Strategy: The Investment Outlook
Introduction Strategy: The Investment Outlook Fall 2014 Volume 34, Number 4 RBC Capital Markets’ (RBC CM) Strategy publication is the outcome of senior representatives of the firm regularly meeting to compare and contrast their views on the investment outlook. Strategy consists of three parts: first, the consensus strategy resulting from these discussions; second, a series of tactics designed to capitalize on this strategy; and third, some of the working papers that guided us to our conclusions.
At times, the views of individual analytic disciplines will differ from the group’s consensus. These divergences will be apparent in the working papers. We believe readers will want to be aware of the full range of views shaping Strategy and have, therefore, included commentary that may appear to be at odds with the consensus view of the committee.
All prices are as of market close August 29, 2014 ET, unless otherwise noted.
All values are in Canadian dollars unless otherwise noted.
Investment Strategy Equity Selection Committee Matt Barasch (Chair), J. Allworth, J-F Dion, N. Downey, A-P Hardy, C. McAlpine, and J. Mirza.
Fall 2014 2 Strategy: The Investment Outlook
Table of Contents Click on titles Recommended Asset Mix ...... 4 to be taken to that section. 57.5% Equities, 35% Bonds, 7.5% Cash
Recommended Equity Weights ...... 5
Strategy Benchmark Returns ...... 6 Bish Koziol (Quantitative Research Associate)
Stock Selections and Updates ...... 8
Investment Strategy Equity Selection Committee Tactics
The Economy ...... 25 US economy slides into driver’s seat with Canada going along for the ride Dawn Desjardins (Assistant Chief Economist, RBC Economics)
Quantitative Research ...... 36
Are Canadian equities becoming too expensive? Papers Chad McAlpine, CFA (Quantitative Research)
Working Trend & Cycle ...... 38 Bull Market intact – DXY nearing next resistance Javed Mirza, CFA, CMT (Analyst, Technical Research – Trend & Cycle)
Fundamental Equity Weightings...... 50
Global Equity Coverage Universe ...... 56
Required Disclosures ...... 57
Fall 2014 3 Strategy: The Investment Outlook
Recommended Asset Mix 57.5% Equities, 35% Bonds, 7.5% Cash By definition, most portfolios are constructed to achieve specific objectives. This definition implies that, in a general publication such as this, it is difficult to address the requirements of every type and class of investor.
One way of partially overcoming this difficulty is to recognize that many portfolios have limits placed on the proportion of assets that can be committed to the equity markets. This being the case, a recommended asset mix could be expressed in terms of the proportion of the minimum/maximum range allowed for equities. Investors with different constraints should be able to translate a certain recommended equity exposure to levels more appropriate for their own portfolios.
This approach is used to translate our general asset-mix recommendations into weightings appropriate for two hypothetical portfolios with differing equity constraints. For example, the weighting of equities in our hypothetically balanced portfolio can vary between 40% and 60%—a minimum/maximum range of 20 percentage points. If we were to recommend an equity exposure of 25%, then this would mean that only five percentage points of the possible 20 should be committed to equities (i.e., 25% of the account’s individually defined minimum/maximum range, or a total equity weighting in the balanced portfolio of 45%). Similarly, a portfolio in which equity exposure could vary between 0% and 100% (such as the growth portfolio) should be no more than 25% equities.
Asset Class Ranges
High/Low Constraint Present Position Balanced (%) Growth (%) Asset Class Balanced (%) Growth (%) 20/0 100/0 Cash 1.5 7.5 60/40 100/0 Bonds 47.0 35.0 60/40 100/0 Stocks 51.5 57.5
Past Range: Growth Portfolio Asset Class Highest %: Date Lowest %: Date Cash 40%: Q2-Q3/87 0%: Q3/91, Q1/92, Q3/92-Q1/93, Q1-Q2/95 Bonds 55%: Q1/92-Q3/92 10%: Q4/86-Q3/87 Stocks 70%: Q4/86-Q1/87 40%: Q2/92, Q1/94-Q4/94
Source: RBC Capital Markets
Fall 2014 4 Strategy: The Investment Outlook
Recommended Equity Weights
S&P/TSX Weight (%) RBC Capital Markets As of As of Recommended Weight (%) 05/30/2014 08/29/2014 Previous Current ENERGY 26.4 26.4 26.0 26.0 Energy Equipment & Services 1.4 1.4 1.0 2.0 Oil, Gas & Consumable Fuels 25.0 25.0 25.0 24.0
MATERIALS 11.7 12.0 10.0 11.0 ↑ Chemicals 3.1 2.9 1.0 1.0 Other* (Construction Materials, Containers & Packaging) 0.2 0.2 0.0 0.0 Metals & Mining ex. Gold and Steel* 2.9 2.9 2.0 2.0 Gold 5.0 5.5 5.0 5.0 Steel 0.1 0.1 1.0 1.0 Paper & Forest Products 0.4 0.4 1.0 2.0
INDUSTRIALS 7.9 8.2 10.0 10.0 Capital Goods 2.0 1.9 2.0 2.0 Commercial & Professional Services 0.7 0.7 2.0 2.0 Transportation 5.2 5.7 6.0 6.0
CONSUMER DISCRETIONARY 5.5 5.6 8.0 8.0 Automobiles & Components 1.6 1.6 2.0 2.0 Consumer Durables & Apparel 0.5 0.5 2.0 2.0 Consumer Services 0.5 0.6 0.0 0.0 Media 2.0 1.9 2.0 2.0 Broadcasting & Cable TV 0.1 0.1 0.0 0.0 Other* (Advertising, Cable & Satellite, Movies & Entertainment, Publishing) 1.9 1.8 2.0 2.0 Retailing 1.0 1.0 2.0 2.0
CONSUMER STAPLES 2.7 2.8 1.0 1.0
HEALTH CARE 3.1 2.6 4.0 4.0
FINANCIALS 34.2 34.2 34.0 35.0 ↑ Banks 22.5 22.4 23.0 23.0 Diversified Financials 1.2 1.4 2.0 3.0 Insurance 6.1 6.2 6.0 6.0 Real Estate 4.3 4.3 3.0 3.0
INFORMATION TECHNOLOGY 1.8 1.8 2.0 1.0 ↓ Software & Services 1.4 1.4 2.0 1.0 Technology Hardware, Semiconductors* 0.4 0.4 0.0 0.0
TELECOMMUNICATION SERVICES 4.8 4.4 4.0 3.0 ↓
UTILITIES 2.0 1.9 1.0 1.0
* RBC Capital Markets estimates Source: RBC Capital Markets
Fall 2014 5 Strategy: The Investment Outlook
Benchmark Returns Bish Koziol (Quantitative Research Associate) Equities on both sides of the border advanced over the past three months. The S&P/TSX Composite rose 7.7% while the S&P 500 gained 4.7% over the same period. Year to date, the Canadian Index is up 16.9%, versus 9.9% for the S&P 500. The Industrial sector had the highest return of all sectors in Canada during the quarter (13.1%) while Information Technology was strongest in the US rising 7.5%. In Canada, all but two sectors (Health Care and Telecommunication Services) have realized double-digit returns year to date, with Energy leading all sectors with a 22.4% gain.
The 30-Year US Treasury Bond and the Long GOC Bond both gained over 5% during the quarter. For the year, the 30-Year US Treasury Bond has risen 20.4%.
All Style Indices posted positive gains in both the US and Canada during the quarter. Value led on both sided of the border with a 7.9% return in Canada and 6.8% gain in the US. Our Diversified Style strategy has returned 14.7% on a year-to-date basis in Canada.
Benchmark Returns (period from May 30, 2014 to August 29, 2014)
Canada (C$) 3-Month 12-Month 5-Year United States (US$) 3-Month 12-Month 5-Year Trailing YTD Trailing Cpd Ann Trailing YTD Trailing Cpd Ann Asset Classes (Total Return) Asset Classes (Total Return except where noted) S&P/TSX Composite 7.7 16.9 27.1 10.7 S&P 500 4.7 9.9 25.2 16.9 S&P/TSX 60 8.1 16.8 27.2 9.7 S&P 400 4.8 8.1 23.2 18.8 S&P/TSX Completion 6.7 17.1 27.0 14.1 S&P 600 3.2 1.7 18.7 18.7 S&P/TSX Smallcap 6.9 17.9 28.2 11.8 Dow Jones Industrial Average 2.9 4.8 18.2 15.5 Long GOC Bond 5.3 15.8 13.8 8.1 NASDAQ Composite Price Return 8.0 9.7 27.6 17.9 10 Year GOC Bond 2.8 9.6 9.2 5.6 NASDAQ 100 Price Return 9.5 16.4 37.1 20.1 5 Year GOC Bond 0.9 3.9 4.6 3.8 Russell 1000 5.1 12.5 29.4 17.1 3 Month Canada T-Bill 0.2 0.6 0.9 0.8 Russell 2000 4.1 4.2 21.5 16.9 DEX Bond Universe 2.0 6.6 7.6 5.2 30 Year US Treasury Bond 5.7 20.4 16.2 7.6 CDN$/US$ exchange -0.3 -2.3 -3.1 0.1 10 Year US Treasury Bond 1.8 8.0 6.7 4.4 5 Year US Treasury Bond 0.0 1.6 1.6 2.2 3 Month US T-Bill 0.0 0.0 0.0 0.1
S&P/TSX Composite Group Indices (Total Return) S&P 500 Group Indices (Price) Energy 6.6 22.4 31.8 10.2 Energy 3.2 9.8 20.3 12.8 Materials 11.9 18.3 10.2 -0.3 Materials 3.0 9.1 25.0 12.3 Industrials 13.1 20.8 47.5 21.0 Industrials -0.2 2.6 22.1 16.3 Consumer Discretionary 9.7 18.0 31.6 18.5 Consumer Discretionary 4.8 2.8 19.4 21.5 Consumer Staples 11.8 19.9 25.8 18.2 Consumer Staples 0.4 4.8 14.1 12.7 Health Care -7.0 2.4 14.1 42.3 Health Care 6.9 14.8 29.7 17.4 Financials 8.0 14.3 28.8 12.8 Financials 4.7 6.5 20.1 9.7 Information Technology 11.0 16.3 23.8 -9.4 Information Technology 7.5 13.6 31.7 15.7 Telecommunication Services -0.2 6.6 19.3 17.5 Telecommunication Services 0.2 3.2 6.9 8.8 Utilities 2.4 11.1 17.1 10.0 Utilities 1.3 13.2 16.1 8.2 Income Trust Index 3.8 12.3 20.0 18.9 High Dividend Index 5.7 14.9 23.5 N/A REIT Index 3.1 12.3 19.2 16.5
RBC Canadian Style Total Return Indices RBC US Style Total Return Indices RBC Canada Style Diversified Index 6.1 14.7 29.2 15.7 RBC US Style Diversified Index 4.9 11.6 24.3 20.0 RBC Canada Value Index 7.9 16.1 27.5 17.4 RBC US Value Index 6.8 12.8 27.5 18.8 RBC Canada Growth Index 3.9 17.3 27.6 12.7 RBC US Growth Index 4.0 11.4 25.2 18.1 RBC Canada Momentum Index 7.2 17.1 34.6 16.2 RBC US Momentum Index 4.4 7.3 23.9 18.0 RBC Canada Predictability Index 8.4 13.2 28.0 16.3 RBC US Predictability Index 2.6 7.4 21.5 18.2
Source: RBC Capital Markets Quantitative Research
Fall 2014 6 Strategy: The Investment Outlook
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Fall 2014 7 Strategy: The Investment Outlook – Stock Selections and Updates
Stock Selections and Updates Investment Strategy Equity Selection Committee We continue to emphasize a portfolio approach to stock selection. Our Strategy Focus List includes names that our three distinct approaches to security selection (fundamental, technical, and quantitative analysis) suggest have the best return potential given the industry exposure constraints outlined on page 5. This implies that, through regular revision, several stocks may be removed from the Focus List even though one or more of our various disciplines still suggest that those stocks have good return potential.
Since its inception at year-end 1984, our Strategy Focus List has outperformed the S&P/TSX Composite with a compound annual return of 14.7% compared to 9.2% for the market.* Over the past three months, the Focus List provided a total return of 6.7% compared to 7.8% for the S&P/TSX (before transaction costs).
Exhibit 1 compares the value of a $10,000 investment in the Strategy Focus List at inception and rebalanced quarterly to reflect changes in the list. Also plotted is the value of an equivalent investment in the S&P/TSX Composite.
We show our Fall 2014 Strategy Focus List in Exhibit 3 with specific recommendations summarized on the following pages.
Please see our Fundamental Equity Weightings section, beginning on page 50. Fundamental Equity Weightings assign weightings for stocks in the S&P/TSX according to their relative attractiveness, as determined by our fundamental research analysts only. The success of this technique over time is reflected in its compound annual growth rate of 11.5% since inception in mid-1986, compared to 8.6% for the S&P/TSX over the same period.*
Strategy Focus List Total Pre-Tax Returns Exhibit 1: RBC Capital Markets Strategy Focus List versus S&P/TSX Composite
$600,000 $588,627 $500,000
$400,000
$300,000
$200,000 $136,137 $100,000
$0 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 RBC CM Strategy Focus List S&P/TSX Index
Note: Based on $10,000 invested in December 1984. Source: RBC Capital Markets Strategy Focus List historical returns Exhibit 2: Last Eight Quarters Total Return (%)
Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 Q3/14 RBC Strategy Focus List 4.5 6.1 4.5 2.4 9.6 4.4 4.8 6.7 S&P/TSX Equity Index 3.2 5.6 3.2 0.8 6.4 6.9 3.5 7.8
Source: RBC Capital Markets
* Compound annual growth rate, 1984 to present. Note: Past performance is not necessarily indicative of future performance. Performance returns do not take into consideration management fees or other account expenses, which would lower actual returns.
Fall 2014 8 Strategy: The Investment Outlook – Stock Selections and Updates
Fall 2014 Focus List Stock Selections and Updates Exhibit 3: Strategy Focus List Stocks
Sym. Stock Price as of Weights Weighting Change (08/29/2014) (%) from Last Quarter Agrium Inc. AGU US$94.63 5.0 Alimentation Couche-Tard ATD.B $32.61 2.5 New this quarter ARC Resources Ltd. ARX $31.43 5.0 Increased from 2.5% Bank of Nova Scotia, The BNS $72.04 5.0 Baytex Energy Corporation BTE $48.62 2.5 Brookfield Asset Management Inc. BAM US$47.75 5.0 CAE Inc. CAE $13.44 2.5 Reduced from 5.0% Canadian National Railway Company CNR $78.09 5.0 Increased from 2.5% Canadian Natural Resources Ltd. CNQ $47.39 5.0 Canadian Real Estate Investment Trust REF.UN $48.37 2.5 Canadian Western Bank CWB $40.67 5.0 Dollarama Inc. DOL $92.57 2.5 Husky Energy Inc. HSE $33.10 2.5 Loblaw Companies Ltd. L $54.20 2.5 MacDonald, Dettwiler and Assoc. Ltd. MDA $83.02 2.5 Magna International Inc. MGA US$113.47 5.0 Manulife Financial Corporation MFC $21.95 5.0 Methanex Corporation MEOH US$66.82 2.5 New this quarter Metro Inc. MRU $70.49 5.0 National Bank of Canada NA $52.31 5.0 Suncor Energy Inc. SU $44.63 5.0 TELUS Corporation T $39.65 2.5 Reduced from 5.0% Toromont Industries Ltd. TIH $27.19 5.0 Toronto-Dominion Bank TD $57.25 5.0 Total 100.0
Stocks added to the Fall 2014 Focus List: Alimentation Couche-Tard (2.5%), Methanex Corporation (2.5%) Stocks removed from the Fall 2014 Focus List: Calfrac Well Services Ltd. (2.5%), Labrador Iron Ore Royalty Corp. (2.5%)
Source: RBC Capital Markets Equity Selection Sub-Committee
Agrium Inc. (NYSE: AGU) Andrew D. Wong – Associate Analyst, RBC Dominion Securities Inc. AGRIUM AGU.U 253 DAYS 29AUG13 - 29AUG14 Agrium is a well-diversified crop input company with US$17 billion of AGRIUM Rel. S&P 500 HI-16SEP13 103.000 HI/LO DIFF -17.07% 100.00 CLOSE 89.882 revenues in 2013. The company’s retail division operates North 95.00 90.00 LO-11JUL14 85.415 America’s largest agricultural retail network and has extensive reach in SEP13 OCT13 NOV13 DEC13 JAN14 FEB14 MAR14 APR14 MAY14 JUN14 JUL14 AUG14 12 26 10 24 7 21 6 20 7 22 5 20 6 20 3 17 2 16 2 16 30 15 29 12 26 AGRIUM HI-1APR14 97.970 LO/HI DIFF 20.06% Australia and Canada. Agrium Wholesale has significant operations 96.00 94.00 that produce nitrogen fertilizers, along with sizeable operations that 92.00 90.00 CLOSE 94.630 produce phosphate and potash fertilizers. 88.00 86.00 84.00 82.00 LO-11OCT13 81.600 Agrium has built the most diverse, vertically integrated agricultural
2000 input business. We believe the company has a clear path to strong PEAK VOL. 2993.6 1000 VOLUME 692.7 earnings growth, from both its retail and wholesale businesses, that will translate to robust cash flows with lower volatility. We expect that the retail business will grow through organic improvements (higher margins, proprietary products, and cost efficiencies) and inorganic growth (Viterra, tuck-ins, and bolt-ons). (Continued on next page.)
Fall 2014 9 Strategy: The Investment Outlook – Stock Selections and Updates
We have an Outperform rating on the shares. We arrive at our US$115 price target by attributing an equal weighting to our sum-of-the-parts (SOTP) EV/EBITDA and DCF valuation. Our SOTP EV/EBITDA analysis applies an 8.2x multiple based on a SOTP analysis of our 2015E EBITDA and equity earnings. We apply a 7.0x multiple to the nitrogen segment, a 7.5x multiple to phosphate, and an 8.5x multiple to potash and retail. These multiples are in line with its peers. Our DCF valuation uses a 6.6% real discount rate for nitrogen cash flows through 2024, 8% for nitrogen cash flows beyond 2024, and 9% for the rest of the business.
Potential price target impediments include: 1) unpredictable weather events in North America or international markets can have an adverse effect on demand for agricultural inputs, 2) Agrium has operations in the US, Canada, and other foreign countries, so currency fluctuations can have an effect on earnings, 3) nutrient prices can be volatile and can have a significant effect on Agrium’s profitability, 4) Agrium uses natural gas, sulphur, and other inputs in producing its fertilizer products, so changes in the price of these inputs can affect Agrium’s earnings, and 5) there is the possibility that Agrium may not realize its targeted synergies with respect to its retail acquisitions, so this could result in lower margins than we forecast.
Alimentation Couche-Tard (TSX: ATD.B) Irene Nattel – Analyst, RBC Dominion Securities Inc. ALIMENTATION COUCHE TARD INC SV ATD.B.T 252 DAYS 29AUG13 - 29AUG14 Alimentation Couche-Tard is the third-largest convenience store ALIMENTATION COUCHE TARD INC SV Rel. S&P/TSX COMPOSITE INDEX HI-24MAR14 145.690 LO/HI DIFF 45.69% 140.00 CLOSE 138.672 retailer in North America and is the leader in the Canadian 120.00
LO-29AUG13 100.000 convenience store industry. Since the acquisition of Statoil Fuel & SEP13 OCT13 NOV13 DEC13 JAN14 FEB14 MAR14 APR14 MAY14 JUN14 JUL14 AUG14 12 26 10 25 8 22 6 20 8 22 5 20 6 20 3 17 2 16 2 16 30 15 29 13 27 ALIMENTATION COUCHE TARD INC SV HI-29AUG14 33.110 LO/HI DIFF 75.34% Retail in 2012, ATD is also a leader in convenience store and road 32.00 30.00 transportation fuel in Scandinavia and the Baltic states, with a growing 28.00 26.00 CLOSE 32.610 presence in Poland. Couche-Tard operates a network of more than 24.00 22.00 6,200 stores located across North America, operating in 40 states in
20.00 LO-29AUG13 18.883 3000 the US and all 10 Canadian provinces, while its European network
2000 PEAK VOL. 3174.9 comprises 2,250 stores across Scandinavia, Poland, the Baltics and 1000 VOLUME 1141.2 Russia. In addition, about 4,600 Circle K stores operate in 12 other countries worldwide under licensing agreements, bringing the total number of stores in ATD’s global network to over 13,000.
ATD continues to deliver solid results from underlying operations, although a sharp acceleration in organic earnings growth likely requires an acceleration of economic activity. ATD has been very active as an industry consolidator and has demonstrated an ability to significantly enhance the profitability of acquisitions post-transaction. Although ATD is doing a good job of delivering improving results from existing operations, we expect ATD to remain an active consolidator with potential transactions of varying sizes across geographies. Potential acquisitions are not reflected in our forecasts or price target.
With estimated consolidated free cash flow in the range of $800–900 MM annually over our forecast horizon, ATD is well positioned to continue to aggressively de-lever the balance sheet, or alternatively, fund incremental acquisitions. The acquisition of SFR initially resulted in Net Debt/Capital rising to 63% and Net Debt/Pro Forma EBITDA rising to 2.8x. Assuming no acquisitions, these balance sheet metrics are forecasted to decline to historical lows by the end of F2016, underscoring management’s prior comments and our calculations around potential borrowing capacity of $1.5–2.0b. Adjusted debt/EBITDAR of 2.23:1 at quarter-end was down from prior quarter’s 2.44:1 and down 1.35 turns on EBITDAR relative to the 3.58:1 immediately post-SFR.
Potential catalysts for share price appreciation from current levels will likely be: 1) potential accretive acquisitions; 2) better- than-anticipated margin performance; and 3) actual consumer spending trends that prove more favourable than currently anticipated.
We have a Sector Perform rating on Alimentation Couche-Tard. Taking the midpoint of 18x F2016E EPS ($35) and 11x F2016E EBITDA ($39) drives our price target of $37. The P/E multiple is higher than the long-term average consumer products P/E multiple (15x) while the EV/EBITDA multiple is a premium to the one-year forward trading multiples of peers Casey’s General Stores (NASDAQ:CASY) and CST Brands (NYSE:CST), reflecting anticipation of potential M&A activity. We believe the multiples are also appropriate relative to our c-store coverage universe based on relative investment attributes.
Fall 2014 10 Strategy: The Investment Outlook – Stock Selections and Updates
Impediments to our price target include actual economic performance that is worse than currently anticipated, which could result in earnings and share price that are below expectations. As well, US gas margins that differ significantly from estimates would affect earnings, either positively or negatively. We also note that with the acquisition of Statoil Fuel & Retail, the risk profile of forecasts has changed significantly given the multiple geographies, currencies, economic and operating environments. We also note that potential acquisitions could affect our price target.
ARC Resources Ltd. (TSX: ARX) Michael Harvey, P.Eng. – Analyst, RBC Dominion Securities Inc. ARC RESOURCES LTD ARX.T 252 DAYS 29AUG13 - 29AUG14 ARC Resources Ltd. is the successor company to ARC Energy Trust, ARC RESOURCES LTD Rel. S&P/TSX COMPOSITE INDEX HI-21APR14 115.660 HI/LO DIFF -16.01% 112.00 CLOSE 101.287 which was established in July 1996 through an IPO at $10/unit, that 104.00 LO-5AUG14 97.146 underwent conversion from an income trust to a corporation in SEP13 OCT13 NOV13 DEC13 JAN14 FEB14 MAR14 APR14 MAY14 JUN14 JUL14 AUG14 12 26 10 25 8 22 6 20 8 22 5 20 6 20 3 17 2 16 2 16 30 15 29 13 27 ARC RESOURCES LTD HI-16JUN14 33.680 December 2010. ARC’s current production is approximately 110,000 LO/HI DIFF 34.34% 32.00 boe/d weighted 60% to natural gas and 40% to oil and liquids. The
30.00 CLOSE 31.430 company’s key assets are the northeastern BC Montney, Ante Creek, 28.00 Pembina, Redwater, and its interests in southeastern Saskatchewan 26.00 LO-30AUG13 25.070 and Manitoba. ARC’s focus in 2014 will be toward the Montney at 2000
PEAK VOL. 2340.8 Ante Creek ($215 million) and in northeastern BC ($440 million). The 1000 VOLUME 547.8 next growth phase in northeastern BC will be at Sunrise, as the company plans to spend $120 million in the region to drill 14 wells and begin investing in its planned 60 mmcf/d gas plant (start up late 2015).
We have an Outperform rating on the shares. Our base case price target of $35 is modelled on our NAVPS plus risked upside approach and maps to multiples of 2.1x NAV and 9.3x 2015E DACF. Our estimate of ARC’s NAVPS is based on a long-term crude oil price of $90/bbl and discount rate of 8.5%. We note that ARC’s NAVPS is highly levered to North American natural gas pricing.
The most significant risk to our price target is unexpected changes in crude oil and natural gas prices. The valuation of oil and gas assets is also subject to risk with respect to reservoir performance, including initial production rates, declines, and expected recovery factors. Other risks include the effect of foreign exchange and government legislation as it relates to royalties, income taxes, and environmental policy.
Bank of Nova Scotia, The (TSX: BNS) Darko Mihelic, CFA – Analyst, RBC Dominion Securities Inc. BANK OF NOVA SCOTIA BNS.T 252 DAYS 29AUG13 - 29AUG14 Scotiabank is Canada’s most international bank and active corporate BANK OF NOVA SCOTIA Rel. S&P/TSX COMPOSITE INDEX HI-25NOV13 107.431 HI/LO DIFF -10.45% 104.00 CLOSE 100.417 lender. Notable for a long track record as the low-cost Canadian 100.00 LO-4MAR14 96.208 producer, Scotiabank currently ranks third by market cap and by SEP13 OCT13 NOV13 DEC13 JAN14 FEB14 MAR14 APR14 MAY14 JUN14 JUL14 AUG14 12 26 10 25 8 22 6 20 8 22 5 20 6 20 3 17 2 16 2 16 30 15 29 13 27 BANK OF NOVA SCOTIA HI-31JUL14 74.930 LO/HI DIFF 29.30% assets. The domestic bank contributes around 32% to earnings, 74.00 72.00 70.00 international banking 26%, wealth management 20%, and wholesale 68.00 CLOSE 72.040 66.00 banking 22%. 64.00 62.00 60.00 LO-29AUG13 57.950 We have an Outperform rating and a $77 price target on the shares of 58.00 8000 BNS as we believe the bank’s International segment is poised for PEAK VOL. 9393.9 4000 VOLUME 1572.5 strong asset and earnings growth in 2015/2016, which should help offset a slowing environment in Canada. We believe earnings growth in the International segment will offset a slowing environment in Canada in 2015/2016. In our view, the bank can overcome recent challenges such as higher expenses and loan loss provisions (LLPs) and generate earnings growth of 7-8% YoY in 2015 and 2016.
Our 12-month price target of $77 is based on a P/E multiple of 12.2x our 2016 EPS estimate. The target multiple is at the high end of the target range of 10.5–12.2X that we use for the big Canadian banks, reflecting our view that the bank’s international division provides it a unique growth platform.
(Continued on next page.)
Fall 2014 11 Strategy: The Investment Outlook – Stock Selections and Updates
Risks and impediments to our price target include the health of the overall economy, sustained deterioration in Latin America and in the capital markets environment, and a greater than anticipated effect from off-balance sheet commitments. Additional risks include regulatory and political risk including tax rates, the potential for non-accretive acquisitions and/or related execution risk, deterioration in the Latin American political and economic climate, litigation risk, a rising Canadian dollar, and rising business loan losses.
Baytex Energy Corporation (TSX: BTE) Mark J. Friesen, CFA – Analyst, RBC Dominion Securities Inc. BAYTEX ENERGY CORP BTE.T 252 DAYS 29AUG13 - 29AUG14 Baytex Energy Corp. has successfully transitioned from being an BAYTEX ENERGY CORP Rel. S&P/TSX COMPOSITE INDEX HI-27SEP13 101.666 HI/LO DIFF -15.12%
96.00 CLOSE 94.776 energy trust to being a hybrid growth-yield focused intermediate
90.00 LO-27FEB14 86.291 producer of approximately 86,000 boe/d (including Aurora Oil & Gas). SEP13 OCT13 NOV13 DEC13 JAN14 FEB14 MAR14 APR14 MAY14 JUN14 JUL14 AUG14 12 26 10 25 8 22 6 20 8 22 5 20 6 20 3 17 2 16 2 16 30 15 29 13 27 BAYTEX ENERGY CORP HI-19JUN14 49.880 The company’s reserves and production are oil weighted with a bias to LO/HI DIFF 28.23% 48.00 heavy oil. We expect the company’s growth to come primarily from 46.00 CLOSE 48.620 44.00 three oil plays: the Peace River oil sands, Lloydminster heavy oil, and 42.00 the Eagle Ford play in Texas. 40.00 LO-7FEB14 38.900 6000
4000 We have an Outperform rating on Baytex with a $53/share 12-month PEAK VOL. 6799.2 2000 VOLUME 3258.4 price target. Our price target is based on a 1.0x multiple of our base NAV calculation (discounted at an after-tax rate of 8.5% for comparability purposes), which is in line with the peer group average of 1.0x. The valuation multiple reflects Baytex’s strong management team, asset quality, and ample financial liquidity. Our base NAV reflects value for developed projects, projects in the development and regulatory stage, as well as value for unevaluated lands and corporate adjustments such as cash balances and debt. We apply a risk factor to projects that are early stage or still in the regulatory process.
We believe the company has somewhat less overall risk than some of its peers by virtue of having current production, cash flow, and strong financial liquidity. We identify six key risks to our price target: oil prices, discount rates, foreign exchange rates, regulatory risks, financing risks, and environmental risks.
Brookfield Asset Management Inc. (NYSE: BAM) Neil Downey, CA, CFA – Analyst, RBC Dominion Securities Inc. BROOKFIELD ASSET MANAGEMENT IN BAM.U 253 DAYS 29AUG13 - 29AUG14 Brookfield Asset Management Inc. (BAM) is a specialist asset manager, BROOKFIELD ASSET MANAGEMENT IN Rel. S&P 500 HI-15AUG14 115.557 LO/HI DIFF 19.92% 112.00 CLOSE 113.340 focused on high-quality property, power, and infrastructure assets. 104.00 LO-9JAN14 96.365 The company has more than US$190 billion of assets under SEP13 OCT13 NOV13 DEC13 JAN14 FEB14 MAR14 APR14 MAY14 JUN14 JUL14 AUG14 12 26 10 24 7 21 6 20 7 22 5 20 6 20 3 17 2 16 2 16 30 15 29 12 26 BROOKFIELD ASSET MANAGEMENT IN HI-27AUG14 48.450 LO/HI DIFF 41.96% management (~US$84 billion of which are ‘fee-bearing’). We believe 46.00 BAM now has the structure in place to grow its pool of managed 44.00 42.00 CLOSE 47.750 capital by a meaningful amount over the long term. Key to this 40.00 38.00 strategy has been the creation of three flagship listed funds for 36.00 LO-29AUG13 34.130 property, renewable power, and infrastructure. BAM has maintained a 1600
PEAK VOL. 1933.5 solid financial position, with corporate liquidity of approximately 800 VOLUME 433.2 US$2.4 billion as at Q2/14.
Fee-bearing managed capital is currently US$84 billion, up from US$79 billion at the outset of this year. The growth in fee- bearing AUM does not tell the whole story, as the profitability mix has improved (via shedding lower margin AUM and adding higher fee bearing funds) while at the same time the asset-management franchise is demonstrating significant operating leverage (fees are growing faster than the related costs of service). As such, asset management and services fees are now annualizing at nearly US$750 million (+20% year over year), including only modest incentive distribution receipts. With the net margin at nearly 50% (US$370 million of forecast 2015 income), we believe the fee earning businesses have become very valuable (~US$7 billion).
Our US$52 price target is derived through the application of a 1x multiple to our expected NAV/share estimate one-year hence, implying a multiple of ~18.5x our 2015 operating FFO/share estimate.
Fall 2014 12 Strategy: The Investment Outlook – Stock Selections and Updates
Overall, we believe our target valuation is appropriate in light of BAM’s high-quality asset base and the growing profitability of its asset management platform. We believe there are few if any companies that are truly comparable to Brookfield Asset Management, and we continue to view BAM’s shares as a ‘core holding’. Based upon risk-adjusted relative return prospects, we rate BAM’s shares Outperform.
Impediments to our earnings estimates and price target include rising interest rates, which might negatively affect earnings at the company’s home-building operations and reduce the value of its long-dated assets (commercial properties, power generation, transmission, and infrastructure assets), a hard cyclical downturn in the commercial property sector (BAM’s largest industry exposure), and any economic shock that causes lending spreads to widen and/or loan-to-value ratios to decline, which could have a notable effect on BAM’s weighted-average costs of capital (and hence, its equity value).
CAE Inc. (TSX: CAE) Steve Arthur, CFA – Analyst, RBC Dominion Securities Inc. CAE CAE.T 252 DAYS 29AUG13 - 29AUG14 CAE is a global leader in flight-simulation technology and pilot-training CAE Rel. S&P/TSX COMPOSITE INDEX HI-4MAR14 122.347 120.00 LO/HI DIFF 27.44% CLOSE 97.394 services. 110.00
100.00 LO-21OCT13 96.003 SEP13 OCT13 NOV13 DEC13 JAN14 FEB14 MAR14 APR14 MAY14 JUN14 JUL14 AUG14 12 26 10 25 8 22 6 20 8 22 5 20 6 20 3 17 2 16 2 16 30 15 29 13 27 CAE HI-4MAR14 15.540 Over the past two years CAE has been actively addressing a number of LO/HI DIFF 41.79% 15.00 end-market and operational challenges: military budget cuts and order 14.00 CLOSE 13.440 delays, softness in European demand, and integration of Oxford 13.00 Aviation. After several quarters of restructuring and relocating 12.00
11.00 LO-7OCT13 10.960 simulators, we believe much of that work is now complete. We should 3000
2000 see these redeployed simulators (approximately 20 full flight PEAK VOL. 3421.3 1000 VOLUME 481.5 simulators) begin contributing materially to revenue and margins in F2H/14E and beyond. Our forecasts call for continued margin expansion in civil over the next several quarters to the high teens, from 16% last quarter.
In coming quarters, we expect the shares to continue to react positively on growing evidence of margin improvement and recommend that investors build positions to capitalize on that.
Longer-term, we see a number of positive secular-growth drivers in the airline industry. These include: 1) a doubling of global commercial airline fleet sizes over the next 20 years requiring a disproportionate number of new pilots, air crew, and maintenance personnel, 2) aging pilot and air crew demographics, 3) new aircraft platform introductions, and 4) new regulations and training standards.
In the military segment, we continue to view simulation technology as part of the longer-term solution to declining budgets. Simulation training represents a practical alternative to live training exercises and maintains force readiness at much lower cost (5–10% simulation versus live). Our forecasts incorporate a measure of expected near-term declines (i.e., expectations of flat to modest 1–3% declines), largely on the deferral of many awards by the respective governments. Over time, we expect budgetary declines to be offset by increased simulation-based training penetration in militaries worldwide.
CAE shares have strengthened YTD, though remain attractively valued at under 15x C2015E EPS. We maintain our Outperform rating and $17 target price. We see $1–3/share potential upside to our target on better than expected margin improvement in the near term and/or multiples expanding toward aerospace peers. The key impediments to achieving our forecasts and target price are slower than expected improvement to margins, deterioration in air passenger traffic demand, more rapid declines to military budgets, and contract deferrals.
Fall 2014 13 Strategy: The Investment Outlook – Stock Selections and Updates
Canadian National Railway Company (TSX: CNR) Walter Spracklin, CFA – Analyst, RBC Dominion Securities Inc. CDN NATIONAL RAILWAY CNR.T 252 DAYS 29AUG13 - 29AUG14 Canadian National Railway is our favourite name in the rail space due CDN NATL RAILWAY CO. Rel. S&P/TSX COMPOSITE INDEX HI-29AUG14 127.162 LO/HI DIFF 28.70% 120.00 CLOSE 127.162 to the company’s best-in-class execution capabilities, strong growth 110.00
100.00 LO-9SEP13 98.804 prospects, and solid management team. SEP13 OCT13 NOV13 DEC13 JAN14 FEB14 MAR14 APR14 MAY14 JUN14 JUL14 AUG14 12 26 10 25 8 22 6 20 8 22 5 20 6 20 3 17 2 16 2 16 30 15 29 13 27 CDN NATL RAILWAY CO. HI-29AUG14 78.370 LO/HI DIFF 58.90% 75.00 Significant earnings growth potential creates upside in CNR shares: We 70.00
65.00 CLOSE 78.090 expect CNR’s strategy of balancing operating and service excellence to 60.00 drive meaningful earnings growth in the near term, and recent market 55.00
50.00 LO-30AUG13 49.320 share gains and superior operating performance reinforce our outlook. 3000 In light of the company’s strong near-term prospects, we expect the 2000 PEAK VOL. 4106.1 VOLUME 1189.4 1000 shares to benefit from a positive multiple re-rating as the market gains an appreciation for the earnings potential afforded by CNR’s best-in- class execution capabilities and new volumes coming on line. We rate CNR shares Outperform.
Our $78 price target is based on a 19.0x P/E multiple applied to our 2015 estimate. This multiple is above the peer average, as we view CNR to be a best-in-class operation with a solid growth pipeline, which warrants a premium valuation. Based on CNR’s relative return to our price target compared to the other class-1 railroads in our coverage space, we rate CNR shares Outperform.
Impediments to achieving our estimates and price target include extreme fluctuations in fuel prices, unusual weather conditions that could affect grain crops or railway operating efficiencies, and weaker economic conditions than currently envisioned.
Canadian Natural Resources Ltd. (TSX: CNQ) Greg Pardy, CFA – Analyst, RBC Dominion Securities Inc. CDN NATURAL RESOURCE CNQ.T 252 DAYS 29AUG13 - 29AUG14 Canadian Natural Resources (CNQ) has become a dominant CDN NATL RES Rel. S&P/TSX COMPOSITE INDEX HI-8JUL14 125.806 LO/HI DIFF 34.59% 120.00 CLOSE 117.581 independent in western Canada, with roots that stretch back to 1988, 110.00 100.00 LO-12NOV13 93.476 when Murray Edwards joined forces with Allan Markin to create a SEP13 OCT13 NOV13 DEC13 JAN14 FEB14 MAR14 APR14 MAY14 JUN14 JUL14 AUG14 12 26 10 25 8 22 6 20 8 22 5 20 6 20 3 17 2 16 2 16 30 15 29 13 27 CDN NATL RES HI-4JUL14 49.570 LO/HI DIFF 56.22% junior producer with a focus on medium- and low-risk development 48.00 46.00 44.00 opportunities. Through successive stages of growth, which have 42.00 CLOSE 47.390 40.00 involved both property and corporate acquisitions, CNQ has emerged 38.00 36.00 as the second-largest natural gas producer and largest heavy oil 34.00 32.00 LO-4OCT13 31.730 10000 producer in western Canada. Over the years, CNQ has made a series of 8000 6000 PEAK VOL. 10512.8 larger strategic acquisitions. CNQ’s production is over two-thirds oil 4000 VOLUME 1651.6 2000 weighted and flows from western Canada, the UK North Sea, and offshore West Africa (Côte d’Ivoire and Gabon). CNQ’s main growth driver is its Horizon (100% working interest) oil sands mining project.
We have an Outperform rating on Canadian Natural Resources Ltd. Our one-year price target is $53 per share. Our price target reflects an equal weighting toward a multiple of 1.0x our base NAV of $42.47 per share and a 2015E mid-cycle, debt-adjusted, cash flow multiple of 7.8x. The above-average multiples that we have chosen reflect CNQ’s superior execution capability, production growth visibility, improving balance sheet, and enormous free cash flow generation.
The most significant risks to our price target are unexpected changes in crude oil and natural gas prices. The ability to replace production and reserves in a cost-effective manner on a per share basis also poses a risk to investors. The valuation of oil and gas assets is subject to risk with respect to reservoir performance, including production rates and expected recovery factors. Other risks include the effect of foreign exchange and government legislation as it relates to royalties, income taxes, and environmental policy.
Fall 2014 14 Strategy: The Investment Outlook – Stock Selections and Updates
Canadian Real Estate Investment Trust (TSX: REF.UN) Neil Downey, CA, CFA – Analyst, RBC Dominion Securities Inc. CDN REIT REF.UN.T 252 DAYS 29AUG13 - 29AUG14 Canadian REIT (CREIT) holds a diversified portfolio of retail, office, and CDN REIT Rel. S&P/TSX COMPOSITE INDEX HI-18OCT13 101.162 HI/LO DIFF -9.24% 100.00 CLOSE 96.156 industrial income-producing real estate located in nine provinces and 96.00
LO-9JUL14 91.810 92.00 one state. The REIT owns interests in more than 180 properties, with SEP13 OCT13 NOV13 DEC13 JAN14 FEB14 MAR14 APR14 MAY14 JUN14 JUL14 AUG14 12 26 10 25 8 22 6 20 8 22 5 20 6 20 3 17 2 16 2 16 30 15 29 13 27 CDN REIT HI-19AUG14 49.700 LO/HI DIFF 23.82% approximately 21 million sf of owned gross leasable area. The tenant 48.00 base is also highly diversified, as no tenant accounts for more than 6% 46.00 CLOSE 48.370 of total revenues. CREIT has one of the longer track records of any 44.00 Canadian REIT (TSX-listed in September 1993). CREIT’s development 42.00 LO-8OCT13 40.140 pipeline (active and future) exceeds $500 million (at its share) and 300 200 PEAK VOL. 402.9 encompasses more than 3 million sf of retail and industrial properties. VOLUME 49.5 100 Over the long term, CREIT has an exceptional track record of delivering unitholder returns (estimated 15-year IRR in excess of 15%). We believe that CREIT’s low leverage (approximately 40% LTV) and low payout ratio (nearly 70% of 2014 estimated AFFO, equating to approximately $60 million of annual cash retention before drip participation) provide the REIT with greater than average flexibility to execute its business plan, regardless of the capital market ‘climate’. By way of example, CREIT was the only REIT to provide investors with an increase in its per unit distribution in 2008, 2009, and 2010 (during and in the aftermath of the Global Financial Crisis). Recent distribution increases include +4% (April 2013), +6% (May 2013) and +6% (February 2014).
Looking to the future, we note that CREIT has an active pipeline that includes 0.6 million sf currently under development, with an additional 2.5 million sf for future development. As a result, the full approximately 3.1 million sf pipeline could have a future completed value of $540 million.
Our $50 price target is derived via the application of ~5% premium to our NAV per unit estimate one year hence, which implies a 19x multiple to our 2015 AFFO/unit estimate. Our target valuation metrics represent modest to moderate premiums to the average target multiples applied to the Canadian commercial-property REITs, which we believe is warranted by CREIT’s low financial leverage, longer than average history, proven management, high-quality (and improving) property portfolio, relatively large market capitalization, and overall franchise value. CREIT remains one of our core REIT holdings. Based on relative risk and total return expectations, we reiterate our Outperform rating.
Impediments to the achievement of our price objectives primarily relate to the risks associated with the ownership of real property, which include but are not limited to general economic conditions, local real estate markets, credit risk of tenants, supply and demand for leased premises, competition from other leased premises, the trust’s above-average exposure to near- term lease expirations, and interest rate fluctuations.
Canadian Western Bank (TSX: CWB) Darko Mihelic, CFA – Analyst, RBC Dominion Securities Inc. CANADIAN WESTERN BANK CWB.T 252 DAYS 29AUG13 - 29AUG14 Canadian Western Bank is the seventh-largest bank in Canada by CDN WESTERN BANK Rel. S&P/TSX COMPOSITE INDEX HI-13DEC13 125.217 LO/HI DIFF 25.22% 120.00 CLOSE 112.131 market capitalization. The Edmonton-based bank derives over 80% of 110.00 LO-29AUG13 100.000 its revenues by generating net interest income, and over 75% of its SEP13 OCT13 NOV13 DEC13 JAN14 FEB14 MAR14 APR14 MAY14 JUN14 JUL14 AUG14 12 26 10 25 8 22 6 20 8 22 5 20 6 20 3 17 2 16 2 16 30 15 29 13 27 CDN WESTERN BANK HI-21AUG14 43.300 LO/HI DIFF 52.09% loan portfolio is focused on commercial lending and equipment 42.00 40.00 financing and leasing. 38.00 36.00 CLOSE 40.670 34.00
32.00 We have a Sector Perform rating and a 12-month price target of $43
30.00 LO-29AUG13 28.470 per share. We believe the bank’s current valuation reflects our 1000 expected above-average EPS growth in 2015 and 2016. We believe PEAK VOL. 1319.7 500 VOLUME 253.8 that the bank’s higher exposure to commercial lending and to Western Canada should support a better earnings growth profile relative to peers in 2015 and 2016, when we expect margin pressure will moderate. We expect loan growth to be a key differentiator for CWB as loan and revenue growth becomes more challenging for the industry. We are forecasting loan growth of 10% in 2015 and 2016, which compares to 12% growth in 2013, and expected organic loan growth in the mid-single digits for peers. (Continued on next page.) Fall 2014 15 Strategy: The Investment Outlook – Stock Selections and Updates
Our 12-month price target of $43 is based on a P/E multiple of 13.0x our 2016E EPS estimate. The target multiple is above the target range of 10.5x-12.2x we use for the big Canadian banks, reflecting a higher loan growth outlook.
Risks to our price target include the health of the overall economy, particularly the economies of Alberta and British Columbia, and sustained commodity price declines or volatility, particularly in oil and natural gas. Additional risks include political or regulatory risk including tax rates, an unexpected acquisition or change to strategy or management, a change in the competitive environment in western Canada, a sustained slowdown in real estate or commercial lending, and rising loan losses.
Dollarama Inc. (TSX: DOL) Irene Nattel – Analyst, RBC Dominion Securities Inc. DOLLARAMA INC DOL.T 252 DAYS 29AUG13 - 29AUG14 Although the Canadian retail segment boasts several industry-leading DOLLARAMA INC Rel. S&P/TSX COMPOSITE INDEX HI-23OCT13 114.531 HI/LO DIFF -15.37% 110.00 CLOSE 100.354 performers, Dollarama is the only true organic growth story in the 105.00
100.00 LO-25FEB14 96.929 Canadian large-cap retail sector. Founded in 1994, the company has SEP13 OCT13 NOV13 DEC13 JAN14 FEB14 MAR14 APR14 MAY14 JUN14 JUL14 AUG14 12 26 10 25 8 22 6 20 8 22 5 20 6 20 3 17 2 16 2 16 30 15 29 13 27 DOLLARAMA INC HI-9JUN14 96.670 grown to over 900 locations across Canada and is Canada’s leading LO/HI DIFF 31.72% 95.00
90.00 dollar store operator. Dollarama’s mission is simple: deliver value for
85.00 CLOSE 92.570 its customers, and the company’s goal is to exceed customer’s 80.00 expectations around the quality and variety of products found at
75.00 LO-4SEP13 73.390 Dollarama at seven price points ranging from $0.69 to $3.00. In
600 PEAK VOL. 842.5 Q1/F15, 62% of sales were generated by products priced higher than 300 VOLUME 380.2 $1.00, which was up from 58% in Q1/F14 and reflected maturation of the $2.50 and $3.00 price points. Dollarama’s key competencies begin with proprietary sourcing of product, with 51% of purchases in F14 sourced directly from overseas, and an estimated 85–90% of Dollarama’s offering is control brands and private label, and only 10–15% national brands.
Dollarama consistently delivers industry-leading revenue growth and profitability, with impressive EBITDA margin of 19.5% in F14, which was a gap of almost 500 basis points relative to its closest North American peer. Our forecasted annual EPS growth of 22% in F14-17 is driven by 1) same stores sales growth of 4–5%, 2) unit growth in the range of 8-9%, 3) operating leverage, 4) efficiency initiatives to drive EBITDA margin growth, and 5) consistent share buyback. In our view, Dollarama’s substantial free cash flow is likely to be deployed to a combination of annual dividend increases and share repurchases, with the company recently renewing its NCIB in conjunction with Q1 results. In our view, no other Canadian retailer offers comparable, consistent growth and earnings visibility in the current challenging retail environment. We believe that Dollarama’s extreme value positioning as a retailer substantially moderates the risk of near-term consumer spending concerns.
We have an Outperform rating on Dollarama. Our $114 price target is based on 20x LTM to mid-F2017E EPS and 14x LTM to mid-F2017E EBITDA, which are at the high end of the range of top-tier, growth-focused, large-cap, Canadian, consumer names and US dollar store retailers, and in our view is warranted by its above-average sales, earnings, and free cash flow growth. Impediments to our price target include a market shift to more cyclical names impeding valuation expansion and results that do not meet consensus expectations. Key risks that influence our forecasts include increased competition, minimum wage rate increases, a sustained decline in the Canadian dollar, and sustained product cost inflation.
Fall 2014 16 Strategy: The Investment Outlook – Stock Selections and Updates
Husky Energy Inc. (TSX: HSE) Greg Pardy, CFA – Analyst, RBC Dominion Securities Inc. HUSKY ENERGY INC HSE.T 252 DAYS 29AUG13 - 29AUG14 Having been a private company since 1987, Husky returned to public HUSKY ENERGY INC Rel. S&P/TSX COMPOSITE INDEX HI-2JUN14 106.785 105.00 HI/LO DIFF -16.24% 100.00 CLOSE 90.068 markets in August 2000 via a reverse takeover through its merger with 95.00 90.00 LO-27AUG14 89.439 Renaissance Energy. Husky’s upstream production is roughly 70% SEP13 OCT13 NOV13 DEC13 JAN14 FEB14 MAR14 APR14 MAY14 JUN14 JUL14 AUG14 12 26 10 25 8 22 6 20 8 22 5 20 6 20 3 17 2 16 2 16 30 15 29 13 27 HUSKY ENERGY INC HI-22APR14 37.310 LO/HI DIFF 30.91% crude oil weighted and flows from western Canada, the Grand Banks 36.00 (Terra Nova and White Rose), and China (Wenchang and Liwan). In 34.00 CLOSE 33.100 2007, Husky acquired Valero Energy’s 160,000 b/d Lima refinery and 32.00 entered into a 50/50 integrated joint venture with BP, combining its 30.00 LO-7OCT13 28.500 Sunrise in-situ oil sands with BP’s 160,000 b/d Toledo, Ohio refinery. 2000
PEAK VOL. 2477.4 The company’s major shareholders are Li Ka-shing and Hutchison 1000 VOLUME 553.3 Whampoa Limited (of which Mr. Li Ka-shing is chairman), which collectively own roughly 69.5% of the company.
We have an Outperform rating on Husky Energy Inc. Our one-year target price is $42 per share. Our price target reflects an equal weighting toward a multiple of 1.0x our base NAV of $32.46 per share and an implied 2015E debt-adjusted cash flow multiple of 8.3x. The multiples that we have chosen reflect Husky’s strong balance sheet and capital discipline, improving long- term production visibility, and a strategic game plan which has taken shape.
The most significant risks to our price target are unexpected changes in crude oil and natural gas prices. The ability to replace production and reserves in a cost-effective manner on a per share basis also poses a risk to investors. The valuation of oil and gas assets is subject to risk with respect to reservoir performance, including production rates and expected recovery factors. Husky is also exposed to downstream margin volatility. Other risks include the effect of foreign exchange and government legislation as it relates to royalties, income taxes, and environmental policy.
Loblaw Companies Ltd. (TSX: L) Irene Nattel – Analyst, RBC Dominion Securities Inc. LOBLAWS L.T 252 DAYS 29AUG13 - 29AUG14 Loblaw Companies Limited is Canada’s largest food distributor and is a LOBLAWS Rel. S&P/TSX COMPOSITE INDEX HI-10SEP13 102.506 HI/LO DIFF -17.93% 100.00 95.00 CLOSE 97.453 leading provider of drugstore, general merchandise, and financial 90.00 85.00 LO-19FEB14 84.129 products and services. Loblaw and its franchisees currently operate over SEP13 OCT13 NOV13 DEC13 JAN14 FEB14 MAR14 APR14 MAY14 JUN14 JUL14 AUG14 12 26 10 25 8 22 6 20 8 22 5 20 6 20 3 17 2 16 2 16 30 15 29 13 27 LOBLAWS HI-31JUL14 54.250 1,050 stores across Canada, and according to The Globe and Mail’s Top LO/HI DIFF 32.90% 52.00 1,000 Rankings, Loblaw, together with its franchisees, is one of Canada’s 50.00 48.00 CLOSE 54.200 larger private-sector employers with more than 134,000 full-time and 46.00 44.00 part-time employees. On a weekly basis, Loblaw serves more than 14
42.00 LO-12DEC13 40.820 million customers across Canada, representing approximately 40% of 6000
PEAK VOL. 7893.7 the Canadian population. On March 23, 2014, Loblaw completed the 3000 VOLUME 747.6 previously announced acquisition of Shoppers Drug Mart for $12.4 billion. The combination of Shoppers Drug Mart, the largest drug store retailer in Canada, and Loblaw solidifies Loblaw’s position as the largest retailer in Canada with combined store count in excess of 2,300, annualized revenues in excess of $44 billion, and combined annualized EBITDA in excess of $3.7 billion.
Since late 2012, Loblaw has become extremely proactive in terms of shareholder value creation: 1) dividend increased in Q4/12 by 4%, in Q2/13 by 9%, and in Q2/14 by 2%, 2) in Q2/13, it created and had an IPO for Choice Properties REIT, and 3) in Q1/14, the acquisition of Shoppers Drug Mart. At the same time, through 2013 and into 2014, Loblaw appears to be making significant strides toward regaining revenue momentum—despite the highly competitive retail climate, Loblaw has consistently delivered industry-leading same store sales growth.
Focus for 2014 is on accelerating the SAP rollout to stores with the objective of successfully implementing SAP in stores representing a majority of sales in 2014 and working through the preliminary stages of the Shoppers integration. Looking to 2015, a combination of 1) accelerating underlying earnings growth at Loblaw as incremental expenses related to IT upgrades taper off, and as Loblaw begins to realize benefits from the multi-year IT and supply chain rebuild and upgrade,
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Fall 2014 17 Strategy: The Investment Outlook – Stock Selections and Updates
2) accelerating earnings growth from Shoppers as headwinds from regulatory reform stabilize, 3) anticipated synergies of $150– 200 million from the proposed Shoppers transaction, and 4) pro forma free cash flow in excess of $1 billion annually applied to debt repayment should drive forecasted economic earnings accretion of 19% in 2014 and 23% in 2015, although estimated IFRS reported EPS is likely to be diluted in 2014E due to stepped-up amortization expense related and short-term negative effect of inventory value adjustment to the Shoppers acquisition.
We have an Outperform rating on Loblaw Companies Ltd. Our $62 target on Loblaw is generated using an SOTP, EBITDA-based, valuation methodology, which in our view is the most appropriate way to value Loblaw given 1) public market value of its holding in Choice Properties Real Estate Investment Trust (TSX: CHP.UN), and 2) noise in our forecasted numbers due to stepped-up, non-cash, amortization expense related to the proposed Shoppers transaction. We apply an 8.5x EBITDA multiple to forecasted mid-2016 adjusted EBITDA of $3.5 billion and take the value of Choice Properties at a target of $11, less a 20% holding company discount.
As Loblaw executes upon its renewal program, investment by management in pricing or other key expense factors or delays in realizing organizational realignment could have a negative effect on the company’s earnings growth rate and share price going forward and our price target. Failure to realize forecasted synergies from the Shoppers Drug Mart acquisition could also negatively affect share price and our price target.
MacDonald, Dettwiler and Associates Ltd. (TSX: MDA) Steve Arthur, CFA – Analyst, RBC Dominion Securities Inc. MACDONALD DETTWILER & ASSOCI MDA.T 252 DAYS 29AUG13 - 29AUG14 MacDonald, Dettwiler and Associates Ltd. (MDA) is the global market MACDONALD DETTWILER Rel. S&P/TSX COMPOSITE INDEX HI-5SEP13 104.762 HI/LO DIFF -21.23% 99.00 CLOSE 84.113 leader in commercial communications satellites with over 30% market 90.00 LO-5AUG14 82.526 share. We see a number of growth drivers ahead, which should deliver SEP13 OCT13 NOV13 DEC13 JAN14 FEB14 MAR14 APR14 MAY14 JUN14 JUL14 AUG14 12 26 10 25 8 22 6 20 8 22 5 20 6 20 3 17 2 16 2 16 30 15 29 13 27 MACDONALD DETTWILER HI-9JUN14 91.200 our base case expectation of nearly 9% revenue growth and LO/HI DIFF 22.15% 90.00 88.00 approximately 12–15% earnings growth over the next several years. 86.00
84.00 CLOSE 83.020 82.00 80.00 In particular, we expect revenue, earnings, and share price to be 78.00 76.00 LO-27JAN14 74.660 driven by: 1) increased order intake of commercial communications 600 satellites and sub-systems (we are tracking over 35 satellite 400 PEAK VOL. 729.5 200 VOLUME 43.4 opportunities targeting launch over the next several years that have yet to be awarded), 2) further penetration into new markets (i.e., the US Government market—approximately half the global satellite market – and the small satellite market), 3) continued success with emerging market operators, 4) expanded service and product offerings in its surveillance and intelligence business, and 5) strategic acquisitions.
Industry consultants expect over 20 satellite orders per year from commercial satellite operators over the coming decade, which would be consistent with recent historical averages. Of these, we believe MDA should maintain roughly its one-third share. In addition, the US Government represents a large, long-term opportunity, in our view. Faced with growing budgetary constraints, US agencies need to consider lower-cost commercial options, thereby opening the door for MDA (SS/L) to bid commercial programs directly or to sell added capability to satellite operators that in turn sell services to the government. Emerging markets represent a high-growth area for communications satellites. MDA has had success in these regions, and we expect a higher level of bid activity.
MDA has a solid balance sheet and generates strong cash flows from operations. Net debt/EBITDA now stands at 1.9x and should move lower in coming quarters. MDA currently pays a dividend of $1.30 per share (close to a 1.6% yield).
Despite share price strength in recent months, MDA shares are attractively valued at roughly 13x 2015E EPS. We maintain our Outperform rating and $94 target price. The key impediment to achieving our forecasts and target price is a slower than expected flow of commercial communications satellite orders, as required to replenish the backlog and drive revenue in 2014 and beyond.
Fall 2014 18 Strategy: The Investment Outlook – Stock Selections and Updates
Magna International Inc. (NYSE: MGA) Steve Arthur, CFA – Analyst, RBC Dominion Securities Inc. MAGNA INTL MGA.U 253 DAYS 29AUG13 - 29AUG14 As a top-five global auto parts supplier, we see a number of drivers for MAGNA INTL INC Rel. S&P 500 HI-8AUG14 121.340 120.00 LO/HI DIFF 32.89% 110.00 CLOSE 119.123 Magna’s earnings growth and share price: 1) growth in global auto
100.00 LO-20DEC13 91.307 volumes, with moderate growth in North America, recovering volumes SEP13 OCT13 NOV13 DEC13 JAN14 FEB14 MAR14 APR14 MAY14 JUN14 JUL14 AUG14 12 26 10 24 7 21 6 20 7 22 5 20 6 20 3 17 2 16 2 16 30 15 29 12 26 MAGNA INTL INC HI-27AUG14 114.480 LO/HI DIFF 51.11% in Europe, and continued growth in developing regions, 2) continued, 110.00 105.00 gradual margin improvement in Europe, 3) expansion in emerging 100.00 95.00 CLOSE 113.470 markets, which is an area where the company has historically been 90.00 85.00 under invested, 4) a strong balance sheet that we expect will be put to 80.00 LO-12DEC13 75.760 work with acquisitions, dividend increases, and/or buybacks, and 5) 1800
1200 PEAK VOL. 2064.9 attractive valuation levels. 600 VOLUME 343.5 US auto sales have largely completed their recovery from 2009 lows. While the pace of growth has moderated, we remain comfortable with our full-year 2014 forecast of 16.2 million units (up from 15.6 million in 2013), as the US returns to a long-term trend line of 16–17 million units annually.
European operations continue to be a focus for both Magna management and investors. Magna reported solid progress in operational improvements over the past two years, now with ten consecutive quarters of profitability. Sales and production appear to have started a modest recovery, which we expect will continue in the coming years. Coupled with operational improvements, we expect margins in the region to continue to move higher—almost doubling to around 4.5% by 2016E.
Magna continues to have a very strong balance sheet, with net cash of ~$650 million. The company is working to deploy excess cash, with a target leverage ratio of 1.0–1.5x adjusted debt to adjusted EBITDAR by the end of 2015E. We forecast this could represent up to $5.0 billion in capital to deploy on acquisitions and/or share buybacks. This is on top of a capital spending plan of nearly $1.4 billion annually and annual dividend increases (which increased 19% for Q1/14).
Magna’s shares have performed very well over the past two or more years and were supported by positive end markets, strong financial performance, and expanding industry multiples. However, the shares continue to trade at 6.9x 2015E EBITDA, which is slightly above the peer-group average of 6.4x, which we see as appropriate. We rate Magna shares Outperform with a US$123 target price. The key impediments to achieving our forecasts and target price are industry volumes, guided by macroeconomic factors. Stalled growth in North America and/or continued declines in Europe would negatively affect our outlook and expectations for the share price.
Manulife Financial Corporation (TSX: MFC) Darko Mihelic, CFA – Analyst, RBC Dominion Securities Inc. MANULIFE FINANCIAL CORP. MFC.T 252 DAYS 29AUG13 - 29AUG14 Manulife is Canada’s largest insurer, a leading global provider of MANULIFE FINANCIAL CORP. Rel. S&P/TSX COMPOSITE INDEX HI-9JAN14 119.383 LO/HI DIFF 21.54% 114.00 CLOSE 103.942 financial protection, and wealth management products and services. 108.00 102.00 LO-19SEP13 98.225 In 2013, Manulife generated 28% of core earnings in Asia, 27% in SEP13 OCT13 NOV13 DEC13 JAN14 FEB14 MAR14 APR14 MAY14 JUN14 JUL14 AUG14 12 26 10 25 8 22 6 20 8 22 5 20 6 20 3 17 2 16 2 16 30 15 29 13 27 MANULIFE FINANCIAL CORP. HI-31JUL14 22.530 Canada, and 45% in the United States (excluding the corporate and LO/HI DIFF 33.63% 22.00
21.00 other segment). Manulife is among the larger life insurers globally as 20.00 CLOSE 21.950 measured by market capitalization. 19.00
18.00
17.00 LO-9OCT13 16.860 We have an Outperform rating on MFC’s shares. The current P/BV
6000 multiple leaves upside potential, in our view, given longer term ROE PEAK VOL. 9082.3 3000 VOLUME 3249.9 possibilities in a better environment. We believe MFC is on track to achieve its 2016 earnings and ROE targets, and in a better environment for interest rates and equity markets, it is well positioned to deliver reported earnings that exceed these objectives. We believe prior capital-related actions (e.g., adding reinsurance, the sale of a reinsurance business, and the raising of debt and preferred shares) are now in the past. If our estimates are realized and MFC’s de-leveraging is accelerated, we believe the lifeco is well positioned for strong organic growth and if the right opportunity became available, potential acquisitions. Investors in Manulife’s shares should benefit from less volatile earnings than in recent years as earnings sensitivities to movements in equity markets and interest rates have declined significantly. (Continued on next page.) Fall 2014 19 Strategy: The Investment Outlook – Stock Selections and Updates
Our 12-month price target of $24 per share is based on a P/E multiple of 12.5x on our core 2015 EPS estimate. Our price target implies a price to book multiple of 1.6x book value, which we view as fair given our ROE expectations of ~11% in 2014/2015.
Risks to our price target include persistently low interest rates, deteriorating equity markets, adequacy of actuarial assumptions, changes to accounting and regulatory rules, acquisition and execution risk, unfavourable political and/or economic developments in Asia, and appreciation in the Canadian dollar.
Methanex Corporation (NASDAQ: MEOH) Robert Kwan, CFA – Analyst, RBC Dominion Securities Inc. METHANEX CORP MEOH.U 253 DAYS 29AUG13 - 29AUG14 Methanex is a global supplier of methanol, a liquid chemical primarily METHANEX CP Rel. S&P 500 HI-6MAR14 135.688 LO/HI DIFF 36.62% 130.00 120.00 CLOSE 116.353 produced from natural gas, which the company sells to international 110.00 100.00 LO-30AUG13 99.314 markets. The shares have an attractive total return profile (i.e., yield SEP13 OCT13 NOV13 DEC13 JAN14 FEB14 MAR14 APR14 MAY14 JUN14 JUL14 AUG14 12 26 10 24 7 21 6 20 7 22 5 20 6 20 3 17 2 16 2 16 30 15 29 12 26 METHANEX CP HI-7MAR14 73.430 LO/HI DIFF 58.60% plus dividend growth) and are attractive for investors seeking a pro- 70.00
65.00 cyclical dividend growth story. With solid forecast demand growth 60.00 CLOSE 66.820 from its use as a crude oil alternative (e.g., gasoline blending, 55.00 methanol-to-olefins) coupled with a modest supply addition outlook 50.00 LO-29AUG13 46.300 that mostly includes higher marginal cost capacity, the long-term 4000 3000 methanol market is attractive. Potential upside catalysts include 2000 PEAK VOL. 4517.7 VOLUME 317.9 1000 higher methanol prices, a valuation bump for the new Geismar facilities if management moves forward with the creation of an MLP, and additional favourable capital allocation activities including a greater-than-expected dividend increase and/or an additional share buyback.
Our price target for the shares is US$70.00 and our ranking is Sector Perform. Our price target is based on a 6.5x EV/EBITDA multiple applied to our forward EBITDA estimate. The multiple is a slight premium to historical valuations when methanol prices have been at current levels, but we believe a premium is warranted for management’s focus on capital allocation, which we see as being rewarded in the current market environment.
Impediments to our price target include: (1) political risk in jurisdictions where Methanex has facilities (e.g., Egypt); (2) availability and pricing of natural gas feedstock supply; (3) a sudden and severe slowdown of the Chinese economy, which currently accounts for roughly 40% of global methanol demand; and (4) the Gulf Coast relocation projects proceeding on materially different economics to those included in our valuation.
Metro Inc. (TSX: MRU) Irene Nattel – Analyst, RBC Dominion Securities Inc. METRO INC. SV MRU.T 252 DAYS 29AUG13 - 29AUG14 Metro Inc. is a leading food and pharmaceutical retailer in Quebec and METRO INC. SV Rel. S&P/TSX COMPOSITE INDEX HI-30AUG13 100.986 HI/LO DIFF -19.24% 96.00 CLOSE 85.478 Ontario. Metro and its franchisees operate over 800 food stores under 88.00 LO-3JUL14 81.551 multiple banners, including Metro, Metro Plus, Super C, Food Basics, SEP13 OCT13 NOV13 DEC13 JAN14 FEB14 MAR14 APR14 MAY14 JUN14 JUL14 AUG14 12 26 10 25 8 22 6 20 8 22 5 20 6 20 3 17 2 16 2 16 30 15 29 13 27 METRO INC. SV HI-19AUG14 73.320 LO/HI DIFF 22.20% and over 250 drugstores under the Brunet, The Pharmacy, and Drug 72.00 70.00 Basics banners. 68.00 CLOSE 70.490 66.00 64.00 Metro has a long track record of delivering industry-leading 62.00 LO-13NOV13 60.000 profitability through rigorous focus on cost management and ongoing 1400 emphasis on in-store offerings. The recent launch of the Metro & Moi PEAK VOL. 1672.5 700 VOLUME 253.2 digital loyalty program and continuation of the rollout of fresh offering across banners and formats should enable Metro to sustain its market position even as competition in food retail remains intense. Metro has also proven its focus on shareholder value creation with a 20-year track record of annual dividend increases and consistent execution of share buybacks. Since 2007, Metro has reduced its share count by 28.3 million shares, or 25%. Consistent execution of share buyback is estimated to add 520 basis points to F07-F16 EPS CAGR.
Fall 2014 20 Strategy: The Investment Outlook – Stock Selections and Updates
Focus for F2014 remains improving the performance of Metro’s Food Basics banner in Ontario. Metro is implementing a comprehensive plan to drive improved consumer price perception and traffic through in-stock guarantee on flyer items, new in- store signage, clearer price messaging, updated mini décor package, and a new marketing campaign. In Quebec, in addition to ongoing store renovation and upgrades, Metro will be focused on improving distribution efficiency through the consolidation of its produce and dairy distribution operations into the new Laval distribution facility.
Metro currently enjoys an extremely conservative capital structure, with net debt of only $889 million as of Q3/14 or less than 25% of capitalization. Factoring in the current $1.2 billion market value of Metro’s 32.2 million shareholding in Alimentation Couche-Tard (TSX: ATD.B), Metro is effectively debt free. In conjunction with the Q3/F14 release, management once again reiterated its preference for a gradual increase in leverage through full execution of its existing NCIB and annual dividend increase, while maintaining some balance sheet capacity for selected acquisitions in food and drug retail.
We have an Outperform rating on Metro Inc. Our $77 target is generated by applying a 13x P/E and a 7.5x EV/EBITDA multiple to Q3/F16 TTM forecasts and adding the estimated after-tax value of MRU’s investment in Alimentation Couche-Tard. The multiples are within Metro’s historical average valuation band and reflect the company’s earnings outlook, conservative capitalization, and long track record of shareholder value creation. Potential acceleration in price competition in the Quebec and Ontario markets could impede the company’s ability to achieve our earnings growth forecast and target price. Conversely, successful redeployment of excess balance sheet capital could drive returns above our current target price.
National Bank of Canada (TSX: NA) Darko Mihelic, CFA – Analyst, RBC Dominion Securities Inc. NATL BANK OF CANADA NA.T 252 DAYS 29AUG13 - 29AUG14 National Bank is a Montreal-based, fully integrated, financial services NATL BANK OF CDA Rel. S&P/TSX COMPOSITE INDEX HI-14NOV13 107.743 HI/LO DIFF -14.38%
102.00 CLOSE 103.395 company, which is the smallest of the big-six Canadian banks. Earnings
96.00 LO-2JUL14 92.252 are typically split among personal and commercial (50%), wealth SEP13 OCT13 NOV13 DEC13 JAN14 FEB14 MAR14 APR14 MAY14 JUN14 JUL14 AUG14 12 26 10 25 8 22 6 20 8 22 5 20 6 20 3 17 2 16 2 16 30 15 29 13 27 NATL BANK OF CDA HI-29AUG14 52.310 LO/HI DIFF 28.97% management (15%), and capital markets (35%).
50.00
48.00 CLOSE 52.310 We rate National Bank’s shares as Sector Perform as our enthusiasm 46.00
44.00 about above-average Canada P&C loan growth and improving business
42.00 LO-29AUG13 40.560 mix in the capital markets business is tempered by the bank’s higher
2000 relative exposure to Quebec. In our view, National Bank will continue PEAK VOL. 3045.2 1000 VOLUME 1280.5 to outperform its peers in terms of loan growth in the Canadian P&C segment, although we are concerned about the potential implications for National Bank from a potential slowdown in the Quebec economy and real estate market. Our negative outlook for the Quebec economy stems from lower expected GDP growth ‘potential’ than the past driven by demographic trends, in particular rapidly slowing working-age population growth. Also, the Quebec housing market has been relatively weak with housing starts slumping to a 12-year low in 2013, and recent house price and sales data have lagged most other Canadian provinces, specifically in the condominium market, where price and sales data have been declining year over year recently. In the bank’s financial markets segment, we are encouraged by an improved revenue mix (lower percentage of revenues from principal activities), as well as recent targets set by management, which suggest reasonable earnings growth of 5% to 10% annually and improved efficiencies over the long term.
Our 12-month price target of $53 is based on a P/E multiple of 10.5x our 2016E EPS estimate. The target multiple is near the low end of the target range of 10.5x-12.2x we use for the big Canadian banks, reflecting lower exposure to retail banking earnings and high relative exposure to Quebec.
Risks to our price target include the health of the overall economy and the Quebec economy in particular, sustained deterioration in the capital markets environment, integration risk of acquisitions, an unexpected acquisition, and a change in the competitive or political environment in Quebec. Additional risks include regulatory and political risks including tax rates, rising business loan losses, a greater than anticipated effect from off-balance sheet commitments, additional write downs related to asset-backed commercial paper, and litigation risk.
Fall 2014 21 Strategy: The Investment Outlook – Stock Selections and Updates
Suncor Energy Inc. (TSX: SU) Greg Pardy, CFA – Analyst, RBC Dominion Securities Inc. SUNCOR ENERGY SU.T 252 DAYS 29AUG13 - 29AUG14 As an integrated oil company, Suncor’s upstream portfolio has shifted SUNCOR Rel. S&P/TSX COMPOSITE INDEX HI-16JUN14 109.391 LO/HI DIFF 22.87% 104.00 CLOSE 100.518 from a 100% oil sands focus to one considerably more diverse in 96.00 LO-18MAR14 89.030 nature. Notwithstanding, over three-quarters of Suncor’s production is SEP13 OCT13 NOV13 DEC13 JAN14 FEB14 MAR14 APR14 MAY14 JUN14 JUL14 AUG14 12 26 10 25 8 22 6 20 8 22 5 20 6 20 3 17 2 16 2 16 30 15 29 13 27 SUNCOR HI-16JUN14 47.180 LO/HI DIFF 35.97% still anchored by oil sands. Along with its legacy oil sands mines in Fort 46.00 44.00 McMurray and Firebag in-situ operations, Suncor’s arsenal of some 26
42.00 CLOSE 44.630 billion barrels of proven, probable, and contingent oil sands resources 40.00 38.00 also include its MacKay River (100% working interest) in-situ project, a 36.00 LO-4FEB14 34.700 12% interest in the Syncrude oil sands joint venture, and a 40.8% 6000
PEAK VOL. 7804.5 interest in the Fort Hills project. 3000 VOLUME 2545.6 We have an Outperform rating on Suncor Energy Inc. Our one-year target price is $49 per share. Our price target reflects a 60% weighting toward a multiple of 1.0x our base NAV of $41.80 per share and a 40% weighting toward a 2015E debt-adjusted cash flow multiple of 9.0x. The multiples that we have chosen reflect Suncor’s strong balance sheet, above-average execution capability, extensive reserve life index, and production visibility secured by its vast oil sands resource base.
The most significant risk to our price target is unexpected changes in crude oil prices. The ability to replace production and reserves in a cost effective manner on a per share basis also poses a risk to investors. The valuation of oil and gas assets is subject to risk with respect to reservoir performance, including production rates and expected recovery factors. Suncor is also exposed to downstream margin volatility. Other risks include the effect of foreign exchange and government legislation as it relates to royalties, income taxes, and environmental policy.
Fall 2014 22 Strategy: The Investment Outlook – Stock Selections and Updates
TELUS Corp. (TSX: T) Drew McReynolds, CA, CFA – Analyst, RBC Dominion Securities Inc. TELUS CORPORATION T.T 252 DAYS 29AUG13 - 29AUG14 TELUS Corp. is the second-largest telecommunications provider in TELUS CORPORATION Rel. S&P/TSX COMPOSITE INDEX HI-4JUN14 109.700 HI/LO DIFF -15.32% 105.00 CLOSE 97.396 Canada, providing wireline, data, and wireless services to consumers,
98.00 LO-28JUL14 92.893 businesses, and wholesale telecom providers. SEP13 OCT13 NOV13 DEC13 JAN14 FEB14 MAR14 APR14 MAY14 JUN14 JUL14 AUG14 12 26 10 25 8 22 6 20 8 22 5 20 6 20 3 17 2 16 2 16 30 15 29 13 27 TELUS CORPORATION HI-4JUN14 42.400 LO/HI DIFF 31.39% Our Outperform rating reflects our view that TELUS has the best 40.00
38.00 CLOSE 39.650 combination of growth, a reasonable valuation, and solid capital 36.00 return potential within the group. 34.00
LO-30AUG13 32.270
4000 We believe the company’s industry-leading growth outlook in both PEAK VOL. 5427.9 2000 VOLUME 1186.9 wireless and wireline combined with commitments for annual dividend increases and share buybacks through 2016E more than compensate for the elevated regulatory risks within wireless. Although recent share price performance could limit near-term upside, a forecast of 9% NAV CAGR from 2013 through 2017E combined with aggressive capital return commitments should continue to drive attractive total returns for investors over the medium term.
Our one-year price target of $40 for TELUS is based on the average of three approaches: 1) applying a 13.5x multiple to our blended two-year forward adjusted EPS estimates, 2) applying target EV/EBITDA multiples of 6.25x and 7.0x to our blended two-year forward EBITDA estimates for wireline and wireless segments, respectively, and 3) discounted FCF through 2018E factoring in a WACC of 8.5% and terminal growth rate of 1.5%. We believe our target multiples are consistent with the growth and risk profile of the company, and a low interest rate environment.
Impediments to the shares reaching our one-year price target are: 1) a sustained increase in wireless competition from the new entrants beyond 2013 resulting in higher churn and/or accelerated declines in postpaid ARPU, 2) an accelerated FTTH build, which would negatively affect FCF, in the face of higher than expected data demand and increased competition from cable, 3) the inability to realize additional cost savings to mitigate wireline margin pressure due to legacy declines and IPTV loading, 4) greater than expected telephony and television substitution, and 5) the emergence of irrational pricing in residential telephony, television, and/or internet.
Toromont Industries Ltd. (TSX: TIH) Sara O’Brien, CA, CFA – Analyst, RBC Dominion Securities Inc. TOROMONT INDUSTRIAL TIH.T 252 DAYS 29AUG13 - 29AUG14 Toromont Industries Ltd. operates CAT Equipment Group, which sells, TOROMONT Rel. S&P/TSX COMPOSITE INDEX HI-6DEC13 112.455 LO/HI DIFF 19.48% 110.00 105.00 CLOSE 97.993 rents, and services a broad range of Caterpillar mobile equipment and 100.00 95.00 LO-24OCT13 94.121 industrial engines across one of CAT’s larger global dealer territories, SEP13 OCT13 NOV13 DEC13 JAN14 FEB14 MAR14 APR14 MAY14 JUN14 JUL14 AUG14 12 26 10 25 8 22 6 20 8 22 5 20 6 20 3 17 2 16 2 16 30 15 29 13 27 TOROMONT HI-25AUG14 27.410 which includes Ontario, Manitoba, Nunavut, Newfoundland, and LO/HI DIFF 24.53% 27.00
26.00 eastern Labrador. Toromont also runs CIMCO, an industrial and 25.00 CLOSE 27.190 recreational refrigeration business. 24.00
23.00
LO-8OCT13 22.010 We view Toromont as an attractive investment for longer-term 400 holders. We believe that it will maintain its ‘best in class’ EBIT margin PEAK VOL. 534.7 200 VOLUME 51.5 and its balance sheet strength, which we expect will allow for a large- sized acquisition over time. We like Toromont’s disciplined approach to balancing growth and dividends. We do not account for acquisitions in our model but use a higher 15x P/E valuation (higher than its peers) on our average F2015/F2016 EPS estimate to derive our $28 target price. We rate TIH shares as Sector Perform as we do not see any short-term positive catalyst for the stock. We continue to expect that longer-term investors will be rewarded with share gains from both organic initiatives as well as future acquisition growth, which we expect will push our long-term earnings growth rate beyond our current 10% range for the next two years.
We note that our price target is based on our estimates for the equipment group and the refrigeration group. Our earnings estimates could be negatively affected by macroeconomic trends and negative commodity prices, as well as company-specific risks such as strategy execution, labour relations, etc. Any change to our earnings estimates based on such factors could change our price target. Fall 2014 23 Strategy: The Investment Outlook – Stock Selections and Updates
Toronto-Dominion Bank (TSX: TD) Darko Mihelic, CFA – Analyst, RBC Dominion Securities Inc. TORONTO DOMINION BK TD.T 252 DAYS 29AUG13 - 29AUG14 Toronto-Dominion Bank is Canada’s second-largest bank by market TORONTO DOMINION Rel. S&P/TSX COMPOSITE INDEX HI-21AUG14 105.164 LO/HI DIFF 7.11% 104.00 CLOSE 103.520 capitalization and by assets. In 2013, TD Bank’s earnings mix was as 102.00 100.00 LO-24FEB14 98.187 follows: Canadian Personal and Commercial (52%), Wealth SEP13 OCT13 NOV13 DEC13 JAN14 FEB14 MAR14 APR14 MAY14 JUN14 JUL14 AUG14 12 26 10 25 8 22 6 20 8 22 5 20 6 20 3 17 2 16 2 16 30 15 29 13 27 TORONTO DOMINION HI-22AUG14 58.200 LO/HI DIFF 31.73% Management and Insurance (16%, which includes 3% for TD 56.00 Ameritrade), US Personal and Commercial (23%), and TD Securities 54.00 52.00 CLOSE 57.250 (9%). 50.00
48.00
46.00 LO-29AUG13 44.180 We believe that TD’s stock is attractive as the bank should have above- 8000 average EPS growth; we expect its relative valuation to continue to PEAK VOL. 9566.4 4000 VOLUME 3202.6 improve. We rate TD Bank shares Outperform. Loan growth should remain strong in the US; however, other income is unlikely to benefit from the same level of securities gains as in 2013. We expect the end-result will be strong US earnings growth in 2015 of 8% and 10% in 2016. We remain optimistic on TD’s Canadian retail business and forecast 6% YoY net income growth in 2015 and 9% in 2016.
Our 12-month price target of $61 is based on a P/E multiple of 12.0x our 2016E cash EPS estimate, a premium to peers based on higher expected EPS growth.
Risks to our price target include the health of the overall economy, sustained deterioration in the capital markets environment, the Canadian and US housing market, a failure of government programs, litigation and tax assessment risk, and greater than anticipated effect from off-balance sheet commitments. Additional risks include regulatory and political risk including tax rates, an unexpected acquisition, weakening retail credit quality, and loss of domestic market share.
Fall 2014 24 Strategy: The Investment Outlook – The Economy
The Economy US economy slides into driver’s seat with Canada going along for the ride Dawn Desjardins (Assistant Chief Economist, RBC Economics) Geopolitical crises have complicated the outlook for the global economy with fighting in the Ukraine and Middle East, the vote on Scottish independence, and sanctions by and against Russia creating downside risks to the forecast. The reaction to recent events in financial markets saw both equity and bond markets rallying with prices for energy commodities surprisingly little changed. This reaction highlights the dilemma faced by investors who are reaching for yield while at the same time harbouring worries about how these geopolitical strains will affect the global economy. To date, we view these developments as increasing the downside risks to the outlook rather than supporting a large-scale downgrading of our growth forecasts.
The world economy is likely to grow by 3.4% this year, slightly slower than was projected in June. The 0.2 percentage point cut to 2014’s growth forecast reflects a very poor start to the year in the US and a weak performance in some of the emerging market economies. With that said, the sharp rebound in US growth in the second quarter of 2014 and signs of an improvement in momentum in other developed market economies limited the magnitude of the forecast downgrade and support expectations that growth will accelerate to a 4.0% pace in 2015.
Exhibit 1: World GDP growth
% change 6 Forecast 5 4.0 4 3.2 3.4 3
2
1
0
-1 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Source: International Monetary Fund, RBC Economics
Despite all the volatility, the underpinnings of our view are little changed with interest rates forecasted to remain historically low in 2014 and the weight from fiscal restraint continuing to recede. Official policy rates in Canada, the US, and the UK are expected to be held steady for the remainder of 2014. The European Central Bank (ECB) reduced its key policy rates in June and September 2014 and implemented policies aimed at facilitating the transmission of the lower rates to the real economy. In 2015, we expect the ECB to continue to apply significant stimulus to the economy. The Bank of Canada, Federal Reserve, and Bank of England conversely are expected to be in position to begin the process of removing policy stimulus with official interest rate increases expected in the first half of 2015.
Fall 2014 25 Strategy: The Investment Outlook – The Economy
Exhibit 2: Policy rates – International
Percent, eop 7 Forecast 6
5
4
3
2
1
0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Canada US UK Eurozone
Source: Bank of England, European Central Bank, Federal Reserve, Bank of Canada, RBC Economics US economy bounced back in second quarter The US economy recorded a sharp 4.2% annualized gain in the second quarter that more than reversed the 2.1% drop in the first quarter of 2014. The first quarter’s decline reflected the effect of the unseasonably harsh winter that reduced business investment, housing activity, and exports. Consumer spending rose in the quarter, but the gain was small and insufficient to offset the declines in activity in other parts of the economy. With the return to more seasonal temperatures came a revival in spending by both businesses and consumers. July data indicate that the strong momentum continued early in the third quarter, albeit at a slower pace relative to the second quarter with growth projected to increase at a 3.3% pace.
Exhibit 3: US – Real GDP growth
Quarter-over-quarter annualized % change 5 Forecast 3
1
-1
-3
-5 2012 2013 2014f 2015f -7 Real GDP 2.3 2.2 2.2 3.2 -9 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: US Bureau of Economics Analysis, RBC Economics
Despite the volatility in the first half of 2014, we maintain our view that US growth will be driven by a pickup in consumer spending and a modest increase in business investment. Trade activity is also expected to quicken although import growth is forecasted to exceed the rise in export activity thereby resulting in net exports trimming the annual growth rate. Favourable balance sheet conditions and improved confidence underpin our forecast for strengthening domestic demand. Housing market activity is also forecasted to accelerate; however, given the slow start to the year, the sector’s contribution to the economy’s growth rate will be limited in 2014 with a much larger boost forecast for 2015. We expect the US economy to grow by 2.2% in 2014 and 3.2% in 2015.
Fall 2014 26 Strategy: The Investment Outlook – The Economy
Exhibit 4: US – Real GDP growth composition
Percentage points 2.0
1.5
1.0
0.5
0.0
-0.5 Consumer Government Residential Non-res. Net trade Inventories spending spending investment investment
2014 2015 Source: US Bureau of Economics Analysis, RBC Economics Consumers got the cash The health of household balance sheets continued to improve with another $1.5 trillion earned in the first quarter of 2014 for a total increase in net worth of $8.8 trillion in the year to March 2014. Both financial and non-financial assets recorded strong gains with liabilities only inching higher. US households increased the amount of equity in their real estate holdings to 54%, which was a significant improvement from the low of 36.5% in the first quarter of 2009. With that said, equity ownership is still less than the historical average of 64%. A pickup in the pace of personal income growth augmented this increase in wealth supporting not only a rise in consumption in the second quarter but also a rise in the savings rate as well. It is likely that this improvement in the health of consumer balance sheets was in part responsible for the easing in lending standards reported by financial institutions in the July Senior Loans Officers Survey.
Exhibit 5: US – Real consumption and real disposable personal income
Year-over-year % change 6 Forecast 5 4 3 2 1 0 -1 -2 -3 -4 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Real consumption Real disposable personal income
Source: US Bureau of Economics Analysis, RBC Economics Easier lending conditions and low interest rates support turn in housing After two consecutive quarters of tightening lending standards, US banks eased conditions for both mortgages and consumer credit according to the Fed’s July survey. The sustained improvement in labour market conditions in 2014 likely played a role in boosting banks’ willingness to lend. The average monthly pace of job creation so far this year was 215,000,
Fall 2014 27 Strategy: The Investment Outlook – The Economy
thereby supporting our forecast that 2014 will produce the strongest job growth in the post- recession period. The August unemployment rate, at 6.1%, is down sharply from the 6.7% recorded in December 2013 to stand the closest to the Fed’s estimated range of full- employment of 5.2% to 5.8% since before the recession. Looking beyond these two key measures of the labour market health, the Fed’s Labour Market Conditions Index showed that as of April almost 80% of the drop in the index during the recession had been recovered although there is still room for further improvement in reducing the duration of unemployment and the number working part-time for economic reasons. The persistence of this slack is likely one of the factors holding back wages, which are only increasing in line with the rate of inflation.
Exhibit 6: US – Change in total non-farm employment
6-month moving average, SA, 000s persons 400
200
0
-200
-400
-600
-800 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: US Bureau of Labor Statistics, RBC Economics
The easing in lending standards and declines in long-term mortgage rates augur well for US housing activity to continue to firm. Both existing home sales and housing starts began the third quarter at an elevated level setting up for a stronger second half of 2014 compared to the weather-related weak activity in the first half of the year. Builder sentiment improved and purchasers are facing historically favourable affordability conditions despite the increase in prices.
Exhibit 7: US – Mortgage rates & housing affordability index
% Median income=qualifying income=100 11 225 10 210 9 195 8 180 7 165 6 150 5 135 4 120 3 105 2 90 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 30-Yr mortgage rates (LHS) Housing affordability (RHS)
Source: National Association of Realtors, Federal Reserve, RBC Economics
Fall 2014 28 Strategy: The Investment Outlook – The Economy
Business investment to get a boost as demand firms US business investment slipped in 2013 as uncertainty about the fiscal backdrop and geopolitical events weighed on confidence. In 2014, businesses are expected to ramp up investment to take advantage of banks’ improved appetite to lend and in reaction to the decline in commercial vacancy rates. Spending on capital goods will likely grind higher as businesses come up against capacity constraints due to rising demand. Similar to US households, business balance sheets are in good health with asset values at all-time highs and debt accumulation growing at a modest pace.
The improvement in domestic activity driven by US consumers and businesses should also fuel increased demand for imports and be aided by an expected strengthening in the US dollar. At the same time, the gradual rise in global activity sets up for a firming in export growth although with the US economy leading the uptick in global growth, imports are likely to post stronger gains thereby resulting in net exports acting as a drag on real GDP this year and next.
Accelerating growth limits downside to inflation outlook As discussed, the US economy is operating with some degree of economic slack that has limited the pace of inflation. Both the headline and core CPI measures started the third quarter of 2014 close to the Fed’s 2% objective. The Fed’s preferred measure of inflation, the core PCE deflator, accelerated in the second quarter to average 1.5%, which was 20 basis points higher than the average pace during the prior four quarters. While the persistence of spare capacity will likely curtail the speed of inflation in the near term, the quickening momentum in the pace of economic growth and stable inflation expectations should limit the downside to the inflation outlook.
Exhibit 8: US – Core rates
Year-over-year % change 3.0
2.5
2.0
1.5
1.0
0.5
0.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Consumer price index PCE deflator
Source: US Bureau of Labor Statistics, Federal Reserve Bank of San Francisco, RBC Economics Monetary policy – slow grind to unwind stimulus The Fed’s decision to reduce the size of the quantitative easing program in recent months has had very limited effect on longer-term interest rates, which slipped to the year’s low in late August. The unwavering bid for these securities reflected a revival in risk aversion due to the rise in geopolitical risks. At the same time, Chinese purchases of US Treasuries accelerated sharply with China accumulating bonds at a record clip during the first six months of 2014. We expect the Fed will conclude the quantitative easing program at the October meeting, thereby completing the first step toward policy normalization. Tightening action via higher interest rates will likely follow late in the second quarter of 2015; at which time, both the unemployment rate and the core PCE measure of inflation should be closer to
Fall 2014 29 Strategy: The Investment Outlook – The Economy
the Fed’s mandated objectives. The most likely course is for the Fed to remove stimulus slowly with 25 basis point increases expected to be announced at every second meeting in the second half of 2015, meaning the funds target will be 1.0% by the end of 2015. Even with these increases, there will still be sufficient monetary policy stimulus being applied to the economy to ensure growth continues at an above-potential pace and excess capacity is mopped up.
Exhibit 9: China’s purchase of US treasury bonds
Billions of $US, 6-month moving total 150
100
50
0
-50
-100 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: US Treasury, RBC Economics Interest rate increases to follow Against this backdrop, we expect US Treasury bond yields will break out of the post-recession range with the 10-year yield expected to breach April 2010’s high of 3.85% in the second half of 2015. Shorter-term yields will come under greater upward pressure with the two-year US government bond yield projected to rise by 190 basis points by the end of 2015, thereby resulting in a flattening in the US yield curve. The more aggressive increase in short-term interest rates combined with acceleration in the pace of US growth will underpin a strengthening in the US dollar which we expect to outperform against the euro, yen, sterling, and the Canadian dollar during the forecast horizon.
Exhibit 10: US – Interest rates
% 7 Forecast 6
5
4
3
2
1
0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Fed Funds Rate 10-year Bond Yield Source: Federal Reserve Board, US Treasury, RBC Economics
Fall 2014 30 Strategy: The Investment Outlook – The Economy
Canada’s economy emerged from Q1’s soft patch Domestic demand contracted, albeit minimally, in early 2014 for the first time since the recession and was weighed down by falling business investment, declining housing market activity, and very soft consumer spending—all of which were hurt by unseasonably harsh winter weather. The trade sector also weakened; however, with the drop in imports being larger than the dip in exports, net trade still managed to prop up real GDP in the quarter and resulted in an overall increase in GDP of 0.9%. Similar to the US, Canada’s economy managed to recover in the second quarter with GDP expanding at a 3.1% pace as more seasonal weather temperatures fuelled a rebound in consumer and business activity. More importantly, Canada’s export sector saw a very sharp increase in demand that added 1.7 percentage points to the second-quarter 2014 real GDP growth rate even after accounting for a jump in imports.
Exhibit 11: Canada – Final domestic demand
Quarter-over-quarter annualized % change 8 Weather 6 effect 4 2 0 -2 -4 -6 -8 -10 2007 2008 2009 2010 2011 2012 2013 2014 Source: Statistics Canada, RBC Economics
July and August data signal that the economy continued along its firmer growth path early in the third quarter. Housing starts and sales, auto sales and the RBC/Markit Manufacturing Index remained elevated, thereby teeing up for another quarter of above-potential real GDP growth.
Labour market volatility obscures trend The month-to-month volatility in the Canadian employment data yielded a very weak trend in job gains in the first half of 2014. To start the third quarter, July’s unexpectedly largely 42,000 job increase and August’s 11,000 dip boosted the average monthly gain to 10,400; however, this is still running slower than what would be consistent with the economy entering a period of above-potential growth. Also worrying was the skew to part-time (6,000 per month) job gains compared to full-time (4,400 per month) in the period. This resulted in the proportion of full-time employed falling by 0.2 percentage points to 80.7% so far in 2014.
A broader measure of labour market conditions showed that excess capacity existed in the first half of 2014, thereby mirroring the persistent output gap as the economy failed to grow at an above-potential pace on a sustained basis. This also helped to explain the slow pace of wage growth. With the economy entering a period of above-potential growth in the second quarter, we expect both a narrowing in the output gap and a tightening in labour market conditions. In turn, this tightening should result in a recovery in full-time employment and eventually exert upward pressure on wages. The unemployment rate, which has been significantly less volatile, remains in a range between 6.9% and 7.2% and is expected to breach the downside of this range to end 2015 at 6.5%.
Fall 2014 31 Strategy: The Investment Outlook – The Economy
Exhibit 12: Canada – Labour market indicator*
Standard deviation from pre-recession mean % 1.5 2 1.0 1 0.5 0 0.0 -0.5 -1 -1.0 -2 -1.5 -3 -2.0 -2.5 -4 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Labour Market Indicator (LHS) BoC output gap (RHS) * Consists of seven indicators including discouraged workers, labour shortages, part-time for economic reasons, unemployment duration. Source: Statistics Canada, RBC Economics Research As the world economy turns more quickly… The long-awaited pickup in demand for Canada’s exports potentially got underway in the second quarter of 2014. Following a period when gains were concentrated in energy exports, both non-natural resource goods and non-energy commodities posted sharp increases. Both of these sectors suffered larger declines during the recession and have taken much longer to recover than the energy sector where exports are 26% higher than at the pre-recession peak. …so too will Canadian exports In the second quarter, exports of industrial machinery, chemicals, electronic machinery, and aircraft posted strong gains. Furthermore, after a period of weakening, exports of autos and parts recorded a double-digit increase in the second quarter and continued to rise in July. We expect that exports, outside of energy, will maintain this improved momentum with sales of non-commodity products rising alongside a strengthening in US investment in equipment and software. The rotation toward external demand opens the door to the economy growing at an above-potential pace despite expectations that the high level of debt will limit growth in consumer spending while affordability strains slow housing market activity. On the upside, strengthening external demand is likely to incent Canadian businesses to increase the pace of investment as capacity limits are reached. Exhibit 13: Canada – Exports by sector
Indexed to Q2/07 130
120
110
100
90
80
70
60 2007 2008 2009 2010 2011 2012 2013 2014 Energy Non-energy commodities Non commodities Source: Statistics Canada, RBC Economics
Fall 2014 32 Strategy: The Investment Outlook – The Economy
Canadian consumers to provide steady, if unspectacular, support The Canadian consumer shook off the winter blues in the second quarter of 2014 with spending rising at a 3.8% annualized pace, which more than compensated for first-quarter 2014 weather-related slowing. Looking forward, we expect consumption to grow at a trend rate of 2.3% with the support from a record level of net wealth tempered by the elevated level of household indebtedness. As discussed, labour market conditions weakened recently, thereby resulting in wage growth barely keeping up with the rate of inflation. We expect labour market conditions will improve resulting in a pickup in wages and incomes and thereby limiting the slowing in consumption activity ahead. Furthermore, interest rate increases are expected to be gradual and occur as income growth accelerates. This should allow consumers to absorb the increase in debt service costs without pulling back sharply on durable goods or services expenditures.
Exhibit 14: Canada – PCE, income, and employment
Year-over-year % change 10 Forecast 8
6
4
2
0
-2
-4 Q1-2000 Q1-2002 Q1-2004 Q1-2006 Q1-2008 Q1-2010 Q1-2012 Q1-2014 Real household disposable income Real consumer spending Employment
Source: Statistics Canada, RBC Economics Can’t keep the housing market down One area of the economy that has proven surprisingly resilient has been the housing market with sales not only fully recovering the winter-related dip but proceeding higher during the summer months. In part, the stronger performance was due to the lowering of mortgage rates in the late spring that tempered deterioration in affordability. We expect home sales activity gradually to soften as affordability is increasingly strained. We expect that strengthening economic activity will lead the Bank of Canada to raise the policy rate in 2015 and will add to pressures coming from the steady rise in prices. Backed by the recent strength in sales activity, 2014 is likely to see re-sales increase by 2.1% with prices posting a hefty 4.3% gain. As pressures on affordability intensify in 2015, however, sales are likely to ease with price gains slowing to 1.1%. With that said, supports for housing will remain in place including demand from immigration that will result in activity cooling although not collapsing.
Fall 2014 33 Strategy: The Investment Outlook – The Economy
Exhibit 15: Canada – Home prices
Annual % change, composite price (bars) 000s of dollars, composite price (line) 14 450 Forecast 12 400 10 350 8 300 6 250 4.4 4.3 4 200 2.5 2 1.1 150 0 100 -2 50 -4 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Source: Royal LePage, RBC Economics Stronger growth to prompt Bank of Canada to change policy bias The Bank of Canada maintained its neutral policy bias in early September although acknowledged that both exports and housing activity were strong in the second quarter. The run of stronger than expected increases in Canada’s headline and core inflation rates that pushed them closer to the 2% target continued to dampen concern that the inflation rate would gravitate back to the lower bound of the 1% to 3% target band. With that said, the Bank still expects the inflation rates to ease due to one-off factors.
Exhibit 16: Canada – Interest rates
7 Forecast 6
5
4
3
2
1
0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
BoC Overnight Rate 10-year Bond Yield Source: Bank of Canada, RBC Economics
Our forecast for real GDP growth in 2014 is higher than the Bank’s 2.2% at 2.4%, and we expect the economy to expand more aggressively at a 2.7% pace in 2015, which would be above the Bank’s 2.4% projection. Our forecast highlights broadening drivers of growth resulting in a strengthening in the economy’s momentum that supports job creation and keeps inflation at the 2% target. The recovery in second-quarter 2014 export growth indicated that this process is underway; however, until there is evidence that the rotation in the drivers of demand is sustainable, the central bank is likely to maintain its policy stance with the overnight rate at 1.0% and the neutral bias intact. Our assessment is that demand for exports will accelerate, thereby supporting a period of above-potential growth, and will likely induce the Bank to shift policy slightly. We expect policymakers to re-establish a tightening bias before year-end 2014. We still see the Bank as likely holding the overnight rate at 1.0% in 2014 with the first rate hike most likely to be announced in the second quarter of 2015.
Fall 2014 34 Strategy: The Investment Outlook – The Economy
Exhibit 17: Canada – Real GDP growth
Quarter-over-quarter % change, annualized rate 8 Forecast 6 4 2 0 -2 -4
-6 2012 2013 2014f 2015f -8 Real GDP 1.7 2.0 2.4 2.7 -10 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Statistics Canada, RBC Economics Canadian dollar weakness a by-product of US dollar appreciation After three months of steady appreciation, the Canadian dollar reversed course in August 2014. The loonie’s decline was more a function of US dollar strength than any made in Canada factor. With that said, at the margin, Canada-US, short-term interest rate spreads narrowed, commodity prices eased, and foreign net purchases of Canadian securities continued to grow at a pace that was much slower than the rapid gains of 2011 and 2012. The prospect of a further appreciation in the US dollar reflecting a strengthening in economic growth and prospective Federal Reserve interest rate hikes should translate into another round of Canadian dollar weakening with the currency forecasted to end 2014 at US$0.87 and 2015 at US$0.85.
Exhibit 18: Canadian dollar forecast
US$/C$ 1.10
Parity 1.00
0.90
0.80
0.70 2012 2013 2014f 2015f US$/C$ 1.00 0.94 0.87 0.85
0.60 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Source: Bank of Canada, RBC Economics
Fall 2014 35 Strategy: The Investment Outlook – Quantitative Research
Quantitative Research Are Canadian equities becoming too expensive? Chad McAlpine, CFA (Quantitative Research) Early this year, the recurring-earnings multiple of the S&P/TSX Composite climbed above 20x for the first time since December 2002 (Exhibit 1). At its current level, this represents a considerable premium to its long-term historic average.
Exhibit 1: S&P/TSX Composite – Price to Recurring Earnings
40 35 30 25 20 15 10 5 0 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: RBC Capital Markets Quantitative Research
For a period of time, this multiple expansion could be attributed to both a rising asset multiple (Price to Book) and declining Return on Equity (Exhibit 2), both of which led to an increase in Price to Earnings, since P / E = (P / B) / (E / B) = (P / B) / ROE. However, in the past few months, profitability appears to have established a bottom near the low end of its 10- year historic range and is showing early signs of improvement. On a positive note, year-over- year earnings growth for the S&P/TSX Composite just turned higher at the end of August, and the trend appears to be decidedly rising (Exhibit 3).
Exhibit 2: S&P/TSX Composite – Price to Book versus Return On Equity
3.5 20 3.0 2.5 15 2.0 10 1.5
1.0 5 0.5 0.0 0 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Price to Book (ls) Return On Equity (rs) Source: RBC Capital Markets Quantitative Research
Fall 2014 36 Strategy: The Investment Outlook – Quantitative Research
Exhibit 3: S&P/TSX Composite – Year-Over-Year Earnings Growth
75
50
25
0
-25
-50
-75 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: RBC Capital Markets Quantitative Research
Furthermore, based on consensus estimates, index earnings are projected to rise almost 33% over the next 12 months (Exhibit 4). Despite a slight decline since the middle of the year, this level of Forecast Earnings Growth is high by historic standards and bodes well for continued earnings expansion in the coming months.
Exhibit 4: S&P/TSX Composite – Forecast Earnings Growth
100 80 60 40 20 0 -20 -40 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: CPMS, RBC Capital Markets Quantitative Research
The key at this stage of the game is to ensure that this lofty earnings growth target remains in strong positive territory, and monitoring estimate revisions will become increasingly import for the remainder of the year. Our Estimate Revisions Index is a measure of the weighted breadth of positive versus negative revisions to consensus earnings forecasts and tends to move in advance of an actual change in the level of earnings for the overall market. As it stands, the level and trend of this leading indicator is in strong bullish territory and implies that analysts have been more bullish than bearish when revising their earnings forecasts.
Exhibit 5: S&P/TSX Composite – Estimate Revisions Index
80 60 40 20 0 -20 -40 -60 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: CPMS, RBC Capital Markets Quantitative Research
Fall 2014 37 Strategy: The Investment Outlook – Trend & Cycle
Trend & Cycle Bull Market intact – DXY nearing next resistance Javed Mirza, CFA, CMT (Analyst, Technical Research – Trend & Cycle) As equity markets pullback from recent all-time highs, we take this opportunity to highlight four key relationships and/or events that are either currently under way or on the horizon for Canadian money managers.
1) As the DXY approaches technical resistance near 85, Commercial Hedger short positions are approaching levels consistent with intermediate-term peaks. Both commercial hedger long positions and technical resistance are building headwinds for the DXY. A pullback in the DXY is positive for commodities (p. 41). 2) Gold broke below its key support near 1,240 on Friday (September 12th). Data for Gold commercial hedger activity are showing increasing long positions, which support a potential triple bottom near the key 1,180 level in Gold. We feature key technical levels on G and AEM (p. 43). 3) Energy is testing support as both WTI Crude and Natural Gas consolidate. Intermediate- term uptrends remain intact for both WTI Crude and Natural Gas. With a pending corrective phase in the DXY, and WTI Crude and Natural Gas near intermediate-term technical support, Energy appears to be at an inflection point. We highlight HSE and PEY (p. 45). 4) The Dow Jones Transports and Industrials continue to make new highs. We feature the positive charts of Transport related Industrials in Canada. These names benefit from exposure to the US economy and any further appreciation in USD/CAD. We feature CNR and TFI (p. 49).
Fall 2014 38 Strategy: The Investment Outlook – Trend & Cycle
Exhibit 1: S&P 500 / S&P 500 QUADRANT BALANCE DATA (WEEKLY)
Source: RBC Capital Markets Trend & Cycle
The S&P recently scored a new all-time high, and the intermediate-term trend remains up—both of which are technical positives. Intermediate-term quadrant balance data has begun to trend lower (see red circle) and is heading close to oversold territory (near 20). Ongoing sector rotation is likely to continue. The S&P is currently in a near-term corrective phase. First support is near the 50-day, currently at 1,972. A rising-wedge pattern remains evident on the weekly charts, which is a negative technical pattern. A close below the next support at 1,900 would challenge the lower end of the rising wedge and could signal the start of an intermediate-term correction. Major support on the S&P 500 is near 1,737.
Fall 2014 39 Strategy: The Investment Outlook – Trend & Cycle
Exhibit 2: TSX COMPOSITE / TSX COMPOSITE QUADRANT BALANCE DATA (WEEKLY)
Source: RBC Capital Markets Trend & Cycle
The TSX Composite recently scored new all-time high, which is a technical positive. The next upside target on the TSX is near 16,000. Intermediate-term quadrant balance data has begun to trend lower, which is consistent with a near-term correction. The TSX is currently in a corrective phase with first support near the August 7 low at 15,056 (not shown). A close below this level targets the next support near 14,765.
Fall 2014 40 Strategy: The Investment Outlook – Trend & Cycle
Exhibit 3: US TRADE WEIGHTED DOLLAR (DXY) / US TRADE WEIGHTED DOLLAR COMMERCIAL HEDGERS (WEEKLY)
Source: RBC Capital Markets Trend & Cycle
The US Trade Weighted Dollar (DXY) has pushed sharply higher since July. An increase in the DXY is a headwind for commodity prices. The DXY is approaching technical resistance near the July 2013 high at 84.75. The next major technical resistance is near the June 2010 high at 86.41. US Commercial Hedgers are increasing their short positions. These positions are approaching levels that have historically led to multi-month tops (see circles, bottom panel). Both commercial hedgers and approaching technical resistance are headwinds for the DXY. A correction in the DXY would be a positive for commodities and commodity- related stocks.
Fall 2014 41 Strategy: The Investment Outlook – Trend & Cycle
Exhibit 4: GOLD / GOLD COMMERCIALS HEDGERS (WEEKLY)
Source: RBC Capital Markets Trend & Cycle
Gold closed below technical support near 1,240 on Friday (September 12th). A close below this level is a lower low, which is a technical negative. The next major support on Gold is near 1,180. Commercial hedger data is trending higher, which is supportive of a floor, likely near major support around 1,180. However, the commercial hedger data are showing lower highs and lower lows (see red line), thereby indicating a downtrend. This downtrend needs to reverse to support a sustainable intermediate low in Gold. A rally from the 1,180 level could coincide with an intermediate-term peak in equity markets (see page 39) and a switch from ‘risk-on’ to ‘risk-off’.
Fall 2014 42 Strategy: The Investment Outlook – Trend & Cycle
Exhibit 5: GOLDCORP / AGNICO-EAGLE (DAILY)
Source: RBC Capital Markets Trend & Cycle
We highlight the charts of Goldcorp (G) and Agnico-Eagle (AEM). Both names remain above their 200-day averages and continue to set higher lows, both of which are positive from a technical perspective. First support on G is near the 200-day, which is currently at 27.56. The next support is near 26.46, followed by 24.71. A close below the 200-day would be a technical negative. First support on AEM is near the 200-day, which is currently at 35.67. The next support is near 31.83, followed by 29.27. A close below the 200-day would be a technical negative.
Fall 2014 43 Strategy: The Investment Outlook – Trend & Cycle
Exhibit 6: WTI CRUDE / NATURAL GAS / TSX ENERGY RELATIVE TO TSX COMPOSITE (WEEKLY)
Source: RBC Capital Markets Trend & Cycle
WTI Crude (top panel) is consolidating near technical support around 90.11. The intermediate-term uptrend remains intact, and we anticipate choppy trading as WTI Crude consolidates near the current intermediate-term uptrend. A close below this level targets next support near 84.05. Natural Gas (middle panel) is attempting to consolidate near the four-year average, which is currently at 3.72. Natural Gas continues to make higher lows, and the intermediate-term trend remains up. A close below 3.72 sees the next support near 3.37. The TSX Energy sector (bottom panel) is correcting after breaking a multi-year downtrend relative to the TSX Composite. The intermediate-term uptrend remains intact, and we anticipate further near-term choppiness during this corrective phase. We believe this corrective phase is an opportunity to accumulate.
Fall 2014 44 Strategy: The Investment Outlook – Trend & Cycle
Exhibit 7: HUSKY / PEYTO (DAILY)
Source: RBC Capital Markets Trend & Cycle
We highlight two Energy stocks holding in above major technical support with improving relative strength profiles. The reward/risk profile is attractive on both names at these levels. Husky (HSE) is holding above major technical support near 31.70. A close below this level would be a technical negative. Peyto (PEY) is also holding in above major technical support near 34.60. A close below this level would be a technical negative.
Fall 2014 45 Strategy: The Investment Outlook – Trend & Cycle
Exhibit 8: CANADIAN DOLLAR / MSCI EEM / COPPER (WEEKLY)
Source RBC Capital Markets Trend & Cycle
USD/CAD (top panel) pulled right back to the key 1.06 breakout level in the summer, before re-accelerating. We anticipate further appreciation of USD/CAD (depreciation of the Canadian dollar) with the next upside target around 1.13. However, a close below 1.06 would cause us to re-evaluate this view. The EEM (middle panel) is challenging the upper end of a two-year trading range, is trading above the 50- and 200-day, and is making higher lows, all of which are technical positives. EEM recently closed above 45.33, which now targets the May 2011 highs around 50. Accumulate on a pullback. Copper (bottom panel) continues to hold above support near the key 2.99 level. A close above the multi-year downtrend line extending back to 2011 would be a strong technical positive.
Fall 2014 46 Strategy: The Investment Outlook – Trend & Cycle
Exhibit 9: S&P 500 / SENSEX (INDIA) / BOVESPA (BRAZIL) / SHANGHAI ‘A’ (WEEKLY, ALL REBASED TO 100)
Source: RBC Capital Markets Trend & Cycle
Rebased to December 2009, the S&P has improved by over 80%, while the recent surge by the Sensex has seen it gain close to 60% in that same time frame (top two panels). Both the Bovespa and Shanghai ‘A’ Index have recently broken multi-year downtrends (see circles, bottom two panels), which is a strong technical positive. Continued strength in equity markets should see a ‘catch-up’ phase, by the Bovespa and Shanghai, of established leadership.
Fall 2014 47 Strategy: The Investment Outlook – Trend & Cycle
Exhibit 10: DOW JONES TRANSPORTS / DOW JONES INDUSTRIALS / CANADIAN NATIONAL RAILWAY (WEEKLY)
Source: RBC Capital Markets Trend & Cycle
Both the Dow Jones Transports (DJT) and Dow Jones Industrials (DJI) continue to make new all-time highs, which is a technical positive. In addition, both indices are trading above the 50- and 200-day moving averages, which is another technical positive. Dow Theory remains supportive of continued equity market strength. The chart of Canadian National Railway has the same technical profile as the Dow Jones Transports Index and continues to make new all-time highs, which is a strong technical positive. We continue to favour Industrial names in Canada that benefit from US exposure and depreciation in the Canadian dollar. We highlight the charts of Canadian National Railway (CNR) and Transforce (TFI) on the next page.
Fall 2014 48 Strategy: The Investment Outlook – Trend & Cycle
Exhibit 11: CANADIAN NATIONAL RAILWAY / TRANSFORCE (DAILY)
Source: RBC Capital Markets Trend & Cycle
Canadian National Railway (CNR) and Transforce (TFI) are trading above their 50- and 200-day moving averages, setting new all-time highs and continuing to make higher lows, all of which are technical positives. We would accumulate CNR and TFI on pullbacks. Strong support exists near the 75 level on CNR and the 26 level on TFI. We continue to believe that Industrials, especially Transports, will continue to lead the market higher, until rising Energy costs begin to affect margins. A sustained negative divergence between the Industrials and Transports would signal a move from the middle innings to the later innings for the current bull market in equities.
Fall 2014 49 Strategy: The Investment Outlook – Fundamental Equity Weightings
Fundamental Equity Weightings Introduction: Fall 2014 Fundamental Equity Weighting Portfolio (FEW) Following the determination of We are pleased to present our Fall 2014 FEW portfolio and a review of the performance of a recommended asset mix, the the Summer 2014 FEW portfolio. strategy process at RBC Capital Markets addresses sector Changes to the Fall 2014 FEW: weightings within the equity component of the portfolio, Stocks added to the Fall 2014 FEW: CI Financial Corp., Precision Drilling Corp., and West followed by specific stock Fraser Timber Co. Ltd. selections within each sector. Stocks deleted from the Fall 2014 FEW: Open Text Corp., Peyto Exploration & Dev. Sector weightings reflect the combined views of our Corp., and Rogers Communications Inc. fundamental, technical, and quantitative analysts. The The Fall 2014 FEW portfolio contains 66 stocks with three additions and three deletions from specific stocks comprising our the Summer portfolio. Fundamental Equity 1) We maintained our Market Weight stance in Energy, with a 26% sector allocation. Weightings (FEW) portfolio are Within Energy Equipment & Services, we added Precision Drilling Corporation to the selected solely by our FEW. Within Oil & Gas, Peyto Exploration & Development Corp. has been removed fundamental analysts. These selections are detailed on the from the FEW. following pages. Our Strategy 2) We added 1% to our Materials weighting, which is now 11%. We remain modestly Focus List, described earlier, is underweight relative to the 12.0% Index weight. Within Materials, we are Underweight drawn from the broader FEW Chemicals and Metals & Mining, Market Weight Gold, and Overweight the smaller portfolio and reflects the best Steel and Paper & Forest Products sectors. With regard to the latter, we added West aggregate rankings of our Fraser Timber Co. Ltd. to the FEW, with the view toward increasing the exposure to the three investment disciplines: US housing cycle. fundamental, technical, and quantitative. 3) Within Industrials, we remain Overweight with our 10% sector allocation (versus the benchmark of 8.2%). There are no changes to our stock selections this quarter. 4) Our weighting in Consumer Discretionary remains at 8%, which is Overweight versus the Index at 5.6%. There are no changes to our stock selections within the FEW this quarter. 5) Consumer Staples’ weighting remains 1%, which is Underweight relative to the 2.8% Index weight. Loblaw Companies Ltd. is our sole and continuing stock selection within the sector. 6) We effectively, yet passively, moved to Overweight Health Care from Market Weight previously. Our two stock selections combine to a 4% portfolio weight, which is unchanged from the Summer FEW, yet the sector’s Index weighting has declined in the past three months to 2.6% from 3.1%. 7) Our Financials weighting continues to be Market Weight with a 35% sector allocation, which is up 1% from the Summer FEW. The benchmark sector weight is 34.2%. The only change within the FEW this quarter is the addition of CI Financial Corp. Within the subsectors, we are Market Weight Banks and Insurance, Overweight Diversified Financials, and Underweight Real Estate. 8) We moved to Underweight in Information Technology from Market Weight formerly. The removal of Open Text Corp. from the FEW reduced our sector exposure to 1%, which compares to the benchmark weight of 1.8%. 9) Telecommunications Services has moved to Underweight from Market Weight formerly. A 1% reduction in our sector allocation, to 3%, has occurred due to the removal of Rogers Communications Inc. from the FEW. The Telecom benchmark weight is 4.4%. 10) The sector allocation recommendation for Utilities remains Underweight. Brookfield Infrastructure Partners LP remains our sole selection in the FEW.
Fall 2014 50 Strategy: The Investment Outlook – Fundamental Equity Weightings
Exhibit 1: RBC Capital Markets Fall 2014 Fundamental Equity Weighting (FEW) Portfolio
Weights (%) RBC CM S&P/TSX Closing Price Symbol 29-Aug-14 30-May-14 29-Aug-14 29-Aug-14 Energy ENC 26.0 26.0 26.5 3,504.24 Energy Equipment & Services ENEQP 2.0 1.0 1.4 2,113.24 Calfrac Well Services Ltd. CFW 1.0 1.0 0.1 20.51 Precision Drilling Corp. PD 1.0 0.0 0.2 13.86 Oil, Gas & Consumable Fuels OIL 24.0 25.0 25.0 3,633.68 ARC Resources Ltd. ARX 1.0 1.0 0.5 31.43 Baytex Energy Corp. BTE 1.0 1.0 0.4 48.62 Cameco Corp. CCO 1.0 1.0 0.4 21.26 Canadian Natural Resources Ltd. CNQ 3.0 3.0 2.7 47.39 Cenovus Energy Inc. CVE 1.0 1.0 1.4 34.68 Enbridge Inc. ENB 2.0 2.0 2.3 54.23 Encana Corp. ECA 2.0 2.0 1.0 25.07 Gran Tierra Energy Inc. GTE 1.0 1.0 0.1 7.29 Husky Energy Inc. HSE 2.0 2.0 0.5 33.10 Inter Pipeline Ltd. IPL 1.0 1.0 0.6 36.28 MEG Energy Corp. MEG 1.0 1.0 0.3 38.73 Pembina Pipeline Corp. PPL 1.0 1.0 0.8 49.97 Suncor Energy Inc. SU 4.0 4.0 3.4 44.63 Tourmaline Oil Corp. TOU 1.0 1.0 0.5 55.07 TransCanada Corp. TRP 2.0 2.0 2.1 58.43 Materials BMS 11.0 10.0 12.0 2,421.05 Chemicals CHM 1.0 1.0 2.9 4,951.66 Agrium Inc. AGU 1.0 1.0 0.8 102.82 Other* 0.0 0.0 0.2 4,931.75 (Const. Materials, Containers & Packaging) Metals & Mining ex Gold and Steel* 2.0 2.0 2.9 6,294.07 Silver Wheaton Corp. SLW 1.0 1.0 0.5 27.16 Teck Resources Ltd. TCK.B 1.0 1.0 0.6 24.69 Gold GLD 5.0 5.0 5.5 1,736.02 Agnico-Eagle Mines Ltd. AEM 1.0 1.0 0.4 41.58 Barrick Gold Corp. ABX 1.0 1.0 1.2 19.99 Franco-Nevada Corp. FNV 1.0 1.0 0.5 61.26 Goldcorp Inc. G 1.0 1.0 1.3 30.53 New Gold Inc. NGD 1.0 1.0 0.2 7.03 Steel STL 1.0 1.0 0.1 9,662.69 Labrador Iron Ore Royalty Corp. LIF 1.0 1.0 0.1 29.99 Paper & Forest Products PPRFP 2.0 1.0 0.4 435.40 International Forest Products Ltd SV IFP 1.0 1.0 0.1 16.64 West Fraser Timber Co. Ltd. WFT 1.0 0.0 0.2 55.05 Industrials CAP 10.0 10.0 8.2 2,406.35 Capital Goods CG 2.0 2.0 1.9 643.35 CAE Inc. CAE 1.0 1.0 0.2 13.44 MacDonald Dettwiler & Assoc. Ltd. MDA 1.0 1.0 0.2 83.02 Commercial & Prof. Services DUR 2.0 2.0 0.7 898.95 Progressive Waste Solutions Ltd. BIN 1.0 1.0 0.2 28.11 Stantec Inc. STN 1.0 1.0 0.2 74.10 Transportation TRNS 6.0 6.0 5.7 8,155.45 Air Canada AC.B 1.0 1.0 0.1 8.49 Canadian National Railway Co. CNR 3.0 3.0 3.3 78.09 Cargojet Inc. CJT 1.0 1.0 n.m 22.80 TransForce Inc. TFI 1.0 1.0 0.1 27.99 Continued on next page.
Fall 2014 51 Strategy: The Investment Outlook – Fundamental Equity Weightings
Exhibit 1: RBC Capital Markets Fall 2014 Fundamental Equity Weighting (FEW) Portfolio…continued
Weights (%) RBC CM S&P/TSX Closing Price Consumer Discretionary CONCSymbol 29-Aug-148.0 30-May-148.0 29-Aug-145.6 29-Aug-141,728.82 ConsumerAutomobiles Discretionary & Components CONCAUTO 8.02.0 8.02.0 5.61.6 1,728.823,417.00 AutomobilesMagna International& Components Inc. MGAUTO 2.0 2.0 1.41.6 3,417.00123.28 ConsumerMagna Durables International & Apparel Inc. DURMG 2.0 2.0 0.51.4 3,836.23123.28 ConsumerBRP Inc,Durables SV & Apparel DOODUR 1.02.0 1.02.0 0.00.5 3,836.2326.48 DorelBRP Inc, Industries SV Inc. DII.BDOO 1.0 1.0 0.10.0 36.7526.48 ConsumerDorel Services Industries Inc. HOTELDII.B 0.01.0 0.01.0 0.60.1 2,407.6836.75 MediaConsumer Services MEDIAHOTEL 2.00.0 2.00.0 1.90.6 2,407.68909.53 MediaBroadcasting TVMEDIA 0.02.0 0.02.0 0.11.9 2,091.59909.53 Other*Broadcasting (Advertising, Cable & Satellite, TV 0.0 0.0 0.1 2,091.59 Other* Movies (Advertising, & Entertainment, Cable & Satellite,Publishing) 2.0 2.0 1.8 7,644.14 Cineplex Movies & Inc. Entertainment, Publishing) CGX 1.02.0 1.02.0 0.11.8 7,644.1440.96 SiriusCineplex XM Inc.Canada Holdings Inc. XSRCGX 1.0 1.0 n.m.0.1 40.967.75 RetailingSirius XM Canada Holdings Inc. RETLXSR 2.01.0 2.01.0 n.m.1.0 3,595.797.75 RetailingCanadian Tire Corp., Ltd., Cl "A" NV CTC.ARETL 1.02.0 1.02.0 0.51.0 3,595.79112.32 DollaramaCanadian Tire Inc. Corp., Ltd., Cl "A" NV DOLCTC.A 1.0 1.0 0.30.5 112.3292.57 ConsumerDollarama Staples Inc. CONSDOL 1.0 1.0 2.80.3 3,045.6292.57 ConsumerLoblaw Staples Companies Ltd. LCONS 1.0 1.0 0.62.8 3,045.6254.20 Health CareLoblaw Companies Ltd. HCL 4.01.0 4.01.0 2.60.6 1,592.5854.20 Health CareCatamaran Corporation CCTHC 1.04.0 1.04.0 0.52.6 1,592.5851.23 ValeantCatamaran Pharmaceuticals Corporation Int'l. Inc. VRXCCT 3.01.0 3.01.0 2.00.5 127.3851.23 FinancialsValeant Pharmaceuticals Int'l. Inc. TSFVRX 35.03.0 34.03.0 34.22.0 2,328.37127.38 FinancialsBanks BKSTSF 23.035.0 23.034.0 22.434.2 2,853.422,328.37 Banks Bank of Montreal BMOBKS 23.02.0 23.02.0 22.42.8 2,853.4283.66 Bank of NovaMontreal Scotia BNSBMO 6.02.0 6.02.0 4.52.8 72.0483.66 CanadianBank of Nova Imperial Scotia Bank of Commerce CMBNS 1.06.0 1.06.0 2.14.5 103.9172.04 Canadian WesternImperial Bank of Commerce CWBCM 1.0 1.0 0.22.1 103.9140.67 NationalCanadian Bank Western of Canada Bank NACWB 1.0 1.0 0.90.2 52.3140.67 RoyalNational Bank Bank of Canadaof Canada RYNA 6.01.0 6.01.0 6.00.9 80.7752.31 TheRoyal Toronto-Dominion Bank of Canada Bank TDRY 6.0 6.0 5.56.0 57.2580.77 DiversifiedThe Toronto-Dominion Financials Bank DIVFINTD 3.06.0 2.06.0 1.45.5 2,668.2257.25 DiversifiedCI Financial Financials Corp. CIXDIVFIN 1.03.0 0.02.0 0.41.4 2,668.2235.68 GluskinCI Financial Sheff Corp. + Associates Inc. GSCIX 1.0 1.00.0 n.m.0.4 33.0935.68 TriconGluskin Capital Sheff +Group Associates Inc. Inc. TCNGS 1.0 1.0 n.m. 33.097.74 InsuranceTricon Capital Group Inc. ISRTCN 6.01.0 6.01.0 n.m.6.2 1,237.597.74 InsuranceIndustrial Alliance Insurance & Fin Serv Inc. IAGISR 1.06.0 1.06.0 0.26.2 1,237.5946.94 IntactIndustrial Financial Alliance Corp. Insurance & Fin Serv Inc. IFCIAG 1.0 1.0 0.50.2 73.9146.94 ManulifeIntact Financial Financial Corp. Corp. MFCIFC 3.01.0 3.01.0 2.10.5 21.9573.91 PowerManulife Corporation Financial Corp. of Canada SV POWMFC 1.03.0 1.03.0 0.62.1 32.0421.95 Real EstatePower Corporation of Canada SV RESPOW 3.01.0 3.01.0 4.30.6 2,722.1932.04 Real EstateBrookfield Asset Management Inc. BAM.ARES 2.03.0 2.03.0 1.54.3 2,722.1951.95 CanadianBrookfield REIT Asset Management Inc. REF.UNBAM.A 1.02.0 1.02.0 0.21.5 48.3751.95 InformationCanadian Technology REIT HTCREF.UN 1.0 2.01.0 1.80.2 166.4748.37 InformationSoftware Technology& Services SFTWRHTC 1.0 2.0 1.41.8 2,742.49166.47 SoftwareCGI & Group Services Inc Class "A" SV GIB.ASFTWR 1.0 1.02.0 0.51.4 2,742.4938.48 TechnologyCGI Group Hardware Inc Class & Semi-conductors* "A" SV GIB.A 0.01.0 0.01.0 0.40.5 937.1838.48 TelecommunicationTechnology Hardware Services & Semi-conductors* CS 3.00.0 4.00.0 4.40.4 1,203.04937.18 TelecommunicationBCE Inc. Services BCECS 1.03.0 1.04.0 2.04.4 1,203.0448.95 TELUSBCE Inc. Corp. TBCE 2.01.0 2.01.0 1.32.0 39.6548.95 Utilities TELUS Corp. UTILT 1.02.0 1.02.0 1.91.3 1,904.1339.65 Utilities Brookfield Infrastructure Partners LP BIP.UNUTIL 1.0 1.0 n.m.1.9 1,904.1346.06 TOTAL PORTFOLIOBrookfield Infrastructure Partners LP TSXBIP.UN 1001.0 1001.0 n.m.100 15,62646.06 TOTAL PORTFOLIO TSX 100 100 100 15,626 New to the FEW portfolio this quarter.
* RBC Capital Markets estimates n.m. = Not a member of TSX Composite. Source: RBC Capital Markets
Fall 2014 52 Strategy: The Investment Outlook – Fundamental Equity Weightings
Summer 2014 FEW Performance Review As summarized in Exhibit 2, the Summer 2014 FEW portfolio delivered a total return of 7.0%, which was 79 basis points below the 7.7% total return from the S&P/TSX Composite Index for the three-month period ending August 31, 2014.1
Exhibits 3 graphically depicts total returns from the FEW relative to the TSX Index since inception.
A detailed re-cap of the stock selections and performance of the Summer 2014 FEW is included in Exhibit 4 on pages 54-55.
Exhibit 2: The FEW’s historical total return performance over the short and long terms (all periods ended August 29, 2014)
RBC CM FEW S&P/TSX 3 months 7.0% 7.7% 6 months 11.0% 11.5% 1 Year 29.9% 27.1% 3 Years 13.9% 10.2% 5 Years 13.5% 10.7% 10 Years 11.5% 9.3% 15 Years 10.3% 8.0% 20 Years 11.8% 9.0% Since Inception (June 30, 1986) 11.5% 8.6% Note: 3-month, 6-month, and 1-year returns are all simple returns. All otherRBC time CM periods Performance (3 years to Since Inception) are compound returns Source: RBC Capital Markets Relative to TSE 300
Exhibit 3: RBC Capital Markets FEW Performance (dividends plus appreciation) vs. S&P/TSX Composite Index (June 1986 = 100)
2500 RBC CM 2200 2,153 1900
1600
1300 S&P/TSX 1,030 1000
700
400
100 Aug-14 Jun-86 Dec-89 May-93 Nov-96 May-00 Nov-03 May-07 Nov-10 May-14 Source: RBC Capital Markets
Market internals included outperformance by Materials, Industrials, Consumer Discretionary, Staples, and Information Technology sectors. The Energy, Health Care, Telecom, and Utilities sectors all underperformed the total return from the S&P/TSX Composite Index. The total return from Financials was in-line with the market.
1 Note: Past performance is not necessarily indicative of future performance. Performance returns do not take into consideration management fees or other account expenses, which would lower actual returns. Fall 2014 53 Strategy: The Investment Outlook – Fundamental Equity Weightings
While the Summer FEW performance slightly lagged the market, we note that relative underperformance by sub-sector was somewhat narrow in that it was limited to three of 10 sectors (Energy, Industrials, and Consumer Discretionary). Four of the 10 sectors (Materials, Consumer Staples, Information Technology, and Utilities) outperformed their respective industry groups, while three (Health Care, Financials, and Telecommunication Services) posted ‘in-line’ performance.
The best-performing stock selections within the FEW were: Agnico-Eagle Mines Ltd., (26.3%), Franco-Nevada Corp., (22.2%), and Open Text Corp. (21.1%). The weakest performers were BRP Inc., SV (-11.1%), Valeant Pharmaceuticals International Inc. (-10.5%), and Dorel Industries Inc. (-10.0%).
Exhibit 4: RBC CM Fundamental Equity Weighting (FEW) Summer 2014 Portfolio Performance – Last Quarter
Performance (%) Weights (%) RBC CM S&P/TSX RBC CM S&P/TSX Closing Price Price Total Price Total Symbol 30-May-14 30-May-14 29-Aug-14 30-May-14 28-Aug-14 Return Return Return Return Energy ENC 26.0 26.4 26.5 3,310.59 3,504.24 4.8 5.4 5.8 6.6 Energy Equipment & Services ENEQP 1.0 1.4 1.4 1,997.83 2,113.24 10.5 11.2 5.8 6.4 Calfrac Well Services Ltd. CFW 1.0 0.1 0.1 18.56 20.51 10.5 11.2 Oil, Gas & Consumable Fuels OIL 25.0 25.0 25.0 3,432.64 3,633.68 4.5 5.2 5.9 6.6 ARC Resources Ltd. ARX 1.0 0.6 0.5 31.25 31.43 0.6 1.5 Baytex Energy Corp. BTE 1.0 0.3 0.4 45.29 48.62 7.4 8.9 Cameco Corp. CCO 1.0 0.5 0.4 21.68 21.26 -1.9 -1.5 Canadian Natural Resources Ltd. CNQ 3.0 2.7 2.7 44.13 47.39 7.4 7.9 Cenovus Energy Inc. CVE 1.0 1.4 1.4 32.27 34.68 7.5 8.3 Enbridge Inc. ENB 2.0 2.4 2.3 51.53 54.23 5.2 5.9 Encana Corp. ECA 2.0 1.0 1.0 25.25 25.07 -0.7 -0.4 Gran Tierra Energy Inc. GTE 1.0 0.1 0.1 7.82 7.29 -6.8 -6.8 Husky Energy Inc. HSE 2.0 0.6 0.5 36.57 33.10 -9.5 -8.7 Inter Pipeline Ltd. IPL 1.0 0.5 0.6 31.77 36.28 14.2 15.2 MEG Energy Corp. MEG 1.0 0.3 0.3 37.84 38.73 2.4 2.4 Pembina Pipeline Corp. PPL 1.0 0.8 0.8 42.81 49.97 16.7 17.7 Peyto Exploration & Development Corp. PEY 1.0 0.3 0.3 38.48 38.53 0.1 0.9 Suncor Energy Inc. SU 4.0 3.4 3.4 41.73 44.63 6.9 7.5 Tourmaline Oil Corp.^ TOU 1.0 0.5 0.5 54.00 55.07 2.0 2.0 TransCanada Corp. TRP 2.0 2.0 2.1 50.48 58.43 15.7 16.7 Materials BMS 10.0 11.7 12.0 2,174.66 2,421.05 14.1 14.7 11.3 11.9 Chemicals CHM 1.0 3.1 2.9 4,865.26 4,951.66 5.6 6.5 1.8 2.7 Agrium Inc. AGU 1.0 0.8 0.8 97.36 102.82 5.6 6.5 Other* 0.0 0.2 0.2 4,482.32 4,931.75 0.0 0.0 10.0 10.4 (Const. Materials, Containers & Packaging) Metals & Mining ex Gold and Steel* 2.0 2.9 2.9 6,003.46 6,294.07 11.4 12.3 4.8 5.5 Silver Wheaton Corp. SLW 1.0 0.5 0.5 22.52 27.16 20.6 20.6 Teck Resources Ltd. TCK.B 1.0 0.6 0.6 24.17 24.69 2.2 4.0 Gold GLD 5.0 5.0 5.5 1,455.63 1,736.02 20.4 20.7 19.3 19.6 Agnico-Eagle Mines Ltd. AEM 1.0 0.3 0.4 32.99 41.58 26.0 26.3 Barrick Gold Corp. ABX 1.0 1.1 1.2 17.60 19.99 13.6 13.9 Franco-Nevada Corp. FNV 1.0 0.4 0.5 50.31 61.26 21.8 22.2 Goldcorp Inc. G 1.0 1.2 1.3 25.52 30.53 19.6 20.1 New Gold Inc. NGD 1.0 0.2 0.2 5.81 7.03 21.0 21.0 Steel STL 1.0 0.1 0.1 9,047.29 9,662.69 6.8 8.2 6.8 8.2 Labrador Iron Ore Royalty Corp. LIF 1.0 0.1 0.1 28.08 29.99 6.8 8.2 Paper & Forest Products PPRFP 1.0 0.4 0.4 412.15 435.40 4.2 4.2 5.6 5.9 International Forest Products Ltd. SV IFP 1.0 0.1 0.1 15.97 16.64 4.2 4.2 Industrials CAP 10.0 7.9 8.2 2,136.38 2,406.35 7.1 7.5 12.6 13.1 Capital Goods CG 2.0 2.0 1.9 632.48 643.35 -7.4 -7.2 1.7 2.2 CAE Inc. CAE 1.0 0.2 0.2 14.70 13.44 -8.6 -8.2 MacDonald Dettwiler & Assoc. Ltd. MDA 1.0 0.2 0.2 88.60 83.02 -6.3 -6.3 Commercial & Prof. Services DUR 2.0 0.7 0.7 880.26 898.95 5.3 5.7 2.1 2.7 Progressive Waste Solutions Ltd. BIN 1.0 0.2 0.2 28.08 28.11 0.1 0.6 Stantec Inc. STN 1.0 0.2 0.2 67.11 74.10 10.4 10.7 Transportation TRNS 6.0 5.2 5.7 6,892.77 8,155.45 12.6 13.0 18.3 18.7 Continued onAir next Canada page. AC.B 1.0 0.1 0.1 8.85 8.49 -4.1 -4.1 Canadian National Railway Co. CNR 3.0 3.1 3.3 65.76 78.09 18.7 19.1 Cargojet Inc. CJT 1.0 n.m n.m 21.70 22.80 5.1 5.8 TransForce Inc. TFI 1.0 0.1 0.1 23.70 27.99 18.1 18.7 Consumer Discretionary CONC 8.0 5.5 5.6 1,584.33 1,728.82 1.3 2.8 9.1 9.7 FallAutomobiles 2014 & Components AUTO 2.0 1.6 1.6 3,083.90 3,417.00 11.1 11.5 10.8 11.154 Magna International Inc. MG 2.0 1.4 1.4 110.94 123.28 11.1 11.5 Consumer Durables & Apparel DUR 2.0 0.5 0.5 3,777.60 3,836.23 -10.9 -10.5 1.6 1.8 BRP Inc, SV^ DOO 1.0 0.1 0.0 29.78 26.48 -11.1 -11.1 Dorel Industries Inc. DII.B 1.0 0.1 0.1 41.20 36.75 -10.8 -10.0 Consumer Services HOTEL 0.0 0.5 0.6 1,617.61 2,407.68 0.0 0.0 48.8 49.5 Media MEDIA 2.0 2.0 1.9 878.68 909.53 0.8 5.6 3.5 4.4 Broadcasting TV 0.0 0.1 0.1 2,143.77 2,091.59 0.0 0.0 -2.4 -1.4 Other* (Advertising, Cable & Satellite, Movies & Entertainment, Publishing) 2.0 1.9 1.8 7,266.53 7,644.14 0.8 5.6 5.2 6.2 Cineplex Inc.^ CGX 1.0 0.1 0.1 40.05 40.96 2.3 3.2 Sirius XM Canada Holdings Inc. XSR 1.0 n.m. n.m. 7.81 7.75 -0.8 8.1 Strategy: The Investment Outlook – Fundamental Equity Weightings
Exhibit 4: RBC CM Fundamental Equity Weighting (FEW) Summer 2014 Portfolio Performance – Last Quarter (continued)
Performance (%) Weights (%) RBC CM S&P/TSX RBC CM S&P/TSX Closing Price Price Total Price Total Transportation TRNSSymbol 30-May-146.0 30-May-145.2 29-Aug-145.7 30-May-146,892.77 28-Aug-148,155.45 Return12.6 Return13.0 Return18.3 Return18.7 TransportationAir Canada TRNSAC.B 6.01.0 5.20.1 5.70.1 6,892.778.85 8,155.458.49 12.6-4.1 13.0-4.1 18.3 18.7 CanadianAir Canada National Railway Co. CNRAC.B 3.01.0 3.10.1 3.30.1 65.768.85 78.098.49 18.7-4.1 19.1-4.1 CargojetCanadian Inc. National Railway Co. CJTCNR 1.03.0 n.m3.1 n.m3.3 21.7065.76 22.8078.09 18.75.1 19.15.8 TransForceCargojet Inc. Inc. TFICJT 1.0 n.m0.1 n.m0.1 23.7021.70 27.9922.80 18.15.1 18.75.8 ConsumerTransForce Discretionary Inc. CONCTFI 8.01.0 5.50.1 5.60.1 1,584.3323.70 1,728.8227.99 18.11.3 18.72.8 9.1 9.7 ConsumerAutomobiles Discretionary & Components AUTOCONC 2.08.0 1.65.5 1.65.6 3,083.901,584.33 3,417.001,728.82 11.11.3 11.52.8 10.89.1 11.19.7 AutomobilesMagna International& Components Inc. MGAUTO 2.0 1.41.6 1.41.6 3,083.90110.94 3,417.00123.28 11.1 11.5 10.8 11.1 ConsumerMagna Durables International & Apparel Inc. DURMG 2.0 0.51.4 0.51.4 3,777.60110.94 3,836.23123.28 -10.911.1 -10.511.5 1.6 1.8 ConsumerBRP Inc,Durables SV^ & Apparel DOODUR 1.02.0 0.10.5 0.00.5 3,777.6029.78 3,836.2326.48 -11.1-10.9 -11.1-10.5 1.6 1.8 DorelBRP Inc, Industries SV^ Inc. DII.BDOO 1.0 0.1 0.10.0 41.2029.78 36.7526.48 -10.8-11.1 -10.0-11.1 ConsumerDorel Services Industries Inc. HOTELDII.B 0.01.0 0.50.1 0.60.1 1,617.6141.20 2,407.6836.75 -10.80.0 -10.00.0 48.8 49.5 MediaConsumer Services MEDIAHOTEL 2.00.0 2.00.5 1.90.6 1,617.61878.68 2,407.68909.53 0.80.0 5.60.0 48.83.5 49.54.4 MediaBroadcasting TVMEDIA 0.02.0 0.12.0 0.11.9 2,143.77878.68 2,091.59909.53 0.00.8 0.05.6 -2.43.5 -1.44.4 Other*Broadcasting (Advertising, Cable & Satellite, TV 0.0 0.1 0.1 2,143.77 2,091.59 0.0 0.0 -2.4 -1.4 Other* Movies (Advertising, & Entertainment, Cable & Satellite,Publishing) 2.0 1.9 1.8 7,266.53 7,644.14 0.8 5.6 5.2 6.2 Cineplex Movies & Inc.^ Entertainment, Publishing) CGX 1.02.0 0.11.9 0.11.8 7,266.5340.05 7,644.1440.96 2.30.8 3.25.6 5.2 6.2 SiriusCineplex XM Inc.^Canada Holdings Inc. XSRCGX 1.0 n.m.0.1 n.m.0.1 40.057.81 40.967.75 -0.82.3 8.13.2 RetailingSirius XM Canada Holdings Inc. RETLXSR 2.01.0 n.m.1.0 n.m.1.0 3,466.777.81 3,595.797.75 -0.84.3 4.68.1 3.7 4.1 RetailingCanadian Tire Corp., Ltd., Cl "A" NV^ CTC.ARETL 1.02.0 0.51.0 0.51.0 3,466.77104.59 3,595.79112.32 7.44.3 7.84.6 3.7 4.1 DollaramaCanadian Tire Inc. Corp., Ltd., Cl "A" NV^ DOLCTC.A 1.0 0.30.5 0.30.5 104.5991.47 112.3292.57 1.27.4 1.47.8 ConsumerDollarama Staples Inc. CONSDOL 1.0 2.70.3 2.80.3 2,734.9691.47 3,045.6292.57 18.61.2 19.11.4 11.4 11.8 ConsumerLoblaw Staples Companies Ltd. LCONS 1.0 0.62.7 0.62.8 2,734.9645.70 3,045.6254.20 18.6 19.1 11.4 11.8 Health CareLoblaw Companies Ltd. HCL 4.01.0 3.10.6 2.60.6 1,712.1245.70 1,592.5854.20 18.6-6.1 19.1-6.1 -7.0 -7.0 Health CareCatamaran Corporation^ CCTHC 1.04.0 0.63.1 0.52.6 1,712.1247.77 1,592.5851.23 -6.17.2 -6.17.2 -7.0 -7.0 ValeantCatamaran Pharmaceuticals Corporation^ Int'l. Inc. VRXCCT 3.01.0 2.50.6 2.00.5 142.3447.77 127.3851.23 -10.57.2 -10.57.2 FinancialsValeant Pharmaceuticals Int'l. Inc. TSFVRX 34.03.0 34.22.5 34.22.0 2,175.43142.34 2,328.37127.38 -10.57.7 -10.58.5 7.0 8.0 FinancialsBanks BKSTSF 23.034.0 22.534.2 22.434.2 2,660.742,175.43 2,853.422,328.37 7.07.7 7.98.5 7.27.0 8.28.0 Banks Bank of Montreal BMOBKS 23.02.0 22.52.8 22.42.8 2,660.7476.28 2,853.4283.66 9.77.0 10.77.9 7.2 8.2 Bank of NovaMontreal Scotia BNSBMO 6.02.0 4.72.8 4.52.8 69.6376.28 72.0483.66 3.59.7 10.74.4 CanadianBank of Nova Imperial Scotia Bank of Commerce CMBNS 1.06.0 2.14.7 2.14.5 95.6669.63 103.9172.04 8.63.5 9.74.4 Canadian WesternImperial Bank of Commerce CWBCM 1.0 0.22.1 0.22.1 37.4095.66 103.9140.67 8.78.6 9.39.7 NationalCanadian Bank Western of Canada Bank NACWB 1.0 0.80.2 0.90.2 45.5037.40 52.3140.67 15.08.7 16.09.3 RoyalNational Bank Bank of Canada of Canada RYNA 6.01.0 6.00.8 6.00.9 74.6445.50 80.7752.31 15.08.2 16.09.2 TheRoyal Toronto-Dominion Bank of Canada Bank TDRY 6.0 5.56.0 5.56.0 53.7674.64 57.2580.77 6.58.2 7.49.2 DiversifiedThe Toronto-Dominion Financials Bank DIVFINTD 2.06.0 1.25.5 1.45.5 2,657.9253.76 2,668.2257.25 6.36.5 6.77.4 0.4 1.0 DiversifiedGluskin Financials Sheff + Associates Inc. GSDIVFIN 1.02.0 n.m.1.2 n.m.1.4 2,657.9229.87 2,668.2233.09 10.86.3 10.86.7 0.4 1.0 TriconGluskin Capital Sheff +Group Associates Inc. Inc. TCNGS 1.0 n.m. n.m. 29.877.60 33.097.74 10.81.8 10.82.6 InsuranceTricon Capital Group Inc. ISRTCN 6.01.0 n.m.6.1 n.m.6.2 1,137.127.60 1,237.597.74 9.61.8 10.32.6 8.8 9.6 InsuranceIndustrial Alliance Insurance & Fin Serv.^ IAGISR 1.06.0 0.26.1 0.26.2 1,137.1241.63 1,237.5946.94 12.89.6 13.410.3 8.8 9.6 IntactIndustrial Financial Alliance Corp. Insurance & Fin Serv.^ IFCIAG 1.0 0.50.2 0.50.2 71.6041.63 73.9146.94 12.83.2 13.43.9 ManulifeIntact Financial Financial Corp. Corp. MFCIFC 3.01.0 2.10.5 2.10.5 19.8571.60 21.9573.91 10.63.2 11.23.9 PowerManulife Corporation Financial Corp.of Canada SV POWMFC 1.03.0 0.62.1 0.62.1 29.1819.85 32.0421.95 10.69.8 10.811.2 Real EstatePower Corporation of Canada SV RESPOW 3.01.0 4.30.6 4.30.6 2,580.6829.18 2,722.1932.04 9.8 10.410.8 5.5 6.5 Real EstateBrookfield Asset Management Inc. BAM.ARES 2.03.0 1.54.3 1.54.3 2,580.6846.60 2,722.1951.95 11.59.8 11.910.4 5.5 6.5 CanadianBrookfield REIT Asset Management Inc. REF.UNBAM.A 1.02.0 0.21.5 0.21.5 45.4446.60 48.3751.95 11.56.4 11.97.4 InformationCanadian Technology REIT HTCREF.UN 2.01.0 1.80.2 1.80.2 150.3345.44 166.4748.37 12.56.4 12.77.4 10.7 11.0 InformationSoftware Technology& Services SFTWRHTC 2.0 1.41.8 1.41.8 2,514.12150.33 2,742.49166.47 12.5 12.7 10.79.1 11.09.4 SoftwareCGI & Group Services Inc Class "A" SV ^ GIB.ASFTWR 1.02.0 0.61.4 0.51.4 2,514.1236.90 2,742.4938.48 12.54.3 12.74.3 9.1 9.4 OpenCGI Group Text IncCorp. Class "A" SV ^ OTCGIB.A 1.0 0.30.6 0.40.5 50.5936.90 61.0838.48 20.74.3 21.14.3 TechnologyOpen HardwareText Corp. & Semi-conductors* OTC 0.01.0 0.40.3 0.4 803.2350.59 937.1861.08 20.70.0 21.10.0 16.7 16.7 TelecommunicationTechnology Hardware Services & Semi-conductors* CS 4.00.0 4.80.4 4.40.4 1,218.90803.23 1,203.04937.18 -1.70.0 -0.70.0 16.7-1.3 16.7-0.2 TelecommunicationBCE Inc. Services BCECS 1.04.0 2.24.8 2.04.4 1,218.9049.84 1,203.0448.95 -1.8-1.7 -0.5-0.7 -1.3 -0.2 RogersBCE Inc. Communications Inc. RCI.BBCE 1.0 0.92.2 0.92.0 43.8249.84 44.3248.95 -1.81.1 -0.52.2 TELUSRogers Corp. Communications Inc. TRCI.B 2.01.0 1.40.9 1.30.9 40.9543.82 39.6544.32 -3.21.1 -2.22.2 Utilities TELUS Corp. UTILT 1.02.0 2.01.4 1.91.3 1,879.1640.95 1,904.1339.65 -3.24.6 -2.25.8 1.3 2.4 Utilities Brookfield Infrastructure Partners LP BIP.UNUTIL 1.0 n.m.2.0 n.m.1.9 1,879.1644.05 1,904.1346.06 4.6 5.8 1.3 2.4 TOTAL PORTFOLIOBrookfield Infrastructure Partners LP TSXBIP.UN 1001.0 n.m.100 n.m.100 14,60444.05 15,62646.06 6.24.6 7.05.8 7.0 7.7 TOTAL PORTFOLIO TSX 100 100 100 14,604 15,626 6.2 7.0 7.0 7.7 * RBC Capital Markets estimates ^ Addition to the list made on June 2, 2014. n.m. = Not a member of TSX Composite. All values in Canadian dollars, unless otherwise noted. Source: RBC Capital Markets
Fall 2014 55 Strategy: The Investment Outlook – Global Equity Coverage Universe
Global Equity Coverage Universe
Click Here for Company Coverage and Rating Summary as of September 15, 2014.
Fall 2014 56 Strategy: The Investment Outlook - Disclosures
Required Disclosures Non-US analyst disclosure Steve Arthur, Neil Downey, Mark J. Friesen, Michael Harvey, Bish Koziol, Robert Kwan, Chad McAlpine, Drew McReynolds, Darko Mihelic, Javed Mirza, Irene Nattel, Sara O’Brien, Greg Pardy, Walter Spracklin, and Andrew D. Wong (i) are not registered/qualified as research analysts with the NYSE and/or FINRA and (ii) may not be associated persons of the RBC Capital Markets, LLC and therefore may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Conflicts disclosures This product constitutes a compendium report (covers six or more subject companies). As such, RBC Capital Markets chooses to provide specific disclosures for the subject companies by reference. To access current disclosures for the subject companies, clients should refer to https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1 or send a request to RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in, this report.
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Distribution of ratings RBC Capital Markets, Equity Research As of 30-Jun-2014 Investment Banking Serv./Past 12 Mos. Rating Count Percent Count Percent BUY [Top Pick & Outperform] 845 53.24 299 35.38 HOLD [Sector Perform] 658 41.46 159 24.16 SELL [Underperform] 84 5.29 10 11.90
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Fall 2014 57 Strategy: The Investment Outlook - Disclosures
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Fall 2014 58 Strategy: The Investment Outlook - Disclosures
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Fall 2014 59 Strategy: The Investment Outlook - Disclosures
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Fall 2014 60 Strategy: The Investment Outlook
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