HEADWINDS AND TAILWINDS
The Canadian dollar’s rally has fired up talk from investors about potential winners and losers. Here are five stocks that could feel the force of the impact — for better or worse — from a stronger loonie, writes 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 export-oriented 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 of 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 Calgary-based 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 healthy 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 six-day 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 Montreal-based 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.