WEDNESDAY,OCTOBER16,2019| THEGLOBEANDMAILO B11
EYEONEQUITIESDAVIDLEEDER
MANULIFEFINANCIAL(MFC-TSX)
CLOSE$24.17,UP17¢
IMPERIALOIL(IMO-TSX)
CLOSE$32.39,UP8¢TECKRESOURCES(TECK.B-TSX)
CLOSE$21.31,DOWN83¢MTYFOODGROUP(MTY-TSX)
CLOSE$56.10,DOWN$1.65LUNDINMINING(LUN-TSX)
CLOSE$6.69,DOWN13¢Desjardins Securities analyst
Doug Young expects Canadian
life-insurance companies to re-
port “decent” core results for the
third quarter, however, despite a
strong recent run, he warns mac-
ro volatility may prove to be a
headwind. He saysManulife Fi-
nancial Corp.“has the potential
to outperform coming out of
3Q19 results.”
Target:He maintained a “buy”
rating and $29 target for Manulife
shares. The consensus target on
the Street is $28.38.
CIBC World Markets analyst Jon
Morrison raised his rating forIm-
perial Oil Ltd.to “neutral” from
“underperformer,” seeing “less
downside risk in the name given
the current valuation, potential
tailwinds of an Alberta Rail-
Above Curtailment announce-
ment and IMO 2020 downstream
tailwinds.”
Target:His target for the stock
rose by a loonie to $38. Consensus
is $38.30.Tracking a dip in metals prices,
Citigroup analyst Alexander
Hacking expects North American
steel and mining companies to
see “weaker” results in the third
quarter, leading him to lower his
target forTeck Resources Ltd.
based on a “more challenging
price outlook and macro uncer-
tainty.”
Target:With a “neutral” rating,
his target slid to $25 from $30.
Consensus is $34.75.Acumen Capital analyst Nick Cor-
coran says Friday’s sell-off in
shares ofMTY Food Group Inc.
was “more than deserved given
the strong fundamentals of the
underlying business and the ex-
pected recovery in Q4/FY19.”
Target:Although he thinks MTY
is poised for a “strong” fourth
quarter both financially and op-
erationally, Mr. Corcoran lowered
his target to $72 from $74, main-
taining a “buy” rating. The con-
sensus on the Street is $63.50.AlthoughLundin Mining Corp.’s
latest technical report on its
Chapada mine in Brazil was met
with a “collective shrug,” RBC Do-
minion Securities analyst Sam
Crittenden said the Toronto-
based company remains his “pre-
ferred name ahead of a potential
FCF inflection point which has
historically driven outperform-
ance for mining stocks.”
Target:Mr. Crittenden main-
tained an “outperform” rating
and $9 target, which exceeds the
consensus of $8.54.T
he U.S. short-seller who
helped take down Valeant
Pharmaceuticals Interna-
tional Inc. has turned bullish on
the company that emerged from
the debacle –Bausch Health
Cos. Inc.
Andrew Left, the Los Angeles-
based founder of Citron Re-
search, said Bausch has under-
gone a “textbook turnaround” in
the years since allegations of
fraud and price gouging trig-
gered Valeant’s spectacular fall.
“The new Bausch Health is not
Valeant,” Mr. Left said in a report
released Tuesday.
“During the past four years we
have observed [Bausch] with a
healthy dose of skepticism and
questioned whether manage-
ment could turn things around.
We have to give credit where
credit is due.”
Mr. Left confirmed he has a
long position in the stock, which
rose by 3.4 per cent on the To-
ronto Stock Exchange on Tues-
day.
But Bausch is still a tough sell
for many Canadian investors,
and not just because so many of
them got burned when Valeant’s
share price collapsed.
While Bausch has made
strides in reducing its debt, the
company still has more than
US$24-billion in long-term debt
on its balance sheet.
“That’s going to hang over
them for a long, long time,” said
Jason Del Vicario, a portfolio
manager at HollisWealth, a divi-
sion of Industrial Alliance Secu-
rities.
A heavy debt burden is just
one of the ways the reformed
and restructured company is still
struggling to free itself from Va-
leant’s legacy.
In 2015, Valeant was one of the
biggest stories on Bay Street.
Through a relentless campaign
of growth through acquisitions
fuelled by debt, Valeant briefly
surpassed Royal Bank of Canada
to become the country’s single
largest publicly traded company,
with a market capitalization of
nearly $120-billion.
Mr. Left emerged as one of Va-
leant’s most vocal critics in Octo-
ber, 2015, when he revealed a
short position and released a re-
port calling the company a
“pharmaceutical Enron.” Va-
leant’s shares fell by as much as
39 per cent that day alone.
Within five months, the stock
had lost 90 per cent of its value
from its peak, and it has mostly
traded sideways since.
“Four years later [Bausch] still
trades with a ‘Valeant discount’
despite new management’s 180-
degree turn of corporate cul-
ture,” Mr. Left wrote. It’s time for
the Street to give the company
another look, he added.Bausch has posted two con-
secutive quarters of growth in
earnings before interest, taxes,
depreciation and amortization
(EBITDA) and six consecutive
quarters of organic growth, the
report said, suggesting the stock
is “on its way” to US$40, which
would represent an 87-per-cent
gain from Tuesday’s closing
price.
The company is poised to
“pivot to offence,” with a partic-
ular focus on its “crown jewel”
Bausch & Lomb eye-care assets,
Mr. Left said.
And with no significant ma-
turities before 2023, the compa-
ny has some breathing room, its
debt finally “manageable,” he
said.
Still not quite manageable
enough for some, however.
Mr. Del Vicario generally looks
for a ratio of net debt to EBITDA
below 3 to 1, while Bausch’s is
closer to 7 to 1.
With that kind of debt, “you’re
not really the master of your
own destiny, you’re at the mercy
of your lenders, and interest
rates,” Mr. Del Vicario said.
High debt burdens can be
more palatable with companies
posting higher rates of growth,
said Jamie Murray, head of re-
search at Murray Wealth Group.
But Bausch’s revenue is forecast
to grow by just 2 per cent to 3 per
cent annually over the next five
years.
“We like growth and we like
strong balance sheets,” Mr. Mur-
ray said. “Right now, Bausch
doesn’t have either of those.”Shortseerîho[riti[iôed
VAeAntisQuishon
su[[essorBAus[hHeAth
Inanewreport,Andrew
Leftsaysthehealth
companyhasmadea
‘textbookturnaround’
TIMSHUFELT
INVESTMENTREPORTER
CANADIANSTOCKS
Canada’s main stock index eked out a small gain on the first
day of trading after the Thanksgiving holiday, while U.S. mar-
kets rose on positive earnings reports.
The S&P/TSX Composite Index closed up 3.23 points at
16,418.39. The Canadian market benefited largely from gains
in the health-care and financials sectors, which more than
offset losses in the materials and energy sectors. Health care
rose 3.2 per cent on the day as Aphria Inc. closed up 15.5 per
cent after the cannabis producer posted a second consecutive
quarter of profitable growth. CannTrust Holdings Inc. was up
51.7 per cent after the pot producer announced it will destroy
$77-million worth of cannabis plants and inventory as part of
its efforts to comply with Health Canada regulations.U.S.STOCKS
Wall Street advanced as third-quarter reporting season hit
with a spate of upbeat earnings reports that brought buyers
back to the equities market. All three major U.S. stock averag-
es gained ground in a broad-based rally, with the S&P 500 and
the Nasdaq hitting their highest closing level in more than
three weeks.
Major financial firms JPMorgan Chase & Co., Citigroup Inc.,
Goldman Sachs Group Inc. and Wells Fargo & Co. all posted
results, as did health-care giants Johnson & Johnson and
UnitedHealth Group Inc. Among the big banks, JPMorgan
Chase stock hit a record high after it handily beat estimates
on bond trading and underwriting strength. Its shares were
up 3 per cent. Citigroup rose 1.4 per cent after its profit beat.
The Dow Jones Industrial Average rose 0.89 per cent, the
S&P 500 gained 1 per cent and the Nasdaq Composite added
1.24 per cent.COMMODITIES
Oil prices fell, as investors worried that the unrelenting U.S.-
China trade war would keep squeezing the global economy,
and that swelling U.S. crude inventories would further press
prices.FOREXANDBONDS
The Canadian dollar strengthened against its U.S. counter-
part, with investors encouraged by signs of progress between
Britain and the European Union to reach an amicable divorce
deal. The American dollar index fell 0.15 per cent. Canadian
government bond prices were lower across the yield curve,
with the two-year down 7 cents to yield 1.693 per cent and the
10-year falling 40 cents to yield 1.562 per cent. The 10-year
yield touched its highest intraday level since July 17 at 1.577
per cent.REUTERSANDTHECANADIANPRESSMarketssummary
REPORTONBUSINESS |P
rofit reports from big manu-
facturers and other industri-
al firms arriving this week
will provide investors with a cru-
cial corporate gauge of the U.S.
economy’s health and the fallout
from trade tensions between
Washington and Beijing.
Third-quarter industrial sector
earnings come after a closely
watched survey earlier this
month that showed U.S. manu-
facturing activity tumbled to a
more than 10-year low in Septem-
ber. Industrial companies also are
among those most at risk from
the lingering trade dispute be-
tween the United States and Chi-
na.
“This third-quarter earnings
season is going to be really impor-
tant for industrials,” said Chuck
Carlson, chief executive officer at
Horizon Investment Services in
Hammond, Ind.
“The industrial sector is really
going to be watched closely for
signs the overall economy is real-
ly slipping, and slipping enough
to matter to stocks,” Mr. Carlson
said.
While the industrial sector rep-
resents slightly less than 10 per
cent of the overall S&P 500 stock
index, it can provide an outsized
perspective on the economy. It in-
cludes major multinational man-
ufacturers as well as transporta-
tion companies whose results of-
fer a barometer of economic ac-
tivity.
The industrial stock sector has
climbed more than 19 per cent
this year, slightly ahead of the 18.5
per cent gain for the overall S&P- But while the broader mar-
ket has hit all-time highs this
year, the industrial sector has yet
to breach its record peak from
early 2018 and currently trades
about 5 per cent below it.
Industrial results start pouring
in this week, including from di-
versified manufacturers Honey-
well International Inc and Tex-
tron Inc., railroads Union Pacific
Corp. and CSX Corp., and United
Airlines Holdings Inc.
Third-quarter earnings over all
for industrial companies are ex-
pected to rise by just 0.7 per cent
from a year earlier, according to
IBES data from Refinitiv. That
would represent a better per-
formance than for the full S&P500, for which earnings are ex-
pected to fall by 3.2 per cent.
Profit declines are expected for
the tech, energy and materials
sectors, while companies overall
are facing tough comparisons
with results from a year ago,
when they benefited from a big
corporate tax cut.
Investors will also be keenly
watching for financial forecasts
for the fourth quarter and next
year. Earnings in 2020 in the in-
dustrials sector are forecast to
jump 16.2 per cent, while the
overall S&P 500 is seen rising 11.1
per cent, according to Refinitiv.
Expectations for a sharp in-
crease in overall earnings next
year rests in part on the economy
avoiding a recession, said Omar
Aguilar, chief investment officer
of equities and multiasset strate-
gies at Charles Schwab Invest-
ment Management in San Fran-
cisco.
For industrial companies, Mr.
Aguilar said, a critical factor is
whether they ramp up capital
spending, which could depend
on U.S.-China trade tensions
yielding a clearer picture of the
business environment.
“The majority of these compa-
nies stopped their capital expen-
ditures as a result of uncertainties
because of the U.S.-China nego-
tiations,” Mr. Aguilar said. A re-
bound in capital spending could
help restore earnings growth, he
added.
U.S. and Chinese officials cul-minated talks in Washington last
week with U.S. President Donald
Trump outlining the first phase of
a deal to end their trade war, in-
cluding suspending a threatened
tariff hike.
But officials on both sides said
much more work was still needed
to reach a final comprehensive
agreement, and Mr. Trump left
tariffs on hundreds of billions of
dollars of Chinese products in
place.
Carol Schleif, deputy chief in-
vestment officer with Abbot
Downing in Minneapolis, said
that Friday’s developments show
some movement in the U.S.-Chi-
na trade tensions, but uncertain-
ty remains for companies.
As the industrial companies
hold their quarterly conference
calls, Ms. Schleif said she will be
listening for commentary about
the impact that has already been
felt from the trade war, including
whether companies have pulled
shipments in to get ahead of tar-
iffs, or if have they deferred cap-
ital spending or employment.
“Companies are being forced
to reassess their supply chains,
and that takes time. To the extent
companies are making progress
on diversifying that, it might lead
to a muddy couple of quarters,”
Ms. Schleif said. “You have a lot of
pieces at play that make it tough
to be an industrial company right
now.”REUTERSIndustriAeArninstAe[entrestAeîithtrAdebe[onoðinfo[us
RefinitivIBESdatashowthird-quarterearningsforindustrialcompanies
areexpectedtorisebyjust0.7percentfromayearearlier.Thesector,
whichrepresentsslightlylessthan10percentoftheoverallS&P500
stockindex,canprovideanoutsizedperspectiveontheeconomy.ISTOCKLEWISKRAUSKOPFNEWYORK