1. F CUS Volume 23, N°8, august 2012
EDITORIAL Ed Sollbach, CFA
Portfolio Strategy and
Quantitative Research Analyst
retail strategy
Message from the
General Manager “Stocks have shown resilience over the last month because they have become
very cheap vs bonds, their competing asset class.“
Bruno Desmarais
Vice-President and General Manager
Full Service Brokerage
Europe Monetary Fund aid payments needed to
Someone you can count on! The outline of a comprehensive pan- avoid a debt default that could lead to its
European banking union, similar to what quick exit from the eurozone. However,
The international situation has been
we have in Canada and the US, was finally the EU will likely avoid a disastrous break-
problematic for several months now,
announced at the end of June. up. The all-powerful European Central
with Greece in a downward spiral, Italy
Bank (ECB) President Mario Draghi said on
on the brink, and now Spain joining
Although Europe has made some progress July 26, “the ECB is ready to do whatever it
the ranks of too many European
over the last month, policy makers are takes to preserve the euro. And believe me,
countries in serious financial difficulty.
still not moving fast enough to deal with it will be enough”.
Hardly a cheerful picture, especially
serious bank and sovereign debt problems.
when you consider the problems we’re
Infighting among the 17 member nations China
experiencing at the provincial level,
has prevented concrete details from China’s GDP growth slowed to 7.6% year-
particularly the impasse our government
emerging as much as a month after the over-year in the second quarter from 8.1% in
finds itself in following its negotiations
21st emergency eurozone summit. This the first quarter. However, the strong increase
with the student associations. Although
means it will likely take months before the in lending activity in June suggests that its
it’s hard to be optimistic, there are some
much needed reforms are put in place. growth should bottom this summer, then
encouraging signs, so we mustn’t give
rebound as borrowed money is put to work.
up hope. Certainly not.
Hence, eurozone worries, centred on Spain
and Greece especially, will likely continue to United States
Now more than ever, your Investment overhang the markets. Spain is in the difficult The US economy has also slowed in
Advisor is the person who can answer position of having to cut unsustainable deficits 2012, making the historically high US
your questions, ease your concerns while also raising 100 billion euros to bail out unemployment rate of 8.1% the main
and, especially, reassess and align your its banks. At the end of July, 10-year Spanish issue in the November presidential election.
investment strategies so that they take bond yields spiked through 7.5%, a level at Ben Bernanke confirmed that the Federal
into account your investor profile and which it becomes increasingly difficult for any Reserve (Fed) “is prepared to take further
current economic conditions. government to borrow in the debt markets. action” to bring down this number. If US jobs
This situation highlights the urgent need for a growth continues to be weak, we believe
banking union where all EU nations share the the Fed will roll out a third quantitative
Enjoy the rest of the summer! burden of backstopping the banks. easing program in September in the form of
mortgage debt purchases. This would drive
Greece continues to struggle with its mortgage rates even lower than the current
austerity program, risking the International record lows of 3.6%.
continued on page 2
Please see the last page of this document for company specific disclosures.
2. EDITORIAL (continued) Recommendations
Bombardier Inc.
7
It is record-low mortgage rates that are Contrarian analysis
6
spurring the emerging recovery in US Despite record-high bond prices (low yields),
PRICE ($)
5
housing after a five-year depression. Prices strategists in general have increased their
4
have increased 7.9% year-over-year, the bond allocation to record highs. Likewise,
3
largest gain since 2005, which eases the despite cheap valuations, equity funds also
Volume (M)
60
burden of struggling US consumers and have a record allocation to cash. In both 40
makes banks more profitable as there are cases, previous record allocations occurred 20
0
fewer defaults on mortgages. at or near stock market bottoms.
Jul-11 Oct-11 Jan-12 Apr-12 Jul-12
RATING BUY–ABOVE-AVERAGE RISK
Over the past month, US bond yields have Contrarian investing suggests going against Target $6.00
fallen 20 basis points (bps) to a record low prevailing market trends and sentiment, Symbol BBD.B
Sector Transportation & Aerospace
as capital continues to flee Europe. More particularly when these hit multi-year Recent price $3.83
importantly, with a continuing “need for extreme levels. Thus, we believe stocks will Total potential return 57%
yield” from investors, corporate bond 52-week range $3.30–6.42
rise as negative sentiment and funds flows
Market cap $6,603m
yields have fallen even more, plunging turn more positive toward stocks, while Year-end Dec-31
30 bps this month to new record lows. All record-high bond valuations (with record- Adjusted EPS 2012E US$0.36
2013E US$0.52
companies with debt are benefiting from low yields) are at risk given extremely P/E 2012E 10.6x
corporate borrowing costs that are down positive sentiment toward bonds after a 2013E 7.4x
136 bps (25%) from last year, but the Dividend yield 2.6%
32-year bond bull market.
Sources: Desjardins Securities, company reports, Bloomberg
biggest beneficiaries are stable companies
with high debt levels such as REITS, utilities Investment strategy
and telecoms that can continue to refinance Stocks have shown resilience over the last
debt at significantly lower rates. month because they have become very
cheap vs bonds, their competing asset Yamana Gold Inc.
Relative yields class. We continue to advocate owning a
20
At the time of writing, there is a positive core portfolio composed mainly of high-
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PRICE (US$)
spread of 75 bps between record-low yielding stocks—REITs, utilities, telecoms
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US bond yields of 1.40% and the S&P 500 and pipelines—to which we recommend
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yield of 2.15%, a situation only seen for a adding a smaller but riskier component
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few days in December 2008 and January comprised of growing companies (pref- 30
Volume (M)
2009 when dividends were being slashed. In erably with a dividend yield greater than 20
10
contrast, dividends are now up an attractive 2% to provide protection) in the financial, 0
15% year-over-year. technology, industrial, consumer discretion- Jul-11 Oct-11 Jan-12 Apr-12 Jul-12
ary, transportation and gold sectors. Also, RATING BUY–ABOVE-AVERAGE RISK
North of the border, 10-year government Target US$22.00
we have become more positive on the oil
Symbol AUY, YRI
bond yields have fallen to a record low of & gas and oil & gas services sectors as we Exchange NYSE, TSX
1.58% with the global slowdown while the believe oil prices have probably bottomed at Sector Gold
Recent price US$14.07, $14.30
TSX currently yields ~3.15%. The TSX–bond US$79 per barrel. n Total potential return 59%
spread is now over 150 bps, the biggest 52-week range US$12.35–18.16
spread since World War II. Of note, 67% Market cap US$10,496m
Year-end Dec-31
of TSX companies and 81% of TSX market Reserves 18.6m ozs
capitalization now yield more than 10-year Resources 23.9m ozs
Adjusted EPS1 2012E US$1.35
Canadian government bonds.
CFPS2 2012E US$1.86
Dividend yield 2.6%
1
From continuing operations
2
Before changes in working capital
Sources: Desjardins Securities, company reports, Bloomberg
3. Benoit Poirier, CFA, Analyst
n Bombardier outpacing Embraer and ATR on the regional Positive news on the development of the CSeries aircraft is a key cata-
aircraft order front so far in 2012 lyst, in our view. Bombardier continues to aim for first flight in late 2012
n Transportation division provides a support level of ~US$3.50/share and entry into service in 2013, whereas we believe the market is already
n Attractive dividend yield of 2.6% pricing in a delay of six months (the flight control system is the main
concern).
Bombardier (BBD) is an international, diversified manufacturing com-
pany that operates within two segments, Aerospace and Transportation. Operations in the Transportation division continue to perform well and,
based on our calculations, provide a support level of ~US$3.50/share—
In contrast to poor booking activity last year, Bombardier Aerospace post- which should significantly reduce downside risk for the shares. Booking
ed a solid first half of the year in 2012 as its recent marketing campaigns activity remains solid and there is a strong pipeline of opportunities;
(Nordic Aviation Capital, WestJet, NetJets) are starting to pay off. The back- management remains committed to achieving EBIT margins of 8.0% in
log is now much sounder and we estimate it is meeting management’s 2013 (we forecast 7.8%).
guidance for four out of five aircraft families (vs one out of five at the end of
2011). In our view, this is very positive as it provides strong revenue visibility. Given the aforementioned factors, we maintain a constructive view
on Bombardier. At current levels, we believe the stock offers an at-
Moreover, we believe momentum in Aerospace will continue to build, tractive value for investors and dividend yield of 2.6%.
given BBD’s strong booking activity as additional marketing campaigns are
scheduled in the US (Delta, SkyWest, US Airways, American Airlines). Most We rate Bombardier Buy–Above-average Risk with a $6/share target,
of the orders should be placed in 2013 (unlikely this year) and will depend which is derived from an average of four valuation methods and
on airline negotiations with labour unions in connection with the right to includes a value of US$1.20/share for the CSeries program.
operate larger regional jets and on the ability to secure financing.
Brian Christie, Analyst
n Forecast cash costs of US$485/oz GEO in 2012 below the Yamana also operates the Chapada copper-gold mine in Brazil, with
industry average annual production of 145-150m lbs of copper, and holds a 12.5%
equity interest in the Alumbrera copper-gold mine in Argentina.
n Expected production increase of 27% year-over-year in 2013 With these assets, the company is poised to benefit from a
with the start-up of new operations potential increase in copper prices in the event of a global
economic recovery.
n Proposed acquisition of Extorre’s 2.4m oz Cerro Moro project
should provide further production growth in 2015–16 Thanks to its portfolio of stable or growing operations and its focus
on organic growth, the company has outperformed many of its
Yamana Gold Inc. is a Canadian-based gold producer focused on peers during the recent economic turmoil. With a diversified asset
Latin America, with significant production, development and ex- base and significant near-term production growth, Yamana is cur-
ploration properties, and land positions in Brazil, Chile, Argentina, rently our preferred large capitalization gold producer.
Mexico and Colombia.
Our net asset value for Yamana is US$14.88/share. Our target price
The company’s key assets include the El Peñón, Gualcamayo and of US$22.00/share is derived by applying operational multiples of
Chapada mines, which provide the bulk of 2012 production of 1.6x to El Peñón and Chapada, 1.4x to the remaining mines and
1.21m ozs GEO (gold-equivalent ounces). Furthermore, produc- 1.3x to the development assets.
tion recently commenced at the Mercedes mine in Mexico at a rate
of 120,000ozs GEO per year. The company is considering increas-
ing throughput, which it expects will allow production to surpass
130,000ozs GEO per year in 2013.
Sources: Desjardins Securities, company reports, Bloomberg
Volume 23, N°8, August 2012 2-3 3
