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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
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Strategy: The Investment Outlook
Table of Contents
Recommended Asset Mix ............................................................ 4
Strategy
Click on titles
to be taken to
that section.
57.5% Equities, 35% Bonds, 7.5% Cash
Recommended Equity Weights ................................................... 5
Benchmark Returns ..................................................................... 6
Tactics
Bish Koziol (Quantitative Research Associate)
Stock Selections and Updates...................................................... 8
Investment Strategy Equity Selection Committee
The Economy ............................................................................ 25
US economy slides into driver’s seat with Canada going along for the ride
Working Papers
Dawn Desjardins (Assistant Chief Economist, RBC Economics)
Quantitative Research............................................................... 36
Are Canadian equities becoming too expensive?
Chad McAlpine, CFA (Quantitative Research)
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 (%)
20/0
100/0
60/40
100/0
60/40
100/0
Asset Class
Cash
Bonds
Stocks
Asset Class
Cash
Bonds
Stocks
Balanced (%)
1.5
47.0
51.5
Growth (%)
7.5
35.0
57.5
Past Range: Growth Portfolio
Highest %: Date
Lowest %: Date
40%: Q2-Q3/87
0%: Q3/91, Q1/92, Q3/92-Q1/93, Q1-Q2/95
55%: Q1/92-Q3/92
10%: Q4/86-Q3/87
70%: Q4/86-Q1/87
40%: Q2/92, Q1/94-Q4/94
Source: RBC Capital Markets
Fall 2014
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Strategy: The Investment Outlook
Recommended Equity Weights
ENERGY
Energy Equipment & Services
Oil, Gas & Consumable Fuels
S&P/TSX Weight (%)
As of
As of
05/30/2014
08/29/2014
26.4
26.4
1.4
1.4
25.0
25.0
MATERIALS
Chemicals
Other*
RBC Capital Markets
Recommended Weight (%)
Previous
Current
26.0
26.0
1.0
2.0
25.0
24.0
11.0 ↑
1.0
11.7
3.1
12.0
2.9
10.0
1.0
0.2
2.9
5.0
0.1
0.4
0.2
2.9
5.5
0.1
0.4
0.0
2.0
5.0
1.0
1.0
0.0
2.0
5.0
1.0
2.0
INDUSTRIALS
Capital Goods
Commercial & Professional Services
Transportation
7.9
2.0
0.7
5.2
8.2
1.9
0.7
5.7
10.0
2.0
2.0
6.0
10.0
2.0
2.0
6.0
CONSUMER DISCRETIONARY
Automobiles & Components
Consumer Durables & Apparel
Consumer Services
Media
Broadcasting & Cable TV
Other* (Advertising, Cable & Satellite,
5.5
1.6
0.5
0.5
2.0
0.1
5.6
1.6
0.5
0.6
1.9
0.1
8.0
2.0
2.0
0.0
2.0
0.0
8.0
2.0
2.0
0.0
2.0
0.0
Movies & Entertainment, Publishing)
1.9
1.0
1.8
1.0
2.0
2.0
2.0
2.0
CONSUMER STAPLES
2.7
2.8
1.0
1.0
HEALTH CARE
3.1
2.6
4.0
4.0
34.2
22.5
1.2
6.1
4.3
34.2
22.4
1.4
6.2
4.3
34.0
23.0
2.0
6.0
3.0
35.0 ↑
23.0
3.0
6.0
3.0
INFORMATION TECHNOLOGY
Software & Services
Technology Hardware, Semiconductors*
1.8
1.4
0.4
1.8
1.4
0.4
2.0
2.0
0.0
1.0 ↓
1.0
0.0
TELECOMMUNICATION SERVICES
4.8
4.4
4.0
3.0 ↓
UTILITIES
2.0
1.9
1.0
1.0
(Construction Materials, Containers & Packaging)
Metals & Mining ex. Gold and Steel*
Gold
Steel
Paper & Forest Products
Retailing
FINANCIALS
Banks
Diversified Financials
Insurance
Real Estate
* 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$)
3-Month
Trailing
YTD
12-Month
Trailing
5-Year
Cpd Ann
7.7
8.1
6.7
6.9
5.3
2.8
0.9
0.2
2.0
-0.3
16.9
16.8
17.1
17.9
15.8
9.6
3.9
0.6
6.6
-2.3
27.1
27.2
27.0
28.2
13.8
9.2
4.6
0.9
7.6
-3.1
10.7
9.7
14.1
11.8
8.1
5.6
3.8
0.8
5.2
0.1
S&P/TSX Composite Group Indices (Total Return)
Energy
6.6
22.4
Materials
11.9
18.3
Industrials
13.1
20.8
Consumer Discretionary
9.7
18.0
Consumer Staples
11.8
19.9
Health Care
-7.0
2.4
Financials
8.0
14.3
Information Technology
11.0
16.3
Telecommunication Services
-0.2
6.6
Utilities
2.4
11.1
Income Trust Index
3.8
12.3
High Dividend Index
5.7
14.9
REIT Index
3.1
12.3
31.8
10.2
47.5
31.6
25.8
14.1
28.8
23.8
19.3
17.1
20.0
23.5
19.2
10.2
-0.3
21.0
18.5
18.2
42.3
12.8
-9.4
17.5
10.0
18.9
N/A
16.5
RBC Canadian Style Total Return Indices
RBC Canada Style Diversified Index 6.1
RBC Canada Value Index
7.9
RBC Canada Growth Index
3.9
RBC Canada Momentum Index
7.2
RBC Canada Predictability Index
8.4
29.2
27.5
27.6
34.6
28.0
15.7
17.4
12.7
16.2
16.3
Asset Classes (Total Return)
S&P/TSX Composite
S&P/TSX 60
S&P/TSX Completion
S&P/TSX Smallcap
Long GOC Bond
10 Year GOC Bond
5 Year GOC Bond
3 Month Canada T-Bill
DEX Bond Universe
CDN$/US$ exchange
14.7
16.1
17.3
17.1
13.2
United States (US$)
3-Month
12-Month
Trailing
YTD
Trailing
Asset Classes (Total Return except where noted)
S&P 500
4.7
9.9
25.2
S&P 400
4.8
8.1
23.2
S&P 600
3.2
1.7
18.7
Dow Jones Industrial Average
2.9
4.8
18.2
NASDAQ Composite Price Return
8.0
9.7
27.6
NASDAQ 100 Price Return
9.5
16.4
37.1
Russell 1000
5.1
12.5
29.4
Russell 2000
4.1
4.2
21.5
30 Year US Treasury Bond
5.7
20.4
16.2
10 Year US Treasury Bond
1.8
8.0
6.7
5 Year US Treasury Bond
0.0
1.6
1.6
3 Month US T-Bill
0.0
0.0
0.0
S&P 500 Group Indices (Price)
Energy
Materials
Industrials
Consumer Discretionary
Consumer Staples
Health Care
Financials
Information Technology
Telecommunication Services
Utilities
RBC US Style Total Return Indices
RBC US Style Diversified Index
RBC US Value Index
RBC US Growth Index
RBC US Momentum Index
RBC US Predictability Index
5-Year
Cpd Ann
16.9
18.8
18.7
15.5
17.9
20.1
17.1
16.9
7.6
4.4
2.2
0.1
3.2
3.0
-0.2
4.8
0.4
6.9
4.7
7.5
0.2
1.3
9.8
9.1
2.6
2.8
4.8
14.8
6.5
13.6
3.2
13.2
20.3
25.0
22.1
19.4
14.1
29.7
20.1
31.7
6.9
16.1
12.8
12.3
16.3
21.5
12.7
17.4
9.7
15.7
8.8
8.2
4.9
6.8
4.0
4.4
2.6
11.6
12.8
11.4
7.3
7.4
24.3
27.5
25.2
23.9
21.5
20.0
18.8
18.1
18.0
18.2
Source: RBC Capital Markets Quantitative Research
Fall 2014
6
Strategy: The Investment Outlook
This page is left intentionally blank.
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
RBC CM Strategy Focus List
2005 2008
S&P/TSX Index
2011
2014
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 (%)
RBC Strategy Focus List
S&P/TSX Equity Index
Q4/12
4.5
3.2
Q1/13
6.1
5.6
Q2/13
4.5
3.2
Q3/13
2.4
0.8
Q4/13
9.6
6.4
Q1/14
4.4
6.9
Q2/14
4.8
3.5
Q3/14
6.7
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.
Agrium Inc.
Alimentation Couche-Tard
ARC Resources Ltd.
Bank of Nova Scotia, The
Baytex Energy Corporation
Brookfield Asset Management Inc.
CAE Inc.
Canadian National Railway Company
Canadian Natural Resources Ltd.
Canadian Real Estate Investment Trust
Canadian Western Bank
Dollarama Inc.
Husky Energy Inc.
Loblaw Companies Ltd.
MacDonald, Dettwiler and Assoc. Ltd.
Magna International Inc.
Manulife Financial Corporation
Methanex Corporation
Metro Inc.
National Bank of Canada
Suncor Energy Inc.
TELUS Corporation
Toromont Industries Ltd.
Toronto-Dominion Bank
Total
Stock Price as of
(08/29/2014)
AGU
US$94.63
ATD.B
$32.61
ARX
$31.43
BNS
$72.04
BTE
$48.62
BAM
US$47.75
CAE
$13.44
CNR
$78.09
CNQ
$47.39
REF.UN
$48.37
CWB
$40.67
DOL
$92.57
HSE
$33.10
L
$54.20
MDA
$83.02
MGA
US$113.47
MFC
$21.95
MEOH
US$66.82
MRU
$70.49
NA
$52.31
SU
$44.63
T
$39.65
TIH
$27.19
TD
$57.25
Weights
(%)
5.0
2.5
5.0
5.0
2.5
5.0
2.5
5.0
5.0
2.5
5.0
2.5
2.5
2.5
2.5
5.0
5.0
2.5
5.0
5.0
5.0
2.5
5.0
5.0
100.0
Weighting Change
from Last Quarter
New this quarter
Increased from 2.5%
Reduced from 5.0%
Increased from 2.5%
New this quarter
Reduced from 5.0%
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
HI-16SEP13
HI/LO DIFF
AGRIUM Rel. S&P 500
100.00
CLOSE
95.00
103.000
-17.07%
89.882
90.00
LO-11JUL14
SEP13
12
26
OCT13
10
24
NOV13
7
21
AGRIUM
DEC13
6
20
JAN14
7
22
FEB14
5
20
MAR14
6
20
3
APR14
17
2
MAY14
16
2
JUN14
16
30
JUL14
15
29
85.415
AUG14
12
26
HI-1APR14
LO/HI DIFF
97.970
20.06%
96.00
94.00
92.00
90.00
CLOSE
94.630
Agrium is a well-diversified crop input company with US$17 billion of
revenues in 2013. The company’s retail division operates North
America’s largest agricultural retail network and has extensive reach in
Australia and Canada. Agrium Wholesale has significant operations
that produce nitrogen fertilizers, along with sizeable operations that
produce phosphate and potash fertilizers.
88.00
86.00
Agrium has built the most diverse, vertically integrated agricultural
input business. We believe the company has a clear path to strong
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.)
84.00
82.00
LO-11OCT13
81.600
PEAK VOL.
VOLUME
2993.6
692.7
2000
1000
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
252 DAYS
ATD.B.T
29AUG13 - 29AUG14
ALIMENTATION COUCHE TARD INC SV Rel. S&P/TSX COMPOSITE INDEX
140.00
HI-24MAR14
LO/HI DIFF
145.690
45.69%
CLOSE
138.672
LO-29AUG13
100.000
HI-29AUG14
LO/HI DIFF
33.110
75.34%
120.00
SEP13
12
26
OCT13
10
25
NOV13
8
22
DEC13
6
20
JAN14
8
22
FEB14
5
20
MAR14
6
20
ALIMENTATION COUCHE TARD INC SV
32.00
APR14
3
17
MAY14
2
16
JUN14
2
16
30
JUL14
15
29
AUG14
13
27
30.00
28.00
26.00
CLOSE
32.610
LO-29AUG13
18.883
PEAK VOL.
VOLUME
3174.9
1141.2
24.00
22.00
20.00
3000
2000
1000
Alimentation Couche-Tard is the third-largest convenience store
retailer in North America and is the leader in the Canadian
convenience store industry. Since the acquisition of Statoil Fuel &
Retail in 2012, ATD is also a leader in convenience store and road
transportation fuel in Scandinavia and the Baltic states, with a growing
presence in Poland. Couche-Tard operates a network of more than
6,200 stores located across North America, operating in 40 states in
the US and all 10 Canadian provinces, while its European network
comprises 2,250 stores across Scandinavia, Poland, the Baltics and
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) betterthan-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
252 DAYS
ARX.T
29AUG13 - 29AUG14
ARC RESOURCES LTD Rel. S&P/TSX COMPOSITE INDEX
HI-21APR14
HI/LO DIFF
115.660
-16.01%
CLOSE
101.287
112.00
104.00
SEP13
12
26
OCT13
10
25
NOV13
8
22
DEC13
6
20
JAN14
8
22
FEB14
5
20
MAR14
6
20
APR14
3
17
MAY14
2
16
JUN14
2
16
30
JUL14
15
29
LO-5AUG14
97.146
HI-16JUN14
LO/HI DIFF
33.680
34.34%
AUG14
13
27
ARC RESOURCES LTD
32.00
30.00
CLOSE
31.430
LO-30AUG13
25.070
PEAK VOL.
VOLUME
2340.8
547.8
28.00
26.00
2000
1000
ARC Resources Ltd. is the successor company to ARC Energy Trust,
which was established in July 1996 through an IPO at $10/unit, that
underwent conversion from an income trust to a corporation in
December 2010. ARC’s current production is approximately 110,000
boe/d weighted 60% to natural gas and 40% to oil and liquids. The
company’s key assets are the northeastern BC Montney, Ante Creek,
Pembina, Redwater, and its interests in southeastern Saskatchewan
and Manitoba. ARC’s focus in 2014 will be toward the Montney at
Ante Creek ($215 million) and in northeastern BC ($440 million). The
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
252 DAYS
BNS.T
29AUG13 - 29AUG14
BANK OF NOVA SCOTIA Rel. S&P/TSX COMPOSITE INDEX
104.00
HI-25NOV13
HI/LO DIFF
107.431
-10.45%
CLOSE
100.417
100.00
SEP13
12
26
OCT13
10
25
NOV13
8
22
DEC13
6
20
JAN14
8
22
FEB14
5
20
MAR14
6
20
3
APR14
17
BANK OF NOVA SCOTIA
74.00
2
MAY14
16
2
JUN14
16
30
JUL14
15
29
LO-4MAR14
96.208
HI-31JUL14
LO/HI DIFF
74.930
29.30%
AUG14
13
27
72.00
70.00
68.00
66.00
CLOSE
72.040
Scotiabank is Canada’s most international bank and active corporate
lender. Notable for a long track record as the low-cost Canadian
producer, Scotiabank currently ranks third by market cap and by
assets. The domestic bank contributes around 32% to earnings,
international banking 26%, wealth management 20%, and wholesale
banking 22%.
64.00
62.00
We have an Outperform rating and a $77 price target on the shares of
BNS as we believe the bank’s International segment is poised for
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.
60.00
58.00
8000
4000
LO-29AUG13
57.950
PEAK VOL.
VOLUME
9393.9
1572.5
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
252 DAYS
BTE.T
29AUG13 - 29AUG14
HI-27SEP13
HI/LO DIFF
BAYTEX ENERGY CORP Rel. S&P/TSX COMPOSITE INDEX
CLOSE
96.00
90.00
SEP13
12
26
OCT13
10
25
NOV13
8
22
DEC13
6
20
JAN14
8
22
FEB14
5
20
MAR14
6
20
3
APR14
17
2
MAY14
16
2
JUN14
16
30
JUL14
15
29
101.666
-15.12%
94.776
LO-27FEB14
86.291
HI-19JUN14
LO/HI DIFF
49.880
28.23%
AUG14
13
27
BAYTEX ENERGY CORP
48.00
46.00
CLOSE
48.620
LO-7FEB14
38.900
44.00
42.00
Baytex Energy Corp. has successfully transitioned from being an
energy trust to being a hybrid growth-yield focused intermediate
producer of approximately 86,000 boe/d (including Aurora Oil & Gas).
The company’s reserves and production are oil weighted with a bias to
heavy oil. We expect the company’s growth to come primarily from
three oil plays: the Peace River oil sands, Lloydminster heavy oil, and
the Eagle Ford play in Texas.
40.00
6000
We have an Outperform rating on Baytex with a $53/share 12-month
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.
4000
PEAK VOL.
VOLUME
2000
6799.2
3258.4
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
253 DAYS
BAM.U
29AUG13 - 29AUG14
BROOKFIELD ASSET MANAGEMENT IN Rel. S&P 500
112.00
HI-15AUG14
LO/HI DIFF
115.557
19.92%
CLOSE
113.340
104.00
SEP13
12
26
OCT13
10
24
NOV13
7
21
DEC13
6
20
JAN14
7
22
FEB14
5
20
MAR14
6
20
BROOKFIELD ASSET MANAGEMENT IN
APR14
3
17
MAY14
2
16
JUN14
2
16
30
JUL14
15
29
LO-9JAN14
96.365
HI-27AUG14
LO/HI DIFF
48.450
41.96%
AUG14
12
26
46.00
44.00
42.00
CLOSE
47.750
LO-29AUG13
34.130
PEAK VOL.
VOLUME
1933.5
433.2
40.00
38.00
36.00
1600
800
Brookfield Asset Management Inc. (BAM) is a specialist asset manager,
focused on high-quality property, power, and infrastructure assets.
The company has more than US$190 billion of assets under
management (~US$84 billion of which are ‘fee-bearing’). We believe
BAM now has the structure in place to grow its pool of managed
capital by a meaningful amount over the long term. Key to this
strategy has been the creation of three flagship listed funds for
property, renewable power, and infrastructure. BAM has maintained a
solid financial position, with corporate liquidity of approximately
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 feebearing 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
HI-4MAR14
LO/HI DIFF
CAE Rel. S&P/TSX COMPOSITE INDEX
120.00
CLOSE
110.00
100.00
LO-21OCT13
SEP13
12
26
OCT13
10
25
NOV13
8
22
CAE
DEC13
6
20
JAN14
8
22
FEB14
5
20
MAR14
6
20
APR14
3
17
MAY14
2
16
JUN14
2
16
30
JUL14
15
29
122.347
27.44%
97.394
96.003
AUG14
13
27
HI-4MAR14
LO/HI DIFF
15.540
41.79%
15.00
14.00
CLOSE
13.440
LO-7OCT13
10.960
PEAK VOL.
VOLUME
3421.3
481.5
13.00
12.00
11.00
3000
2000
1000
CAE is a global leader in flight-simulation technology and pilot-training
services.
Over the past two years CAE has been actively addressing a number of
end-market and operational challenges: military budget cuts and order
delays, softness in European demand, and integration of Oxford
Aviation. After several quarters of restructuring and relocating
simulators, we believe much of that work is now complete. We should
see these redeployed simulators (approximately 20 full flight
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
252 DAYS
CNR.T
29AUG13 - 29AUG14
CDN NATL RAILWAY CO. Rel. S&P/TSX COMPOSITE INDEX
120.00
HI-29AUG14
LO/HI DIFF
127.162
28.70%
CLOSE
127.162
110.00
100.00
SEP13
12
26
OCT13
10
25
NOV13
8
22
DEC13
6
20
JAN14
8
22
FEB14
5
20
MAR14
6
20
APR14
3
17
MAY14
2
16
JUN14
2
16
30
JUL14
15
29
LO-9SEP13
98.804
HI-29AUG14
LO/HI DIFF
78.370
58.90%
Canadian National Railway is our favourite name in the rail space due
to the company’s best-in-class execution capabilities, strong growth
prospects, and solid management team.
AUG14
13
27
CDN NATL RAILWAY CO.
75.00
70.00
65.00
CLOSE
78.090
LO-30AUG13
49.320
PEAK VOL.
VOLUME
4106.1
1189.4
60.00
55.00
50.00
3000
2000
1000
Significant earnings growth potential creates upside in CNR shares: We
expect CNR’s strategy of balancing operating and service excellence to
drive meaningful earnings growth in the near term, and recent market
share gains and superior operating performance reinforce our outlook.
In light of the company’s strong near-term prospects, we expect the
shares to benefit from a positive multiple re-rating as the market gains
an appreciation for the earnings potential afforded by CNR’s best-inclass 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
252 DAYS
CNQ.T
29AUG13 - 29AUG14
CDN NATL RES Rel. S&P/TSX COMPOSITE INDEX
120.00
110.00
100.00
HI-8JUL14
LO/HI DIFF
125.806
34.59%
CLOSE
117.581
LO-12NOV13
SEP13
12
26
OCT13
10
25
NOV13
8
22
DEC13
6
20
CDN NATL RES
48.00
46.00
44.00
42.00
40.00
JAN14
8
22
FEB14
5
20
MAR14
6
20
APR14
3
17
MAY14
2
16
JUN14
2
16
30
JUL14
15
29
93.476
AUG14
13
27
HI-4JUL14
LO/HI DIFF
49.570
56.22%
CLOSE
47.390
LO-4OCT13
31.730
PEAK VOL.
VOLUME
10512.8
1651.6
38.00
36.00
34.00
32.00
10000
8000
6000
4000
2000
Canadian Natural Resources (CNQ) has become a dominant
independent in western Canada, with roots that stretch back to 1988,
when Murray Edwards joined forces with Allan Markin to create a
junior producer with a focus on medium- and low-risk development
opportunities. Through successive stages of growth, which have
involved both property and corporate acquisitions, CNQ has emerged
as the second-largest natural gas producer and largest heavy oil
producer in western Canada. Over the years, CNQ has made a series of
larger strategic acquisitions. CNQ’s production is over two-thirds oil
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
HI-18OCT13
HI/LO DIFF
CDN REIT Rel. S&P/TSX COMPOSITE INDEX
100.00
CLOSE
101.162
-9.24%
96.156
96.00
92.00
SEP13
12
26
OCT13
10
25
NOV13
8
22
DEC13
6
20
JAN14
8
22
FEB14
5
20
MAR14
6
20
APR14
3
17
MAY14
2
16
JUN14
2
16
30
JUL14
15
29
LO-9JUL14
91.810
HI-19AUG14
LO/HI DIFF
49.700
23.82%
AUG14
13
27
CDN REIT
48.00
46.00
CLOSE
48.370
LO-8OCT13
40.140
PEAK VOL.
VOLUME
402.9
49.5
44.00
42.00
300
200
100
Canadian REIT (CREIT) holds a diversified portfolio of retail, office, and
industrial income-producing real estate located in nine provinces and
one state. The REIT owns interests in more than 180 properties, with
approximately 21 million sf of owned gross leasable area. The tenant
base is also highly diversified, as no tenant accounts for more than 6%
of total revenues. CREIT has one of the longer track records of any
Canadian REIT (TSX-listed in September 1993). CREIT’s development
pipeline (active and future) exceeds $500 million (at its share) and
encompasses more than 3 million sf of retail and industrial properties.
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 nearterm lease expirations, and interest rate fluctuations.
Canadian Western Bank (TSX: CWB)
Darko Mihelic, CFA – Analyst, RBC Dominion Securities Inc.
CANADIAN WESTERN BANK
252 DAYS
CWB.T
29AUG13 - 29AUG14
CDN WESTERN BANK Rel. S&P/TSX COMPOSITE INDEX
120.00
HI-13DEC13
LO/HI DIFF
125.217
25.22%
CLOSE
112.131
LO-29AUG13
100.000
HI-21AUG14
LO/HI DIFF
43.300
52.09%
110.00
SEP13
12
26
OCT13
10
25
NOV13
8
22
DEC13
6
20
JAN14
8
22
FEB14
5
20
MAR14
6
20
APR14
3
17
CDN WESTERN BANK
42.00
MAY14
2
16
JUN14
2
16
30
JUL14
15
29
AUG14
13
27
40.00
Canadian Western Bank is the seventh-largest bank in Canada by
market capitalization. The Edmonton-based bank derives over 80% of
its revenues by generating net interest income, and over 75% of its
loan portfolio is focused on commercial lending and equipment
financing and leasing.
38.00
36.00
CLOSE
40.670
We have a Sector Perform rating and a 12-month price target of $43
per share. We believe the bank’s current valuation reflects our
expected above-average EPS growth in 2015 and 2016. We believe
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.
34.00
32.00
30.00
LO-29AUG13
28.470
PEAK VOL.
VOLUME
1319.7
253.8
1000
500
(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
Although the Canadian retail segment boasts several industry-leading
performers, Dollarama is the only true organic growth story in the
Canadian large-cap retail sector. Founded in 1994, the company has
grown to over 900 locations across Canada and is Canada’s leading
dollar store operator. Dollarama’s mission is simple: deliver value for
its customers, and the company’s goal is to exceed customer’s
expectations around the quality and variety of products found at
Dollarama at seven price points ranging from $0.69 to $3.00. In
Q1/F15, 62% of sales were generated by products priced higher than
$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.
252 DAYS
29AUG13 - 29AUG14
DOLLARAMA INC Rel. S&P/TSX COMPOSITE INDEX
110.00
HI-23OCT13
HI/LO DIFF
114.531
-15.37%
CLOSE
100.354
105.00
100.00
LO-25FEB14
SEP13
12
26
OCT13
10
25
NOV13
8
22
DEC13
6
20
DOLLARAMA INC
95.00
JAN14
8
22
FEB14
5
20
MAR14
6
20
APR14
3
17
MAY14
2
16
JUN14
2
16
30
JUL14
15
29
96.929
AUG14
13
27
HI-9JUN14
LO/HI DIFF
96.670
31.72%
90.00
85.00
CLOSE
92.570
LO-4SEP13
73.390
PEAK VOL.
VOLUME
842.5
380.2
80.00
75.00
600
300
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
252 DAYS
HSE.T
29AUG13 - 29AUG14
HI-2JUN14
HI/LO DIFF
HUSKY ENERGY INC Rel. S&P/TSX COMPOSITE INDEX
105.00
CLOSE
100.00
106.785
-16.24%
90.068
95.00
90.00
SEP13
12
26
OCT13
10
25
NOV13
8
22
DEC13
6
20
JAN14
8
22
FEB14
5
20
MAR14
6
20
APR14
3
17
MAY14
2
16
JUN14
2
16
30
JUL14
15
29
LO-27AUG14
89.439
HI-22APR14
LO/HI DIFF
37.310
30.91%
AUG14
13
27
HUSKY ENERGY INC
36.00
34.00
CLOSE
33.100
LO-7OCT13
28.500
PEAK VOL.
VOLUME
2477.4
553.3
32.00
30.00
2000
1000
Having been a private company since 1987, Husky returned to public
markets in August 2000 via a reverse takeover through its merger with
Renaissance Energy. Husky’s upstream production is roughly 70%
crude oil weighted and flows from western Canada, the Grand Banks
(Terra Nova and White Rose), and China (Wenchang and Liwan). In
2007, Husky acquired Valero Energy’s 160,000 b/d Lima refinery and
entered into a 50/50 integrated joint venture with BP, combining its
Sunrise in-situ oil sands with BP’s 160,000 b/d Toledo, Ohio refinery.
The company’s major shareholders are Li Ka-shing and Hutchison
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 longterm 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
Loblaw Companies Limited is Canada’s largest food distributor and is a
leading provider of drugstore, general merchandise, and financial
products and services. Loblaw and its franchisees currently operate over
1,050 stores across Canada, and according to The Globe and Mail’s Top
1,000 Rankings, Loblaw, together with its franchisees, is one of Canada’s
larger private-sector employers with more than 134,000 full-time and
part-time employees. On a weekly basis, Loblaw serves more than 14
million customers across Canada, representing approximately 40% of
the Canadian population. On March 23, 2014, Loblaw completed the
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.
252 DAYS
29AUG13 - 29AUG14
HI-10SEP13
HI/LO DIFF
LOBLAWS Rel. S&P/TSX COMPOSITE INDEX
100.00
CLOSE
95.00
102.506
-17.93%
97.453
90.00
85.00
SEP13
12
26
OCT13
10
25
NOV13
8
22
DEC13
6
20
JAN14
8
22
FEB14
5
20
MAR14
6
20
LOBLAWS
3
APR14
17
2
MAY14
16
2
JUN14
16
30
JUL14
15
29
LO-19FEB14
84.129
HI-31JUL14
LO/HI DIFF
54.250
32.90%
AUG14
13
27
52.00
50.00
48.00
CLOSE
54.200
LO-12DEC13
40.820
PEAK VOL.
VOLUME
7893.7
747.6
46.00
44.00
42.00
6000
3000
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,
(Continued on next page.)
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
252 DAYS
MDA.T
29AUG13 - 29AUG14
HI-5SEP13
HI/LO DIFF
MACDONALD DETTWILER Rel. S&P/TSX COMPOSITE INDEX
99.00
CLOSE
104.762
-21.23%
84.113
90.00
SEP13
12
26
OCT13
10
25
NOV13
8
22
DEC13
6
20
JAN14
8
22
FEB14
5
20
MACDONALD DETTWILER
90.00
MAR14
6
20
APR14
3
17
MAY14
2
16
JUN14
2
16
30
JUL14
15
29
LO-5AUG14
82.526
HI-9JUN14
LO/HI DIFF
91.200
22.15%
AUG14
13
27
88.00
86.00
84.00
CLOSE
MacDonald, Dettwiler and Associates Ltd. (MDA) is the global market
leader in commercial communications satellites with over 30% market
share. We see a number of growth drivers ahead, which should deliver
our base case expectation of nearly 9% revenue growth and
approximately 12–15% earnings growth over the next several years.
83.020
82.00
In particular, we expect revenue, earnings, and share price to be
driven by: 1) increased order intake of commercial communications
satellites and sub-systems (we are tracking over 35 satellite
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.
80.00
78.00
76.00
LO-27JAN14
74.660
PEAK VOL.
VOLUME
729.5
43.4
600
400
200
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
MAGNA INTL INC Rel. S&P 500
120.00
110.00
HI-8AUG14
LO/HI DIFF
121.340
32.89%
CLOSE
119.123
100.00
SEP13
12
26
OCT13
10
24
NOV13
7
21
DEC13
6
20
JAN14
7
22
FEB14
5
20
MAR14
6
20
APR14
3
17
MAY14
2
16
JUN14
2
16
30
JUL14
15
29
LO-20DEC13
91.307
HI-27AUG14
LO/HI DIFF
114.480
51.11%
CLOSE
113.470
AUG14
12
26
MAGNA INTL INC
110.00
105.00
100.00
95.00
90.00
85.00
80.00
LO-12DEC13
75.760
PEAK VOL.
VOLUME
2064.9
343.5
1800
1200
600
As a top-five global auto parts supplier, we see a number of drivers for
Magna’s earnings growth and share price: 1) growth in global auto
volumes, with moderate growth in North America, recovering volumes
in Europe, and continued growth in developing regions, 2) continued,
gradual margin improvement in Europe, 3) expansion in emerging
markets, which is an area where the company has historically been
under invested, 4) a strong balance sheet that we expect will be put to
work with acquisitions, dividend increases, and/or buybacks, and 5)
attractive valuation levels.
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.
252 DAYS
MFC.T
29AUG13 - 29AUG14
MANULIFE FINANCIAL CORP. Rel. S&P/TSX COMPOSITE INDEX
114.00
HI-9JAN14
LO/HI DIFF
119.383
21.54%
CLOSE
103.942
108.00
102.00
SEP13
12
26
OCT13
10
25
NOV13
8
22
DEC13
6
20
JAN14
8
22
FEB14
5
20
MAR14
6
20
3
APR14
17
MANULIFE FINANCIAL CORP.
2
MAY14
16
2
JUN14
16
30
JUL14
15
29
LO-19SEP13
98.225
HI-31JUL14
LO/HI DIFF
22.530
33.63%
AUG14
13
27
22.00
21.00
20.00
CLOSE
21.950
Manulife is Canada’s largest insurer, a leading global provider of
financial protection, and wealth management products and services.
In 2013, Manulife generated 28% of core earnings in Asia, 27% in
Canada, and 45% in the United States (excluding the corporate and
other segment). Manulife is among the larger life insurers globally as
measured by market capitalization.
19.00
18.00
We have an Outperform rating on MFC’s shares. The current P/BV
multiple leaves upside potential, in our view, given longer term ROE
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.
17.00
LO-9OCT13
16.860
PEAK VOL.
VOLUME
9082.3
3249.9
6000
3000
(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
Methanex is a global supplier of methanol, a liquid chemical primarily
produced from natural gas, which the company sells to international
markets. The shares have an attractive total return profile (i.e., yield
plus dividend growth) and are attractive for investors seeking a procyclical dividend growth story. With solid forecast demand growth
from its use as a crude oil alternative (e.g., gasoline blending,
methanol-to-olefins) coupled with a modest supply addition outlook
that mostly includes higher marginal cost capacity, the long-term
methanol market is attractive. Potential upside catalysts include
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.
253 DAYS
29AUG13 - 29AUG14
METHANEX CP Rel. S&P 500
130.00
120.00
HI-6MAR14
LO/HI DIFF
135.688
36.62%
CLOSE
116.353
110.00
100.00
LO-30AUG13
SEP13
12
26
OCT13
10
24
NOV13
7
21
DEC13
6
20
JAN14
7
22
FEB14
5
20
MAR14
6
20
APR14
3
17
MAY14
2
16
JUN14
2
16
30
JUL14
15
29
99.314
AUG14
12
26
HI-7MAR14
LO/HI DIFF
METHANEX CP
73.430
58.60%
70.00
65.00
60.00
CLOSE
66.820
LO-29AUG13
46.300
PEAK VOL.
VOLUME
4517.7
317.9
55.00
50.00
4000
3000
2000
1000
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
HI-30AUG13
HI/LO DIFF
METRO INC. SV Rel. S&P/TSX COMPOSITE INDEX
96.00
CLOSE
100.986
-19.24%
85.478
88.00
SEP13
12
26
OCT13
10
25
NOV13
8
22
DEC13
6
20
METRO INC. SV
JAN14
8
22
FEB14
5
20
MAR14
6
20
3
APR14
17
2
MAY14
16
2
JUN14
16
30
JUL14
15
29
LO-3JUL14
81.551
HI-19AUG14
LO/HI DIFF
73.320
22.20%
AUG14
13
27
72.00
70.00
68.00
CLOSE
Metro Inc. is a leading food and pharmaceutical retailer in Quebec and
Ontario. Metro and its franchisees operate over 800 food stores under
multiple banners, including Metro, Metro Plus, Super C, Food Basics,
and over 250 drugstores under the Brunet, The Pharmacy, and Drug
Basics banners.
70.490
66.00
Metro has a long track record of delivering industry-leading
profitability through rigorous focus on cost management and ongoing
emphasis on in-store offerings. The recent launch of the Metro & Moi
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.
64.00
62.00
LO-13NOV13
60.000
PEAK VOL.
VOLUME
1672.5
253.2
1400
700
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 instore 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
252 DAYS
NA.T
29AUG13 - 29AUG14
NATL BANK OF CDA Rel. S&P/TSX COMPOSITE INDEX
102.00
96.00
SEP13
12
26
OCT13
10
25
NOV13
8
22
DEC13
6
20
JAN14
8
22
NATL BANK OF CDA
FEB14
5
20
MAR14
6
20
APR14
3
17
MAY14
2
16
JUN14
2
16
30
JUL14
15
29
HI-14NOV13
HI/LO DIFF
107.743
-14.38%
CLOSE
103.395
LO-2JUL14
92.252
HI-29AUG14
LO/HI DIFF
52.310
28.97%
AUG14
13
27
National Bank is a Montreal-based, fully integrated, financial services
company, which is the smallest of the big-six Canadian banks. Earnings
are typically split among personal and commercial (50%), wealth
management (15%), and capital markets (35%).
50.00
We rate National Bank’s shares as Sector Perform as our enthusiasm
about above-average Canada P&C loan growth and improving business
mix in the capital markets business is tempered by the bank’s higher
relative exposure to Quebec. In our view, National Bank will continue
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.
48.00
CLOSE
52.310
LO-29AUG13
40.560
PEAK VOL.
VOLUME
3045.2
1280.5
46.00
44.00
42.00
2000
1000
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
252 DAYS
SU.T
29AUG13 - 29AUG14
SUNCOR Rel. S&P/TSX COMPOSITE INDEX
104.00
HI-16JUN14
LO/HI DIFF
109.391
22.87%
CLOSE
100.518
96.00
SEP13
12
26
OCT13
10
25
NOV13
8
22
SUNCOR
DEC13
6
20
JAN14
8
22
FEB14
5
20
MAR14
6
20
APR14
3
17
MAY14
2
16
JUN14
2
16
30
JUL14
15
29
LO-18MAR14
89.030
HI-16JUN14
LO/HI DIFF
47.180
35.97%
AUG14
13
27
46.00
44.00
42.00
CLOSE
44.630
LO-4FEB14
34.700
PEAK VOL.
VOLUME
7804.5
2545.6
40.00
38.00
36.00
6000
3000
As an integrated oil company, Suncor’s upstream portfolio has shifted
from a 100% oil sands focus to one considerably more diverse in
nature. Notwithstanding, over three-quarters of Suncor’s production is
still anchored by oil sands. Along with its legacy oil sands mines in Fort
McMurray and Firebag in-situ operations, Suncor’s arsenal of some 26
billion barrels of proven, probable, and contingent oil sands resources
also include its MacKay River (100% working interest) in-situ project, a
12% interest in the Syncrude oil sands joint venture, and a 40.8%
interest in the Fort Hills project.
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
252 DAYS
T.T
29AUG13 - 29AUG14
HI-4JUN14
HI/LO DIFF
TELUS CORPORATION Rel. S&P/TSX COMPOSITE INDEX
105.00
CLOSE
109.700
-15.32%
97.396
98.00
LO-28JUL14
SEP13
12
26
OCT13
10
25
NOV13
8
22
DEC13
6
20
JAN14
8
22
FEB14
5
20
MAR14
6
20
APR14
3
17
MAY14
2
16
JUN14
2
16
30
JUL14
15
29
92.893
TELUS Corp. is the second-largest telecommunications provider in
Canada, providing wireline, data, and wireless services to consumers,
businesses, and wholesale telecom providers.
AUG14
13
27
HI-4JUN14
LO/HI DIFF
TELUS CORPORATION
42.400
31.39%
40.00
38.00
CLOSE
39.650
LO-30AUG13
32.270
PEAK VOL.
VOLUME
5427.9
1186.9
36.00
Our Outperform rating reflects our view that TELUS has the best
combination of growth, a reasonable valuation, and solid capital
return potential within the group.
34.00
We believe the company’s industry-leading growth outlook in both
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.
4000
2000
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
252 DAYS
TIH.T
29AUG13 - 29AUG14
HI-6DEC13
LO/HI DIFF
TOROMONT Rel. S&P/TSX COMPOSITE INDEX
110.00
CLOSE
105.00
112.455
19.48%
97.993
100.00
95.00
SEP13
12
26
OCT13
10
25
NOV13
8
22
DEC13
6
20
TOROMONT
27.00
JAN14
8
22
FEB14
5
20
MAR14
6
20
3
APR14
17
2
MAY14
16
2
JUN14
16
30
JUL14
15
29
LO-24OCT13
94.121
HI-25AUG14
LO/HI DIFF
27.410
24.53%
AUG14
13
27
26.00
25.00
CLOSE
27.190
Toromont Industries Ltd. operates CAT Equipment Group, which sells,
rents, and services a broad range of Caterpillar mobile equipment and
industrial engines across one of CAT’s larger global dealer territories,
which includes Ontario, Manitoba, Nunavut, Newfoundland, and
eastern Labrador. Toromont also runs CIMCO, an industrial and
recreational refrigeration business.
24.00
23.00
We view Toromont as an attractive investment for longer-term
holders. We believe that it will maintain its ‘best in class’ EBIT margin
and its balance sheet strength, which we expect will allow for a largesized 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.
LO-8OCT13
22.010
PEAK VOL.
VOLUME
534.7
51.5
400
200
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
252 DAYS
TD.T
29AUG13 - 29AUG14
TORONTO DOMINION Rel. S&P/TSX COMPOSITE INDEX
104.00
102.00
HI-21AUG14
LO/HI DIFF
105.164
7.11%
CLOSE
103.520
100.00
SEP13
12
26
OCT13
10
25
NOV13
8
22
DEC13
6
20
JAN14
8
22
TORONTO DOMINION
FEB14
5
20
MAR14
6
20
APR14
3
17
MAY14
2
16
JUN14
2
16
30
JUL14
15
29
LO-24FEB14
98.187
HI-22AUG14
LO/HI DIFF
58.200
31.73%
AUG14
13
27
56.00
54.00
52.00
CLOSE
57.250
50.00
Toronto-Dominion Bank is Canada’s second-largest bank by market
capitalization and by assets. In 2013, TD Bank’s earnings mix was as
follows: Canadian Personal and Commercial (52%), Wealth
Management and Insurance (16%, which includes 3% for TD
Ameritrade), US Personal and Commercial (23%), and TD Securities
(9%).
48.00
We believe that TD’s stock is attractive as the bank should have aboveaverage EPS growth; we expect its relative valuation to continue to
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.
46.00
LO-29AUG13
44.180
PEAK VOL.
VOLUME
9566.4
3202.6
8000
4000
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
13
14
3
2
1
0
-1
00
01
02
03
04
05
06
07
08
09
10
11
12
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
Canada
07
08
09
US
10
11
UK
12
13
14
15
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
-7
Real GDP
2012 2013 2014f 2015f
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
spending
Government
spending
Residential
investment
Non-res.
investment
2014
Net trade
Inventories
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
Real consumption
2009
2010
2011
2012
2013
2014
2015
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 postrecession 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 fullemployment 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
Consumer price index
2011
2012
2013
2014
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
effect
6
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
Energy
2010
2011
Non-energy commodities
2012
2013
Non commodities
2014
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
Real household disposable income
Q1-2008
Q1-2010
Q1-2012
Real consumer spending
Q1-2014
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)
14
000s of dollars, composite price (line)
450
Forecast
12
400
10
350
8
300
6
4
250
4.3
4.4
200
2.5
1.1
2
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
Real GDP
-8
2012 2013 2014f 2015f
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
2012 2013 2014f 2015f
US$/C$ 1.00 0.94 0.87 0.85
0.70
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 10year historic range and is showing early signs of improvement. On a positive note, year-overyear 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
15
2.5
2.0
10
1.5
1.0
5
0.5
0.0
0
80
82
84
86
88
90
92
94
96
Price to Book (ls)
98
00
02
04
06
08
10
12
14
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)
2)
3)
4)
Fall 2014
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).
th
Gold broke below its key support near 1,240 on Friday (September 12 ). 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).
Energy is testing support as both WTI Crude and Natural Gas consolidate. Intermediateterm 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).
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).
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



Fall 2014
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.
39
Strategy: The Investment Outlook – Trend & Cycle
Exhibit 2: TSX COMPOSITE / TSX COMPOSITE QUADRANT BALANCE DATA (WEEKLY)
Source: RBC Capital Markets Trend & Cycle



Fall 2014
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.
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




Fall 2014
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 commodityrelated stocks.
41
Strategy: The Investment Outlook – Trend & Cycle
Exhibit 4: GOLD / GOLD COMMERCIALS HEDGERS (WEEKLY)
Source: RBC Capital Markets Trend & Cycle



Fall 2014
th
Gold closed below technical support near 1,240 on Friday (September 12 ). 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’.
42
Strategy: The Investment Outlook – Trend & Cycle
Exhibit 5: GOLDCORP / AGNICO-EAGLE (DAILY)
Source: RBC Capital Markets Trend & Cycle



Fall 2014
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.
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



Fall 2014
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.
44
Strategy: The Investment Outlook – Trend & Cycle
Exhibit 7: HUSKY / PEYTO (DAILY)
Source: RBC Capital Markets Trend & Cycle



Fall 2014
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.
45
Strategy: The Investment Outlook – Trend & Cycle
Exhibit 8: CANADIAN DOLLAR / MSCI EEM / COPPER (WEEKLY)
Source RBC Capital Markets Trend & Cycle



Fall 2014
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.
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



Fall 2014
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.
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



Fall 2014
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.
48
Strategy: The Investment Outlook – Trend & Cycle
Exhibit 11: CANADIAN NATIONAL RAILWAY / TRANSFORCE (DAILY)
Source: RBC Capital Markets Trend & Cycle



Fall 2014
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.
49
Strategy: The Investment Outlook – Fundamental Equity Weightings
Fundamental Equity Weightings
Introduction:
Following the determination of
a recommended asset mix, the
strategy process at RBC Capital
Markets addresses sector
weightings within the equity
component of the portfolio,
followed by specific stock
selections within each sector.
Sector weightings reflect the
combined views of our
fundamental, technical, and
quantitative analysts. The
specific stocks comprising our
Fundamental Equity
Weightings (FEW) portfolio are
selected solely by our
fundamental analysts. These
selections are detailed on the
following pages. Our Strategy
Focus List, described earlier, is
drawn from the broader FEW
portfolio and reflects the best
aggregate rankings of our
three investment disciplines:
fundamental, technical, and
quantitative.
Fall 2014
Fall 2014 Fundamental Equity Weighting Portfolio (FEW)
We are pleased to present our Fall 2014 FEW portfolio and a review of the performance of
the Summer 2014 FEW portfolio.
Changes to the Fall 2014 FEW:


Stocks added to the Fall 2014 FEW: CI Financial Corp., Precision Drilling Corp., and West
Fraser Timber Co. Ltd.
Stocks deleted from the Fall 2014 FEW: Open Text Corp., Peyto Exploration & Dev.
Corp., and Rogers Communications Inc.
The Fall 2014 FEW portfolio contains 66 stocks with three additions and three deletions from
the Summer portfolio.
1)
We maintained our Market Weight stance in Energy, with a 26% sector allocation.
Within Energy Equipment & Services, we added Precision Drilling Corporation to the
FEW. Within Oil & Gas, Peyto Exploration & Development Corp. has been removed
from the FEW.
2) We added 1% to our Materials weighting, which is now 11%. We remain modestly
underweight relative to the 12.0% Index weight. Within Materials, we are Underweight
Chemicals and Metals & Mining, Market Weight Gold, and Overweight the smaller
Steel and Paper & Forest Products sectors. With regard to the latter, we added West
Fraser Timber Co. Ltd. to the FEW, with the view toward increasing the exposure to the
US housing cycle.
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.
50
Strategy: The Investment Outlook – Fundamental Equity Weightings
Exhibit 1: RBC Capital Markets Fall 2014 Fundamental Equity Weighting (FEW) Portfolio
Symbol
Energy
Energy Equipment & Services
Calfrac Well Services Ltd.
Precision Drilling Corp.
Oil, Gas & Consumable Fuels
ARC Resources Ltd.
Baytex Energy Corp.
Cameco Corp.
Canadian Natural Resources Ltd.
Cenovus Energy Inc.
Enbridge Inc.
Encana Corp.
Gran Tierra Energy Inc.
Husky Energy Inc.
Inter Pipeline Ltd.
MEG Energy Corp.
Pembina Pipeline Corp.
Suncor Energy Inc.
Tourmaline Oil Corp.
TransCanada Corp.
Materials
Chemicals
Agrium Inc.
Other*
(Const. Materials, Containers & Packaging)
Metals & Mining
ex Gold and Steel*
Silver Wheaton Corp.
Teck Resources Ltd.
Gold
Agnico-Eagle Mines Ltd.
Barrick Gold Corp.
Franco-Nevada Corp.
Goldcorp Inc.
New Gold Inc.
Steel
Labrador Iron Ore Royalty Corp.
Paper & Forest Products
International Forest Products Ltd SV
West Fraser Timber Co. Ltd.
Industrials
Capital Goods
CAE Inc.
MacDonald Dettwiler & Assoc. Ltd.
Commercial & Prof. Services
Progressive Waste Solutions Ltd.
Stantec Inc.
Transportation
Air Canada
Canadian National Railway Co.
Cargojet Inc.
TransForce Inc.
ENC
ENEQP
CFW
PD
OIL
ARX
BTE
CCO
CNQ
CVE
ENB
ECA
GTE
HSE
IPL
MEG
PPL
SU
TOU
TRP
BMS
CHM
AGU
SLW
TCK.B
GLD
AEM
ABX
FNV
G
NGD
STL
LIF
PPRFP
IFP
WFT
CAP
CG
CAE
MDA
DUR
BIN
STN
TRNS
AC.B
CNR
CJT
TFI
Weights (%)
RBC CM
29-Aug-14
30-May-14
S&P/TSX
29-Aug-14
Closing Price
29-Aug-14
26.0
2.0
1.0
1.0
24.0
1.0
1.0
1.0
3.0
1.0
2.0
2.0
1.0
2.0
1.0
1.0
1.0
4.0
1.0
2.0
11.0
1.0
1.0
0.0
26.0
1.0
1.0
0.0
25.0
1.0
1.0
1.0
3.0
1.0
2.0
2.0
1.0
2.0
1.0
1.0
1.0
4.0
1.0
2.0
10.0
1.0
1.0
0.0
26.5
1.4
0.1
0.2
25.0
0.5
0.4
0.4
2.7
1.4
2.3
1.0
0.1
0.5
0.6
0.3
0.8
3.4
0.5
2.1
12.0
2.9
0.8
0.2
3,504.24
2,113.24
20.51
13.86
3,633.68
31.43
48.62
21.26
47.39
34.68
54.23
25.07
7.29
33.10
36.28
38.73
49.97
44.63
55.07
58.43
2,421.05
4,951.66
102.82
4,931.75
2.0
1.0
1.0
5.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
2.0
1.0
1.0
10.0
2.0
1.0
1.0
2.0
1.0
1.0
6.0
1.0
3.0
1.0
1.0
2.0
1.0
1.0
5.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
0.0
10.0
2.0
1.0
1.0
2.0
1.0
1.0
6.0
1.0
3.0
1.0
1.0
2.9
0.5
0.6
5.5
0.4
1.2
0.5
1.3
0.2
0.1
0.1
0.4
0.1
0.2
8.2
1.9
0.2
0.2
0.7
0.2
0.2
5.7
0.1
3.3
n.m
0.1
6,294.07
27.16
24.69
1,736.02
41.58
19.99
61.26
30.53
7.03
9,662.69
29.99
435.40
16.64
55.05
2,406.35
643.35
13.44
83.02
898.95
28.11
74.10
8,155.45
8.49
78.09
22.80
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
Consumer Discretionary
Automobiles
& Components
Consumer
Discretionary
Automobiles
& Components
Magna International
Inc.
Magna
International
Inc.
Consumer
Durables
& Apparel
Consumer
Durables
BRP Inc,
SV & Apparel
BRP Inc,
SV
Dorel
Industries
Inc.
DorelServices
Industries Inc.
Consumer
Consumer Services
Media
Media
Broadcasting
Broadcasting
Other*
(Advertising, Cable & Satellite,
Other*
(Advertising,
Cable & Satellite,
Movies
& Entertainment,
Publishing)
Movies &Inc.
Entertainment, Publishing)
Cineplex
Cineplex
Sirius
XMInc.
Canada Holdings Inc.
Sirius XM Canada Holdings Inc.
Retailing
Retailing
Canadian Tire Corp., Ltd., Cl "A" NV
Canadian Tire
Dollarama
Inc.Corp., Ltd., Cl "A" NV
ConsumerDollarama
Staples Inc.
ConsumerLoblaw
StaplesCompanies Ltd.
Loblaw Companies Ltd.
Health Care
Health Care
Catamaran Corporation
Catamaran
Corporation Int'l. Inc.
Valeant Pharmaceuticals
FinancialsValeant Pharmaceuticals Int'l. Inc.
Financials
Banks
Banks Bank of Montreal
Montreal
Bank of Nova
Scotia
Bank of Nova
ScotiaBank of Commerce
Canadian
Imperial
Imperial Bank of Commerce
Canadian Western
CanadianBank
Western
Bank
National
of Canada
National
Bank
of Canada
Royal
Bank
of Canada
RoyalToronto-Dominion
Bank of Canada Bank
The
The Toronto-Dominion
Bank
Diversified
Financials
Diversified
Financials
CI Financial
Corp.
CI Financial
Corp.
Gluskin
Sheff
+ Associates Inc.
GluskinCapital
Sheff +Group
Associates
Tricon
Inc. Inc.
Tricon Capital Group Inc.
Insurance
Insurance
Industrial Alliance Insurance & Fin Serv Inc.
Industrial
Alliance
Insurance & Fin Serv Inc.
Intact
Financial
Corp.
Intact
Financial
Corp.
Manulife
Financial
Corp.
Manulife
Financial Corp.
Power
Corporation
of Canada SV
Power Corporation of Canada SV
Real Estate
Real Estate
Brookfield Asset Management Inc.
BrookfieldREIT
Asset Management Inc.
Canadian
Canadian
REIT
Information
Technology
Information
Software Technology
& Services
Software
Services
CGI&
Group
Inc Class "A" SV
CGI Group
Inc Class
"A" SV
Technology
Hardware
& Semi-conductors*
Technology Hardware
& Semi-conductors*
Telecommunication
Services
Telecommunication
BCE Inc. Services
BCE Inc.
TELUS
Corp.
Utilities TELUS Corp.
Utilities Brookfield Infrastructure Partners LP
Brookfield Infrastructure Partners LP
TOTAL PORTFOLIO
TOTAL PORTFOLIO
New to the FEW portfolio this quarter.
Symbol
CONC
AUTO
CONC
AUTO
MG
MG
DUR
DUR
DOO
DOO
DII.B
DII.B
HOTEL
HOTEL
MEDIA
MEDIA
TV
TV
CGX
CGX
XSR
XSR
RETL
RETL
CTC.A
CTC.A
DOL
DOL
CONS
LCONS
L
HC
HC
CCT
CCT
VRX
VRX
TSF
TSF
BKS
BKS
BMO
BMO
BNS
BNS
CM
CM
CWB
CWB
NA
NA
RY
RY
TD
TD
DIVFIN
DIVFIN
CIX
CIX
GS
GS
TCN
TCN
ISR
ISR
IAG
IAG
IFC
IFC
MFC
MFC
POW
POW
RES
RES
BAM.A
BAM.A
REF.UN
REF.UN
HTC
HTC
SFTWR
SFTWR
GIB.A
GIB.A
CS
CS
BCE
TBCE
T
UTIL
UTIL
BIP.UN
BIP.UN
TSX
TSX
Weights (%)
RBC CM
29-Aug-14
30-May-14
8.0
8.0
2.0
8.0
2.0
2.0
2.0
1.0
1.0
1.0
0.0
0.0
2.0
2.0
0.0
0.0
2.0
2.0
1.0
1.0
1.0
2.0
2.0
1.0
1.0
1.0
1.0
1.0
4.0
4.0
1.0
1.0
3.0
3.0
35.0
35.0
23.0
23.0
2.0
2.0
6.0
6.0
1.0
1.0
1.0
1.0
6.0
6.0
6.0
3.0
3.0
1.0
1.0
1.0
1.0
6.0
6.0
1.0
1.0
1.0
3.0
3.0
1.0
1.0
3.0
3.0
2.0
2.0
1.0
1.0
1.0
1.0
1.0
0.0
0.0
3.0
3.0
1.0
1.0
2.0
2.0
1.0
1.0
1.0
100
100
2.0
8.0
2.0
2.0
2.0
1.0
1.0
1.0
0.0
0.0
2.0
2.0
0.0
0.0
2.0
2.0
1.0
1.0
1.0
2.0
2.0
1.0
1.0
1.0
1.0
1.0
4.0
4.0
1.0
1.0
3.0
3.0
34.0
34.0
23.0
23.0
2.0
2.0
6.0
6.0
1.0
1.0
1.0
1.0
6.0
6.0
6.0
2.0
2.0
0.0
0.0
1.0
1.0
1.0
6.0
6.0
1.0
1.0
1.0
3.0
3.0
1.0
1.0
3.0
3.0
2.0
2.0
1.0
1.0
2.0
2.0
2.0
1.0
1.0
0.0
0.0
4.0
4.0
1.0
1.0
2.0
2.0
1.0
1.0
1.0
100
100
S&P/TSX
29-Aug-14
5.6
1.6
5.6
1.6
1.4
1.4
0.5
0.5
0.0
0.0
0.1
0.1
0.6
0.6
1.9
1.9
0.1
0.1
1.8
1.8
0.1
0.1
n.m.
n.m.
1.0
1.0
0.5
0.5
0.3
0.3
2.8
2.8
0.6
0.6
2.6
2.6
0.5
0.5
2.0
2.0
34.2
34.2
22.4
22.4
2.8
2.8
4.5
4.5
2.1
2.1
0.2
0.2
0.9
0.9
6.0
6.0
5.5
5.5
1.4
1.4
0.4
0.4
n.m.
n.m.
n.m.
6.2
6.2
0.2
0.2
0.5
0.5
2.1
2.1
0.6
0.6
4.3
4.3
1.5
1.5
0.2
0.2
1.8
1.8
1.4
1.4
0.5
0.5
0.4
0.4
4.4
4.4
2.0
2.0
1.3
1.3
1.9
1.9
n.m.
n.m.
100
100
Closing Price
29-Aug-14
1,728.82
3,417.00
1,728.82
3,417.00
123.28
123.28
3,836.23
3,836.23
26.48
26.48
36.75
36.75
2,407.68
2,407.68
909.53
909.53
2,091.59
2,091.59
7,644.14
7,644.14
40.96
40.96
7.75
7.75
3,595.79
3,595.79
112.32
112.32
92.57
92.57
3,045.62
3,045.62
54.20
54.20
1,592.58
1,592.58
51.23
51.23
127.38
127.38
2,328.37
2,328.37
2,853.42
2,853.42
83.66
83.66
72.04
72.04
103.91
103.91
40.67
40.67
52.31
52.31
80.77
80.77
57.25
57.25
2,668.22
2,668.22
35.68
35.68
33.09
33.09
7.74
7.74
1,237.59
1,237.59
46.94
46.94
73.91
73.91
21.95
21.95
32.04
32.04
2,722.19
2,722.19
51.95
51.95
48.37
48.37
166.47
166.47
2,742.49
2,742.49
38.48
38.48
937.18
937.18
1,203.04
1,203.04
48.95
48.95
39.65
39.65
1,904.13
1,904.13
46.06
46.06
15,626
15,626
* 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)
3 months
6 months
1 Year
3 Years
5 Years
10 Years
15 Years
20 Years
Since Inception (June 30, 1986)
RBC CM FEW
7.0%
11.0%
29.9%
13.9%
13.5%
11.5%
10.3%
11.8%
11.5%
S&P/TSX
7.7%
11.5%
27.1%
10.2%
10.7%
9.3%
8.0%
9.0%
8.6%
Note: 3-month, 6-month, and 1-year returns are all simple returns. All other
(3 years to Since Inception) are compound returns
RBCtime
CMperiods
Performance
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
2,153
2200
1900
1600
S&P/TSX
1,030
1300
1000
700
400
100
Jun-86
Dec-89
May-93
Nov-96
May-00
Nov-03
May-07
Nov-10
Aug-14
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
Weights (%)
RBC CM
S&P/TSX
Symbol 30-May-14 30-May-14 29-Aug-14
Energy
ENC
Energy Equipment & Services
ENEQP
Calfrac Well Services Ltd.
CFW
Oil, Gas & Consumable Fuels
OIL
ARC Resources Ltd.
ARX
Baytex Energy Corp.
BTE
Cameco Corp.
CCO
Canadian Natural Resources Ltd.
CNQ
Cenovus Energy Inc.
CVE
Enbridge Inc.
ENB
Encana Corp.
ECA
Gran Tierra Energy Inc.
GTE
Husky Energy Inc.
HSE
Inter Pipeline Ltd.
IPL
MEG Energy Corp.
MEG
Pembina Pipeline Corp.
PPL
Peyto Exploration & Development Corp. PEY
Suncor Energy Inc.
SU
Tourmaline Oil Corp.^
TOU
TransCanada Corp.
TRP
Materials
BMS
Chemicals
CHM
Agrium Inc.
AGU
Other*
(Const. Materials, Containers & Packaging)
Metals & Mining
ex Gold and Steel*
Silver Wheaton Corp.
SLW
Teck Resources Ltd.
TCK.B
Gold
GLD
Agnico-Eagle Mines Ltd.
AEM
Barrick Gold Corp.
ABX
Franco-Nevada Corp.
FNV
Goldcorp Inc.
G
New Gold Inc.
NGD
Steel
STL
Labrador Iron Ore Royalty Corp.
LIF
Paper & Forest Products
PPRFP
International Forest Products Ltd. SV
IFP
Industrials
CAP
Capital Goods
CG
CAE Inc.
CAE
MacDonald Dettwiler & Assoc. Ltd.
MDA
Commercial & Prof. Services
DUR
Progressive Waste Solutions Ltd.
BIN
Stantec Inc.
STN
Transportation
TRNS
Continued on next page.
Air Canada
AC.B
Canadian National Railway Co.
CNR
Cargojet Inc.
CJT
TransForce Inc.
TFI
Consumer Discretionary
CONC
FallAutomobiles
2014
& Components
AUTO
Magna International Inc.
MG
Consumer Durables & Apparel
DUR
Performance (%)
RBC CM
S&P/TSX
Closing Price
Price
Total
Price
Total
30-May-14 28-Aug-14 Return Return Return Return
26.0
1.0
1.0
25.0
1.0
1.0
1.0
3.0
1.0
2.0
2.0
1.0
2.0
1.0
1.0
1.0
1.0
4.0
1.0
2.0
10.0
1.0
1.0
0.0
26.4
1.4
0.1
25.0
0.6
0.3
0.5
2.7
1.4
2.4
1.0
0.1
0.6
0.5
0.3
0.8
0.3
3.4
0.5
2.0
11.7
3.1
0.8
0.2
26.5
1.4
0.1
25.0
0.5
0.4
0.4
2.7
1.4
2.3
1.0
0.1
0.5
0.6
0.3
0.8
0.3
3.4
0.5
2.1
12.0
2.9
0.8
0.2
3,310.59
1,997.83
18.56
3,432.64
31.25
45.29
21.68
44.13
32.27
51.53
25.25
7.82
36.57
31.77
37.84
42.81
38.48
41.73
54.00
50.48
2,174.66
4,865.26
97.36
4,482.32
3,504.24
2,113.24
20.51
3,633.68
31.43
48.62
21.26
47.39
34.68
54.23
25.07
7.29
33.10
36.28
38.73
49.97
38.53
44.63
55.07
58.43
2,421.05
4,951.66
102.82
4,931.75
4.8
10.5
10.5
4.5
0.6
7.4
-1.9
7.4
7.5
5.2
-0.7
-6.8
-9.5
14.2
2.4
16.7
0.1
6.9
2.0
15.7
14.1
5.6
5.6
0.0
5.4
11.2
11.2
5.2
1.5
8.9
-1.5
7.9
8.3
5.9
-0.4
-6.8
-8.7
15.2
2.4
17.7
0.9
7.5
2.0
16.7
14.7
6.5
6.5
0.0
2.0
1.0
1.0
5.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
10.0
2.0
1.0
1.0
2.0
1.0
1.0
6.0
1.0
3.0
1.0
1.0
8.0
2.0
2.0
2.0
2.9
0.5
0.6
5.0
0.3
1.1
0.4
1.2
0.2
0.1
0.1
0.4
0.1
7.9
2.0
0.2
0.2
0.7
0.2
0.2
5.2
0.1
3.1
n.m
0.1
5.5
1.6
1.4
0.5
2.9
0.5
0.6
5.5
0.4
1.2
0.5
1.3
0.2
0.1
0.1
0.4
0.1
8.2
1.9
0.2
0.2
0.7
0.2
0.2
5.7
0.1
3.3
n.m
0.1
5.6
1.6
1.4
0.5
6,003.46
22.52
24.17
1,455.63
32.99
17.60
50.31
25.52
5.81
9,047.29
28.08
412.15
15.97
2,136.38
632.48
14.70
88.60
880.26
28.08
67.11
6,892.77
8.85
65.76
21.70
23.70
1,584.33
3,083.90
110.94
3,777.60
6,294.07
27.16
24.69
1,736.02
41.58
19.99
61.26
30.53
7.03
9,662.69
29.99
435.40
16.64
2,406.35
643.35
13.44
83.02
898.95
28.11
74.10
8,155.45
8.49
78.09
22.80
27.99
1,728.82
3,417.00
123.28
3,836.23
11.4
20.6
2.2
20.4
26.0
13.6
21.8
19.6
21.0
6.8
6.8
4.2
4.2
7.1
-7.4
-8.6
-6.3
5.3
0.1
10.4
12.6
-4.1
18.7
5.1
18.1
1.3
11.1
11.1
-10.9
12.3
20.6
4.0
20.7
26.3
13.9
22.2
20.1
21.0
8.2
8.2
4.2
4.2
7.5
-7.2
-8.2
-6.3
5.7
0.6
10.7
13.0
-4.1
19.1
5.8
18.7
2.8
11.5
11.5
-10.5
5.8
5.8
6.6
6.4
5.9
6.6
11.3
1.8
11.9
2.7
10.0
10.4
4.8
5.5
19.3
19.6
6.8
8.2
5.6
5.9
12.6
1.7
13.1
2.2
2.1
2.7
18.3
18.7
9.1
10.8
9.7
54
11.1
1.6
1.8
Strategy: The Investment Outlook – Fundamental Equity Weightings
Exhibit 4: RBC CM Fundamental Equity Weighting (FEW) Summer 2014 Portfolio Performance – Last Quarter (continued)
Transportation
Air Canada
Transportation
Air CanadaNational Railway Co.
Canadian
CanadianInc.
National Railway Co.
Cargojet
Cargojet Inc.Inc.
TransForce
Inc.
ConsumerTransForce
Discretionary
Consumer
Discretionary
Automobiles
& Components
Automobiles
& Components
Magna International
Inc.
Magna
International
Inc.
Consumer
Durables
& Apparel
Consumer
Durables
BRP Inc,
SV^ & Apparel
BRP Inc,
SV^
Dorel
Industries
Inc.
DorelServices
Industries Inc.
Consumer
Consumer Services
Media
Media
Broadcasting
Broadcasting
Other*
(Advertising, Cable & Satellite,
Other*
(Advertising,
Cable & Satellite,
Movies
& Entertainment,
Publishing)
Movies &Inc.^
Entertainment, Publishing)
Cineplex
Cineplex
Sirius
XMInc.^
Canada Holdings Inc.
Sirius XM Canada Holdings Inc.
Retailing
Retailing
Canadian Tire Corp., Ltd., Cl "A" NV^
Canadian Tire
Dollarama
Inc.Corp., Ltd., Cl "A" NV^
ConsumerDollarama
Staples Inc.
ConsumerLoblaw
StaplesCompanies Ltd.
Loblaw Companies Ltd.
Health Care
Health Care
Catamaran Corporation^
Catamaran
Corporation^ Int'l. Inc.
Valeant
Pharmaceuticals
FinancialsValeant Pharmaceuticals Int'l. Inc.
Financials
Banks
Banks Bank of Montreal
Montreal
Bank of Nova
Scotia
Bank of Nova
ScotiaBank of Commerce
Canadian
Imperial
Imperial Bank of Commerce
Canadian Western
Canadian
Western
Bank
National Bank
of Canada
National
Bank
of Canada
Royal
Bank
of Canada
RoyalToronto-Dominion
Bank of Canada Bank
The
The Toronto-Dominion
Bank
Diversified
Financials
Diversified
Financials
Gluskin
Sheff + Associates Inc.
GluskinCapital
Sheff +Group
Associates
Tricon
Inc. Inc.
Tricon Capital Group Inc.
Insurance
Insurance
Industrial Alliance Insurance & Fin Serv.^
Industrial
Alliance
Insurance & Fin Serv.^
Intact Financial
Corp.
Intact Financial
Corp.
Manulife
Financial
Corp.
Manulife
Financial Corp.
Power
Corporation
of Canada SV
Power Corporation of Canada SV
Real Estate
Real Estate
Brookfield Asset Management Inc.
BrookfieldREIT
Asset Management Inc.
Canadian
Canadian
REIT
Information
Technology
Information
Software Technology
& Services
Software
Services
CGI&Group
Inc Class "A" SV ^
CGI Group
Class "A" SV ^
Open
Text Inc
Corp.
Open Hardware
Text Corp.& Semi-conductors*
Technology
Technology Hardware
& Semi-conductors*
Telecommunication
Services
Telecommunication
BCE Inc. Services
BCE Inc.Communications Inc.
Rogers
RogersCorp.
Communications Inc.
TELUS
Utilities TELUS Corp.
Utilities Brookfield Infrastructure Partners LP
Brookfield Infrastructure Partners LP
TOTAL PORTFOLIO
TOTAL PORTFOLIO
* 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
Symbol
TRNS
AC.B
TRNS
AC.B
CNR
CNR
CJT
CJT
TFI
TFI
CONC
CONC
AUTO
AUTO
MG
MG
DUR
DUR
DOO
DOO
DII.B
DII.B
HOTEL
HOTEL
MEDIA
MEDIA
TV
TV
CGX
CGX
XSR
XSR
RETL
RETL
CTC.A
CTC.A
DOL
DOL
CONS
LCONS
L
HC
HC
CCT
CCT
VRX
VRX
TSF
TSF
BKS
BKS
BMO
BMO
BNS
BNS
CM
CM
CWB
CWB
NA
NA
RY
RY
TD
TD
DIVFIN
DIVFIN
GS
GS
TCN
TCN
ISR
ISR
IAG
IAG
IFC
IFC
MFC
MFC
POW
POW
RES
RES
BAM.A
BAM.A
REF.UN
REF.UN
HTC
HTC
SFTWR
SFTWR
GIB.A
GIB.A
OTC
OTC
CS
CS
BCE
BCE
RCI.B
TRCI.B
TUTIL
UTIL
BIP.UN
BIP.UN
TSX
TSX
Weights (%)
RBC CM
S&P/TSX
30-May-14
6.0 30-May-14
5.2 29-Aug-14
5.7
1.0
0.1
0.1
6.0
5.2
5.7
1.0
0.1
0.1
3.0
3.1
3.3
3.0
3.1
3.3
1.0
n.m
n.m
n.m
n.m
1.0
0.1
0.1
1.0
0.1
0.1
8.0
5.5
5.6
8.0
5.5
5.6
2.0
1.6
1.6
1.6
1.6
2.0
1.4
1.4
1.4
1.4
2.0
0.5
0.5
2.0
0.5
0.5
1.0
0.1
0.0
0.0
1.0
0.1
0.1
1.0
0.1
0.1
0.0
0.5
0.6
0.0
0.5
0.6
2.0
2.0
1.9
2.0
2.0
1.9
0.0
0.1
0.1
0.0
0.1
0.1
2.0
1.9
1.8
2.0
1.9
1.8
1.0
0.1
0.1
0.1
0.1
1.0
n.m.
n.m.
1.0
n.m.
n.m.
2.0
1.0
1.0
2.0
1.0
1.0
1.0
0.5
0.5
0.5
0.5
1.0
0.3
0.3
0.3
0.3
1.0
2.7
2.8
2.7
2.8
1.0
0.6
0.6
1.0
0.6
0.6
4.0
3.1
2.6
4.0
3.1
2.6
1.0
0.6
0.5
1.0
0.6
0.5
3.0
2.5
2.0
3.0
2.5
2.0
34.0
34.2
34.2
34.0
34.2
34.2
23.0
22.5
22.4
23.0
22.5
22.4
2.0
2.8
2.8
2.0
2.8
2.8
6.0
4.7
4.5
6.0
4.7
4.5
1.0
2.1
2.1
2.1
2.1
1.0
0.2
0.2
1.0
0.2
0.2
0.8
0.9
1.0
0.8
0.9
6.0
6.0
6.0
6.0
6.0
6.0
5.5
5.5
6.0
5.5
5.5
2.0
1.2
1.4
2.0
1.2
1.4
1.0
n.m.
n.m.
1.0
n.m.
n.m.
1.0
n.m.
n.m.
6.0
6.1
6.2
6.0
6.1
6.2
1.0
0.2
0.2
1.0
0.2
0.2
0.5
0.5
1.0
0.5
0.5
3.0
2.1
2.1
3.0
2.1
2.1
1.0
0.6
0.6
1.0
0.6
0.6
3.0
4.3
4.3
3.0
4.3
4.3
2.0
1.5
1.5
2.0
1.5
1.5
1.0
0.2
0.2
1.0
0.2
0.2
2.0
1.8
1.8
2.0
1.8
1.8
1.4
1.4
2.0
1.4
1.4
1.0
0.6
0.5
0.6
0.5
1.0
0.3
0.4
1.0
0.3
0.0
0.4
0.4
0.0
0.4
0.4
4.0
4.8
4.4
4.0
4.8
4.4
1.0
2.2
2.0
2.2
2.0
1.0
0.9
0.9
1.0
0.9
0.9
2.0
1.4
1.3
2.0
1.4
1.3
1.0
2.0
1.9
1.0
2.0
1.9
n.m.
n.m.
1.0
n.m.
n.m.
100
100
100
100
100
100
Performance (%)
RBC CM
S&P/TSX
Closing Price
Price
Total
Price
Total
30-May-14
6,892.77 28-Aug-14
8,155.45 Return
12.6 Return
13.0 Return
18.3 Return
18.7
8.85 8,155.45
8.49
-4.1
-4.1
6,892.77
12.6
13.0
18.3
18.7
8.85
8.49
-4.1
-4.1
65.76
78.09
18.7
19.1
65.76
78.09
18.7
19.1
21.70
22.80
5.1
5.8
21.70
22.80
5.1
5.8
23.70
27.99
18.1
18.7
23.70 1,728.82
27.99
18.1
18.7
1,584.33
1.3
2.8
9.1
9.7
1,584.33 3,417.00
1,728.82
1.3
2.8
9.1
9.7
3,083.90
11.1
11.5
10.8
11.1
3,083.90
10.8
11.1
110.94 3,417.00
123.28
11.1
11.5
110.94 3,836.23
123.28
11.1 -10.5
11.5
3,777.60
-10.9
1.6
1.8
3,777.60
-10.9 -11.1
-10.5
1.6
1.8
29.78 3,836.23
26.48
-11.1
29.78
26.48
-11.1 -10.0
-11.1
41.20
36.75
-10.8
41.20 2,407.68
36.75
-10.8
1,617.61
0.0 -10.0
0.0
48.8
49.5
1,617.61
0.0
0.0
48.8
49.5
878.68 2,407.68
909.53
0.8
5.6
3.5
4.4
878.68 2,091.59
909.53
0.8
5.6
3.5
4.4
2,143.77
0.0
0.0
-2.4
-1.4
2,143.77 2,091.59
0.0
0.0
-2.4
-1.4
7,266.53 7,644.14
0.8
5.6
5.2
6.2
7,266.53
0.8
5.6
5.2
6.2
40.05 7,644.14
40.96
2.3
3.2
40.05
40.96
2.3
3.2
7.81
7.75
-0.8
8.1
7.81 3,595.79
7.75
-0.8
8.1
3,466.77
4.3
4.6
3.7
4.1
3,466.77
4.3
4.6
3.7
4.1
104.59 3,595.79
112.32
7.4
7.8
104.59
112.32
7.4
7.8
91.47
92.57
1.2
1.4
91.47 3,045.62
92.57
1.2
1.4
2,734.96
18.6
19.1
11.4
11.8
2,734.96
11.4
11.8
45.70 3,045.62
54.20
18.6
19.1
45.70 1,592.58
54.20
18.6
19.1
1,712.12
-6.1
-6.1
-7.0
-7.0
1,712.12
-6.1
-6.1
-7.0
-7.0
47.77 1,592.58
51.23
7.2
7.2
47.77
51.23
7.2 -10.5
7.2
142.34
127.38
-10.5
142.34 2,328.37
127.38
-10.5
2,175.43
7.7 -10.5
8.5
7.0
8.0
2,175.43 2,853.42
2,328.37
7.7
8.5
7.0
8.0
2,660.74
7.0
7.9
7.2
8.2
2,660.74
7.0
7.9
7.2
8.2
76.28 2,853.42
83.66
9.7
10.7
76.28
83.66
9.7
10.7
69.63
72.04
3.5
4.4
69.63
72.04
3.5
4.4
95.66
103.91
8.6
9.7
95.66
103.91
8.6
9.7
37.40
40.67
8.7
9.3
37.40
40.67
8.7
9.3
45.50
52.31
15.0
16.0
45.50
52.31
15.0
16.0
74.64
80.77
8.2
9.2
74.64
80.77
8.2
9.2
53.76
57.25
6.5
7.4
53.76 2,668.22
57.25
6.5
7.4
2,657.92
6.3
6.7
0.4
1.0
2,657.92
6.3
6.7
0.4
1.0
29.87 2,668.22
33.09
10.8
10.8
29.87
33.09
10.8
10.8
7.60
7.74
1.8
2.6
7.60 1,237.59
7.74
1.8
2.6
1,137.12
9.6
10.3
8.8
9.6
1,137.12
9.6
10.3
8.8
9.6
41.63 1,237.59
46.94
12.8
13.4
41.63
46.94
12.8
13.4
71.60
73.91
3.2
3.9
71.60
73.91
3.2
3.9
19.85
21.95
10.6
11.2
19.85
21.95
10.6
11.2
29.18
32.04
9.8
10.8
29.18 2,722.19
32.04
9.8
10.8
2,580.68
10.4
5.5
6.5
2,580.68
9.8
10.4
5.5
6.5
46.60 2,722.19
51.95
11.5
11.9
46.60
51.95
11.5
11.9
45.44
48.37
6.4
7.4
45.44
48.37
6.4
7.4
150.33
166.47
12.5
12.7
10.7
11.0
150.33 2,742.49
166.47
12.5
12.7
10.7
11.0
2,514.12
9.1
9.4
2,514.12
12.5
12.7
9.1
9.4
36.90 2,742.49
38.48
4.3
4.3
36.90
38.48
4.3
4.3
50.59
61.08
20.7
21.1
50.59
61.08
20.7
21.1
803.23
937.18
0.0
0.0
16.7
16.7
803.23 1,203.04
937.18
0.0
0.0
16.7
16.7
1,218.90
-1.7
-0.7
-1.3
-0.2
1,218.90
-1.7
-0.7
-1.3
-0.2
49.84 1,203.04
48.95
-1.8
-0.5
49.84
48.95
-1.8
-0.5
43.82
44.32
1.1
2.2
43.82
44.32
1.1
2.2
40.95
39.65
-3.2
-2.2
40.95 1,904.13
39.65
-3.2
-2.2
1,879.16
4.6
5.8
1.3
2.4
1,879.16
4.6
5.8
1.3
2.4
44.05 1,904.13
46.06
44.05
46.06
4.6
5.8
14,604
15,626
6.2
7.0
7.0
7.7
14,604
15,626
6.2
7.0
7.0
7.7
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,
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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
84
5.29
10
11.90
SELL [Underperform]
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Fall 2014
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Strategy: The Investment Outlook - Disclosures
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Strategy: The Investment Outlook - Disclosures
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Fall 2014
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Strategy: The Investment Outlook - Disclosures
To Persons Receiving This Advice in Australia: This material has been distributed in Australia by Royal Bank of Canada - Sydney Branch (ABN 86 076 940 880,
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Copyright © RBC Capital Markets, LLC 2014 - Member SIPC
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