WHAT STOCKS TO WATCH AS THE LOONIE RISES.

THE LOONIE HIT A TWO-YEAR HIGH THIS WEEK AND THERE IS AL­READY TALK ABOUT WIN­NERS AND LOSERS

National Post (National Edition) - - FRONT PAGE - GE­OFF ZOCHODNE

The loonie hit the 80-cent U.S. mark for the first time in two years this week, on the back of strong eco­nomic data and the Bank of Canada’s rate hike on July 12.

Though it’s still a long way from par­ity and the ram­i­fi­ca­tions of the in­crease are only be­gin­ning to rip­ple through the Cana­dian econ­omy, in­vestors are al­ready try­ing to sort the win­ners from the losers.

Firms that buy in the United States but sell in Canada could have the most to gain.

“The win­ners are com­pa­nies that im­port goods, par­tic­u­larly re­tail­ers,” said Avery Shen­feld, Chief Economist at CIBC Cap­i­tal Mar­kets. “Where it has a neg­a­tive im­pact are on ex­por­to­ri­ented in­dus­tries, so, the re­source sec­tor and man­u­fac­tur­ers in Canada, par­tic­u­larly those that com­pete with Amer­i­cans.”

Here’s a look at stocks that could feel the ef­fects — one way or an­other — of an em­bold­ened Cana­dian dol­lar.

ROCKY MOUN­TAIN DEAL­ER­SHIPS — TAIL­WIND

Rocky Moun­tain

Deal­er­ships Inc. — one of Canada’s largest agri­cul­tural and con­struc­tion equip­ment bro­kers — is one of those com­pa­nies that could take ad­van­tage lower ef­fec­tive prices in the United States.

“As the price of agri/in­dus­trial/trans­porta­tion equip­ment in North Amer­ica is in U.S. dol­lars, one of the big­gest chal­lenges for the Cana­dian deal­ers has been the ex­change rate sticker shock on prices for new equip­ment in­ven­tory,” Na­tional Bank Fi­nan­cial an­a­lyst Greg Col­man wrote in a re­search note on Wed­nes­day.

Lower prices could help rein­vig­o­rate cus­tomer de­mand, while a drop in cost of sales at Rocky Moun­tain could boost the bot­tom line.

“When taken in the con­text of the re­cent Cana­dian dol­lar move since May, we be­lieve eco­nomic forces are emerg­ing that have the po­ten­tial to ma­te­ri­ally al­ter pur­chase be­hav­iour of cus­tomers, driv­ing de­mand for new equip­ment sales, which is pos­i­tively cor­re­lated to mar­gin ex­pan­sion,” Col­man said.

Na­tional Bank said it was hik­ing both its rat­ing and tar­get price for the Cal­gar­y­based com­pany, to out­per­form from sec­tor per­form and to $13.50 from $9.25. Rocky Moun­tain shares closed at $10.04 on Thurs­day in Toronto.

CANA­DIAN NA­TIONAL RAIL­WAY CO. — HEAD­WIND

Cana­dian Na­tional

Rail­way Co. re­ported health quar­terly re­sults ear­lier this week, but warned the ris­ing loonie could work against it in the lat­ter half of 2017.

While CN, which posted a 20 per cent gain in profit, re­ports earn­ings in Cana­dian dol­lars, the com­pany noted that “a large por­tion of its rev­enues and ex­penses is de­nom­i­nated in U.S. dol­lars.”

CN said that 17 per cent of their rev­enues were tied to U.S. do­mes­tic traf­fic in 2016 and an ad­di­tional 34 per cent in­volved trans-bor­der traf­fic. It also said that ev­ery one cent change in the Cana­dian dol­lar would change net in­come by ap­prox­i­mately $30 mil­lion.

“The North Amer­i­can eco­nomic out­look con­tin­ues to be pos­i­tive, and we re­main com­mit­ted to de­liv­er­ing on our 2017 fi­nan­cial out­look,” said Luc Jobin, pres­i­dent and chief ex­ec­u­tive of­fi­cer, in a state­ment. “How­ever, vol­ume com­par­isons in the sec­ond half of the year will be more chal­leng­ing, and the strength­en­ing of the Cana­dian dol­lar will con­sti­tute a head­wind.”

Shares in CN closed Thurs­day at $98.90 in Toronto.

WEST FRASER TIM­BER — MIXED

Van­cou­ver-based West Fraser Tim­ber Co. Ltd. was al­ready fac­ing head­winds from soft­wood tar­iffs levied by the U.S. gov­ern­ment and wild­fires in Bri­tish Columbia.

On Mon­day, CIBC’s In­sti­tu­tional Eq­uity Re­search team noted that the ris­ing loonie was also a “con­cern” for the lum­ber pro­ducer, al­beit one with a sil­ver lin­ing.

“Our 2018 fore­cast as­sumes CAD/USD at 0.76,” wrote CIBC an­a­lyst Hamir Pa­tel in an earn­ings up­date. “Each one cent in­crease in the Cana­dian dol­lar rep­re­sents a $30MM/yr EBITDA head­wind for WFT (though ad­mit­tedly there would be a par­tial off­set from higher prod­uct prices).”

CIBC nev­er­the­less lifted its price tar­get on WFT to $66 from $62.

West Fraser, how­ever, may have found a way to turn the ris­ing loonie to its ad­van­tage: On Wed­nes­day, it an­nounced that it had agreed to an ap­prox­i­mately US$430 mil­lion deal to buy seven Ge­or­gia and Florida-based mills from the Howard Gil­man Foun­da­tion.

Ray­mond James an­a­lyst Daryl Swetlishoff said in a Thurs­day re­search note that the firm re­mains “bullish on build­ing ma­te­ri­als pro­duc­ers in our uni­verse,” and hiked West Fraser’s tar­get price to $76 a share from $72. WFT closed at $65.84 on Thurs­day.

CANA­DIAN TIRE AND DOLLARAMA — TAIL­WINDS

A more valu­able loonie could go fur­ther than usual for Dollarama Inc. and

Cana­dian Tire Corp., re­tail­ers that buy plenty of mer­chan­dise abroad.

A July 13 re­port from Eight Cap­i­tal an­a­lyst Tal Wool­ley said the mar­ket had yet to ac­count for the ef­fect the loonie’s flight has on re­tail stocks.

“That re­tail­ers, es­pe­cially dis­cre­tionary re­tail­ers that im­port sig­nif­i­cant vol­umes of over­seas mer­chan­dise priced in USD, ben­e­fit from a stronger CAD is not some well-kept se­cret,” Wool­ley wrote. “So we have been sur­prised that shares have con­tin­ued to lag on this sig­nif­i­cant move in the CAD. “

“This move, if it sticks, rep­re­sents a ma­te­rial in­crease in pur­chas­ing power for over­seas im­porters like DOL and CTC.A, and it is cer­tainly a help for the gro­cers in cer­tain cat­e­gories like fresh pro­duce and com­modi­ties (which are ei­ther sourced from the U.S. or priced in USD).”

Eight Cap­i­tal had buy rat­ings on both com­pa­nies, with a $165 tar­get for Cana­dian Tire shares and $145 for Dollarama.

Dollarama’s shares closed at $124.49 on Thurs­day. Cana­dian Tire Lim­ited Class A shares closed at $142.35.

AIR CANADA — TAIL­WIND

Air­lines could get a dou­ble lift from the loonie’s rise, as more Cana­di­ans could plan in­ter­na­tional trips while some of its key in­put costs are priced in US dol­lars.

“The air­line sec­tor would gen­er­ally like a stronger Cana­dian dol­lar, even though it makes the in­flow of for­eign tourists to Canada a lit­tle less at­trac­tive,” said CIBC’s Avery Shen­feld, not­ing that the air­lines’ fuel costs would de­cline.

Air Canada, the coun­try’s largest air­line, was al­ready hav­ing a strong sum­mer, an­nounc­ing ear­lier this month that it had car­ried nearly one mil­lion cus­tomers over a six­day pe­riod span­ning the Canada Day week­end.

It has also al­ready ben­e­fited from low jet fuel prices that had noth­ing to do with the ex­change rate, as RBC Do­min­ion Se­cu­ri­ties Inc. an­a­lysts Wal­ter Sprack­lin and Derek Spronck pointed out in a July 6 note.

“We be­lieve the cost-trans­for­ma­tion story is in its early days, and should it be fully ex­e­cuted, we see a step func­tion re-rat­ing in the shares, with sub­stan­tial up­side po­ten­tial,” they wrote of the com­pany. “Fur­ther­more, we see an­other stage of cost re­duc­tions that have yet to be im­ple­mented, on top of sig­nif­i­cantly lower jet fuel prices — which, if sus­tained, of­fer in­vestors an­other val­u­a­tion leg higher.”

The an­a­lysts upped the price tar­get for the Mon­tre­al­based car­rier to $25 from $21.

Air Canada’s stock price rose above $20 ear­lier in July, be­fore land­ing at $18.80 in Toronto on Thurs­day.

THE WIN­NERS ARE COM­PA­NIES THAT IM­PORT GOODS, PAR­TIC­U­LARLY RE­TAIL­ERS.

GRA­HAM HUGHES / THE CANA­DIAN PRESS

Cana­dian Na­tional Rail­way Co. posted a 20 per cent quar­terly profit gain ear­lier this week but also warned the ris­ing value of the Cana­dian dol­lar could af­fect earn­ings in the lat­ter half of this year.

Newspapers in English

Newspapers from Canada

© PressReader. All rights reserved.