM is expected to release a number of new products in 2010, including the Pearl 9100 and the Storm Slider (a slide-out keyboard version of the Storm 2). WES 2010 (Wireless Enterprise Symposium) in April is a high-profile upcoming event that could serve as the official announcement date for some of RIM’s new handsets.
Given its strong market positioning and attractive valuation, we continue to recommend the shares of RIM as BUY with a US$98.00 target price. Our target price reflects an 18.5x multiple to our 2011 EPS forecast of US$5.31, which we see as a reasonable given RIM’s strong earnings profile.
PennyStockFinder.com offers a wide variety of services to both investors and public companies. Whether you are an investor seeking an investment opportunity or a public company seeking to reach the investment community, http://www.PennyStockFinder.com can bridge the gap. We encourage investors to take advantage of our trading tools. You may perform your own DD to help make the right investment choices. Visit our Market Education page to better educate yourself in order to become a more profitable investor. PennyStockFinder.com goal is to provide investors and stockbrokers with timely financial news, data and links to valuable investment tools (i.e., stock quotes, stock charts, stock research, stock message boards, etc.) to assist in making informed decisions about small cap investments.
Release of Liability: Through use of this website viewing or using you agree to hold http://www.PennyStockFinder.com, its operators owners and employees harmless and to completely release them from any and all liability due to any and all loss (monetary or otherwise), damage (monetary or otherwise), or injury (monetary or otherwise) that you may incur. The information contained herein is based on sources, which we believe to be reliable, but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of the available data. PennyStockFinder.com affiliates may from time to time have a position in the securities mentioned herein and may increase or decrease such positions without notice, which may negatively affect the market. PennyStockFinder.com encourages readers and investors to supplement the information in these reports with independent research and other professional advice. All information on featured companies is provided by the companies profiled, or is available from public sources and http://www.PennyStockFinder.com makes no representations, warranties or guarantees as to the accuracy or completeness of the disclosure by the profiled companies. PennyStockFinder.com, nor any of its affiliates are not registered investment advisors or a broker dealers.
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PennyStockFinder.com can bridge the gap. We encourage investors to take advantage of our trading tools. You may perform your own DD to help make the right investment choices. Visit www.pennystockfinder.com to better educate yourself in order in order to become a more profitable investor.
PennyStockFinder.com offers a media source for publicly traded companies who wish to share their companies' success stories with investors and business opportunists. Our services can provide vast exposure, thereby creating added market awareness, and thus creating new investment and business opportunities. If you are interested in our services and profiling your company on our website, please contact us for more information.
PennyStockFinder.com goal is to provide investors and stockbrokers with timely financial news, data and links to valuable investment tools (i.e., Stock quotes, stock charts, stock research, stock message boards, etc.) to assist in making informed decisions about small cap investments.
Russel Metals Inc. (RUS-TSX)
Armtec Infrastructure Income Fund (ARF.UN-TSX)
Shoppers Drug Mart (SC-TSX) Rating: BUY
Research In Motion Ltd. (RIM – TSX / RIMM – NASDAQ)
Russel Metals Inc. (RUS-TSX) Rating: BUY Target Price: $25.00 Potential Total Return: 30.0%
Current Price: $20.10 Market Cap: $1.1 billion
We increase our target price from $21.50 to $25.00. The dividend of $1.00 a share (a 5% dividend yield) is safe and we look for the shares to rise from the current $20.00 to $25.00 for a total return of 30%. Fundamentals continue to improve. Steel prices peaked in the third quarter of 2008 at over US$1,000 a tonne. Steel price bottomed in the second quarter of 2009 at US$400. To arrive at a normal ratio, either Russel Metals stock goes up (implying a lower dividend yield) or ten-year bond rates goes up.
1) To have the Russel Metals dividend yield equal to the ten-year bond yield (longer-term average of one) implies Russel stock increases to $28.50. The Russel dividend of $1.00 and a $28.50 stock price equals the current bond yield 3.5%.
2) To reach parity, bond yields move from 3.5% to 5.0%. We do not see this large increase in bond yields as a likely event as the economy is still weak.
3) We assume bond yield increases from 3.5% to 4.0% and the stock of Russel to increase to $25.00. At $25.00 with a $1.00 dividend the stock will yield 4.0%.This assumes no increases in the Russel dividend.
We are increasing our target price from $21.50 to $25.00. This implies a return of 30% from the current stock price of $20.00 (25% in capital appreciation and a 5.0% dividend yield). We see the chance of a dividend reduction as remote as steel price increases have held and likely to increase. Longer-term ratio is 1.0% i.e. bond yields equal dividend yield of Russel Metals. Russel has $360 million in cash and $341 million in debt. The yearly obligation to pay the $1.00 dividend is $60 million or $15 million a quarter. High stock price for Russel stock is $34.00 Low stock price for Russel stock $9.90 Current $20.00
We see more good news and upside risk for Russel as opposed to downside/bad news for the company.
We feel investors are still looking at where the stock has come from (low of $9.90) rather than looking at where it can go (2008 high of $34.00). The stock may not reach $34, but $25.00 is very realistic. BUY Russel (RUS-TSX).
A Weak Finish to 2009 and a Slow Start to 2010 Disappoint Investors Fiscal 2009 results released on March 19th were below expectations and management acknowledged that this trend has continued in the seasonally small first quarter. Q4 2009 was essentially flat, with the prior year in terms of revenues and EBITDA. Distributable cash per unit declined to $0.62 from $0.67. The disappointment was in the Con-Force division where, despite two sizeable acquisitions made last summer, revenues were slightly below the prior year. This reflected the completion of major contracts in Q3 2009 and the absence of new replacement projects. The division recently won two major contracts in the Toronto area (York Durham sewer system ($26.9 million) and an extension of the Toronto Subway into York Region ($43.0 million) but these will not start until Q2 and Q3 of this year. The new contracts will continue throughout 2011. The rest of the business remained relatively buoyant and in fact the Armtec division recorded a 6.6% increase in sales in Q4 which was a reversal of the declining trend which existed throughout the previous two quarters.
Exclusive of a $6.5 million reorganization charge, distributable cash rose to a record $3.16 per unit in 2009, up from $2.93 in 2008. Given the slow start to the year in the Con-Force division, combined with rising raw material costs which will pressure margins, we now expect distributable cash to decline to $2.82 per unit this year. The annualized distribution of $2.16 represents a payout ratio of only 77% of forecast 2010 distributable cash. Details of Armtec’s plans to convert to a corporate structure and possible acquisitions will likely be revealed at the AGM on June 24, 2010. We assume that the operating results will be modestly stronger in 2011 than 2010 and assuming a 30% tax rate, distributable cash is forecast at $2.30 per share. A 75% payout would result in a dividend of around $1.70 per share. This is below our previous expectation of $1.85 per share.
Armtec Infrastructure Income Fund (ARF.UN-TSX)
Rating: BUY Target Price: $23.00 Potential Return: 17.3%
Current Price: $21.30 Market Cap: $430 million
We are lowering our target price to $23.00 from $27.50.
Assuming a dividend of $1.70 per share in 2011 the dividend yield on the new target price would be 7.4%, which may be considered overly conservative. The indicated total return from the current price is 17%.
We are maintaining a BUY rating although we realize that with the recent disappointment and the prospect of a weak Q1 2010 a period of consolidation is likely before a recovery is established. Ontario Budget Acknowledges Difficulties in Establishing New Pricing Structure Included in the recent Ontario provincial budget document was a confirmation by the government of its plans to reduce the costs of the Ontario Drug Benefit Plan by reducing the price it pays for generic drugs. This is consistent with the message it has employed in the ongoing discussions with other pharmaceutical industry participants since last summer. The difficulty in developing a satisfactory system appears to hinge on how to reduce prices paid for generic drugs and not undermine the financial viability of drug stores, particularly the smaller independents. Unfortunately the resolution of this situation does not appear imminent.
Shoppers’ is well positioned to adapt to whatever changes are made but they will likely adversely affect its profitability over the near term. Accordingly, the share price is likely to remain constrained at under $45.00 until this is resolved. Given the underlying strength and longer-term growth potential we are maintaining our BUY rating and $48.00 target price.
Shoppers Drug Mart (SC-TSX) Rating: BUY Target Price: $48.00 Potential Return: 12.0%
Current Price: $43.68 Market Cap: $9.6 billion
Research In Motion Ltd. (RIM – TSX / RIMM – NASDAQ) Rating: BUY Target Price: US$98.00 Potential Return: 29.5%
Current Price: US$75.70 Market Cap: US$42.2 billion
RIM is due to report Q4 f2010. The Street is looking for revenue of $4.31 billion (+22.7% Y/Y) and EPS of $1.28 (+42.2% Y/Y). Gross margin is projected to improve to 43.3% from 40.0% a year ago and is expected to be guided to stay in the low-40% range for the next several quarters. Strong international sales of the new Curve (8520) and the Bold 2 (8700) should help drive a 42.7% Y/Y increase in handset units to 11.1 million. Increased focus on consumer oriented handsets should result, however, in a lower Average Selling Price (ASP) of $319 versus $371 a year ago. Despite having a lower ASP, growing unit sales are expected to have resulted in an increase in economies of scale within RIM, which in turn, should deliver both a better gross and operating margin, growing +330 basis points and +190 basis points Y/Y, respectively.
Demand for smartphones continues to increase and is forecast to make up nearly half of all mobile phone sales by the end of next year (please see graph below).
RIM appears to have made the correct decision in expanding its focus from the enterprise segment to the consumer segment, which in Q3 f2010 made up 80% of RIM’s total sales. With the launch of consumer oriented phones in 2006, ASPs have fallen but market share has continued to rise (please see graph below). The launch of the Pearl Flip in 2008 further expanded RIMs reach into the consumer market. With increased market share, cost structures improve as do sales of highly profitable BlackBerry apps, helping to mitigate the negative impact of lower ASPs. RIM is expected to release a number of new products in 2010, including the Pearl 9100 and the Storm Slider (a slide-out keyboard version of the Storm 2). WES 2010 (Wireless Enterprise Symposium) in April is a high-profile upcoming event that could serve as the official announcement date for some of RIM’s new handsets.
Given its strong market positioning and attractive valuation, we continue to recommend the shares of RIM as BUY with a US$98.00 target price. Our target price reflects an 18.5x multiple to our 2011 EPS forecast of US$5.31, which we see as a reasonable given RIM’s strong earnings profile.
PennyStockFinder.com offers a wide variety of services to both investors and public companies. Whether you are an investor seeking an investment opportunity or a public company seeking to reach the investment community, http://www.PennyStockFinder.com can bridge the gap. We encourage investors to take advantage of our trading tools. You may perform your own DD to help make the right investment choices. Visit our Market Education page to better educate yourself in order to become a more profitable investor. PennyStockFinder.com goal is to provide investors and stockbrokers with timely financial news, data and links to valuable investment tools (i.e., stock quotes, stock charts, stock research, stock message boards, etc.) to assist in making informed decisions about small cap investments.
Release of Liability: Through use of this website viewing or using you agree to hold http://www.PennyStockFinder.com, its operators owners and employees harmless and to completely release them from any and all liability due to any and all loss (monetary or otherwise), damage (monetary or otherwise), or injury (monetary or otherwise) that you may incur. The information contained herein is based on sources, which we believe to be reliable, but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of the available data. PennyStockFinder.com affiliates may from time to time have a position in the securities mentioned herein and may increase or decrease such positions without notice, which may negatively affect the market. PennyStockFinder.com encourages readers and investors to supplement the information in these reports with independent research and other professional advice. All information on featured companies is provided by the companies profiled, or is available from public sources and http://www.PennyStockFinder.com makes no representations, warranties or guarantees as to the accuracy or completeness of the disclosure by the profiled companies. PennyStockFinder.com, nor any of its affiliates are not registered investment advisors or a broker dealers.
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