retail strategy

Volume 23, N°4, April 2012

eDiToriAl ed sollbach, CFAPortFolio StrAtegy And QuAntitAtive reSeArCh AnAlySt

F CuS

pleAse see The lAsT pAge of This DocumeNT for compANy specific Disclosures.

Continued on PAge 2

The US Federal Reserve (Fed) has cut short-

term rates to zero—and suggested rates

would stay at zero until 2014—as well as

used unconventional methods to push US

bond yields to their lowest levels since 1940

in an attempt to kick-start the moribund US

economy. Some have called these tactics

‘financial repression’, ie a slow transfer of

wealth from savers to borrowers, as a means

to lessen the burden of debt levels that are

otherwise unsustainable. In this edition of

the Focus, we examine the implications for

debtors at both the consumer and corporate

level, investors, savers and pensioners.

60-year debt build-up to financial crisisUS consumer debt has been building up

since World War  II, with household debt

rising to a peak of 135% of disposable

income in 2008 from 37% in the 1950s. The

largest chunk of this debt (70%) consisted

of mortgage debt, which financed the

housing bubble. House prices finally peaked

in 2006, and then collapsed by 32% to their

lows in 2009. The plunge in prices meant

that many houses were worth less than the

mortgage on the house, and homeowners

simply walked away from their financial

obligations. As a result, 10% of mortgages

became delinquent.

Default is the typical outcome when there is

too much debt. Rising bad loans hurt banks

and other creditors, who then pull back

credit, further weakening the economy in

a vicious circle until there is a widespread

financial crisis. Only the very few with large

cash balances are able to benefit from falling

asset prices.

In 2008–09, the global economy was on

its way to a prolonged financial crisis, but

the central bankers stepped in and started

printing money to offset the US$14 trillion

drop in the value of US financial assets. At

one point, the Fed had even committed to

US$7.7 trillion in financial guarantees.

Given that much of the debt has still

not been written off or paid off, the US

economic recovery has been weaker than

in past recoveries—three years into this

recovery, unemployment is still high despite

recent improvements. After stabilizing the

financial system in 2009, the Fed has since

worked to ease the burden of servicing

private and public debt by pushing down

yields aggressively, particularly for long-term

mortgage debt.

Record-low borrowing rates are slowly

gaining traction, especially in the US housing

At Desjardins Securities, maintaining

an ongoing relationship with our

clients is important to us. That is why

I am pleased that I will now have the

opportunity to communicate regularly

with you via our Focus newsletter.

Like me, my team of Investment

Advisors believes that over and above

numbers and returns, it is essential,

as part of the services we offer you,

to have regular exchanges that foster

quality communication.

I would therefore like to take this

opportunity to invite you to attend our

next conference call on the markets:

Friday, April 13 at 3:00 p.m. EDT.

Dial 514-861-2255 or 1-866-696-5910

and the access code 3300300.

I also invite you to view our Finance

Matters clips now available on the

homepage of our website: dsia.ca.

Thank you for placing your trust in us.

Message froM the general ManagerBrUNO DESMArAISVIce-PReSIDenT AnD GeneRAL MAnAGeR FULL SeRVIce BROkeRAGe

“ Ironically, if central bank ‘financial repression’ continues to work and increases

economic growth, we will likely see markedly higher bond yields by year-end

following intervention by the Fed to rein in stimulus as unemployment falls.“

EDITORIAL (continued) REcOmmEnDATIOns

PRIC

E ($

)PR

ICE

($)

Volu

mE

(m)

Volu

mE

(m)

BOMBArDIEr INc.

cANADIAN WESTErN BANk

050

100150

2

4

6

8

Mar-11 Jun-11 Sep-11 Dec-11 Mar-12

market, although it remains depressed. In

February, US home sales increased 9% vs

last year and inventories of unsold homes

fell 19% from last year, while overall US

unemployment dropped to 8.3% from 9.1%

in August of last year.

Ironically, if central bank ‘financial repression’

continues to work and increases economic

growth, we will likely see markedly

higher bond yields by year-end following

intervention by the Fed to rein in stimulus as

unemployment falls.

creditorsFor pensioners and those on a fixed income,

low rates for savers makes it difficult to live

on the interest on government bonds. The

return on cash is now zero while yields on

government bonds of about 2% are less than

inflation of 3%, meaning savers are losing

1% to inflation every year as they subsidize

debtors with lower interest payments.

For pension funds and insurance companies

that have liabilities stretching 20 to 30 years

into the future, low government bond yields

are especially problematic. As a case in point,

bond yields averaged only 2% over the last

six months vs 6.66% in the 1990s, so income

to support pensioners or life insurance

beneficiaries has been curtailed by 70%.

debtorsconsumers and corporate borrowers should

move to take advantage of record-low

long-term borrowing rates. Homeowners in

canada recently had the opportunity to lock

in five-year mortgages at a record-low 3%,

meaning borrowing costs are the same as the

loss to inflation every year. With respect to

corporate borrowers, this credit environment

greatly benefits companies with a lot of

debt and good credit ratings, such as ReITs,

telecoms and utilities.

Gold should continue to benefit over the

long term, given the value of cash and bonds

is being slowly eroded away by inflation over

time as central bank policy continues the

slow transfer of wealth from creditors to

debtors.

In view of record-low (fixed income) yields

on government bonds, we believe dividend

streams are an attractive source of income

for canadians since many companies are

increasing their dividends; note that dividends

have an approximate 17% tax advantage for

high-income earners in non tax-sheltered

accounts. In our Focus 15 portfolio, we have

purposely targeted high-yielding stocks in

diversified sectors to provide a portfolio that

yields 60 basis points more than the TSX.

Hence, we continue to advocate a barbell

portfolio with a core portfolio of high-yielding

ReITs, utilities, telecoms and pipelines, and a

‘risk on’ component comprised of growing

companies (preferably with yield protection)

in the financial, technology, industrial,

consumer discretionary, transportation, gold,

oil and oil services sectors. n

0246

24

26

28

30

32

Mar-11 Jun-11 Sep-11 Dec-11 Mar-12

RATING BUY–ABOVE-AVERAGE RISKTarget $7.00

Symbol BBD.B

Sector Transportation & Aerospace

Recent price $4.19

Total potential return 67%

52-week range $3.30–7.29

Market cap $7,224m

Year-end Dec-31

Adjusted EPS 2012E US$0.46

2013E US$0.59

P/E 2012E 9.1x

2013E 7.1x

Dividend yield 2.5%

Sources: Desjardins Securities, company reports, Bloomberg

RATING BUY–AVERAGE RISKTarget $36.00

Symbol CWB

Exchange TSX

Sector Banks & Diversified Financials

Recent price $29.49

Total potential return 24%

52-week range $24.00–31.45

Market cap $2,232m

Year-end Oct-31

EPS FY12E $2.45

FY13E $2.75

P/E FY12E 12.0x

FY13E 10.7x

Dividend yield 2.0%

Sources: Desjardins Securities, company reports, Bloomberg

3

Recommendations

Volume 23, n°4, apRil 2012 2-3

Sources: Desjardins Securities, company reports, Bloomberg

BOMBArDIEr INc.

cANADIAN WESTErN BANk

n expected orders for regional and business aircraft and increased visibility on cseries development should propel the stock

n transportation division provides a support level of ~$4/share

n dividend yield of 2.5%

Bombardier (BBD) is an international, diversified manufacturing com-pany operating in two segments, Aerospace and Transportation.

In our view, several catalysts should propel the stock higher over the coming year. Regional aircraft orders from WestJet, nordic Aviation capital, United Airlines, American Airlines and SkyWest (in  2013) could bring some much needed life into BBD’s aerospace backlog and lead the way to higher deliveries.

We believe the company is also well positioned to receive a significant order for midsize/super-midsize bizjets from Warren Buffett’s netJets, the largest fractional jet provider. Should such an order materialize, it could prompt Bombardier to increase its bizjet production rate.

Positive news on the development of the cSeries aircraft is another element that could lift the stock. Bombardier continues to aim for first

flight in late 2012 and entry into service in 2013, whereas we believe the market is already anticipating a delay of six months. We would not be surprised to see an order coming from a chinese airline sometime over the next year, as the chinese typically order closer to commence-ment of production.

Transportation operations continue to perform well and provide a sup-port level of ~$4/share, which significantly reduces downside risk for the shares. Booking remains solid and there is a strong pipeline of opportunities; management remains committed to delivering an eBIT margin of 8.0% in 2013 (we forecast 8.1%).

Given the aforementioned factors, we maintain a constructive view on Bombardier—this is despite the disappointing 2012 guidance which calls for a lower aerospace margin (~5.0% vs 5.8% in 2011) and soft free cash flow generation. At current levels, we believe the stock offers attractive value for investors.

We rate Bombardier Buy–Above-average Risk with a $7/share target, which is derived from an average of four valuation methods and in-cludes a value of US$1.20 for the cSeries program.

n growth-oriented bank stock driven by very strong, well-secured lending activity in the robust economic environment in western canada

n cWb already exceeds the minimum basel iii capital requirements and is very well capitalized and well positioned to return capital to shareholders with regular dividend increases

n cWb’s positive earnings and dividend growth prospects justify a premium valuation relative to its canadian banking peers

We recommend canadian Western Bank (cWB) for investors looking for a growth-oriented alternative to the six major canadian banks. cWB offers a unique play on the strong economic growth and re-source development in western canada, mainly Alberta and British columbia. It has the infrastructure, relationships and capital to support its growth.

In our view, the economic environment in western canada should sustain cWB’s key organic business drivers, namely deposit and loan growth (particularly in higher margin products), increased cross-sell-ing, credit quality and favourable insurance underwriting.

cWB is in strategic investment mode, with plans to enhance its market presence by increasing its branch count to 50 by 2015 from the cur-rent level of 39, and to pursue opportunities for tuck-in acquisitions that fit with its national Leasing subsidiary and wealth management division.

The headwinds that cWB faces—flat yield curves, competitive canadian banking pressures and potential spillover effects from global economic uncertainty, are the same as those faced by other canadian banks. In our view, however, cWB is better sheltered from such head-winds due to its western orientation and minimal capital markets ex-posure.

Our FY12 and FY13 ePS estimates of $2.45 and $2.75, respectively, represent a 12% annual ePS growth. We also expect double-digit an-nual dividend growth for the next two years. Our $36 target price is based on a relative yield projection (cWB’s dividend yield over long canadian corporate yields) of 52.5% vs 72.6% currently. This equates to a P/e of 13.1x on projected FY13 ePS—up from the current 12.0x P/e on projected FY12 ePS.

BENOIT POIrIEr, cFA, AnALYST

MIchAEL GOLDBErG, cFA, AnALYST

DesjarDins securities top 25

Volume 23, n°4, april 2012 4

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Although each company issuing this publication is a wholly owned subsidiary of Desjardins Group, each is solely responsible for its contractual obligations and commitments, and any securities products offered or recommended to or purchased or sold in any client accounts (i) will not be insured by the Federal Deposit Insurance Corporation (“FDIC”), the Canada Deposit Insurance Corporation or other similar deposit insurance, (ii) will not be considered a deposit or an obligation of Desjardins Group, (iii) will not be endorsed or guaranteed by Desjardins Group, and (iv) will be subject to investment risks, including possible loss of the principal invested.

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NOTE: All information (including prices and returns) as at March 22, 2012

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COMPANY TICKER RATING & RISK TARGET PRICE ($) MARKET CAP (M$)

Toronto-Dominion Bank (The) TD Top Pick–Average 95.00 76,149Bank of Nova Scotia (The) BNS Top Pick–Average 65.00 63,362Brookfield Asset Management Inc. BAM Top Pick–Average US$40.00 US$19,623TransForce Inc. TFI Top Pick–Average 22.00 1,615Algonquin Power & Utilities Corp. AQN Top Pick–Average 7.75 804Whitecap Resources Inc. WCP Top Pick–Average 15.00 799Potash Corporation of Saskatchewan Inc. POT Buy–Average 60.20 38,951Canadian National Railway Company CNR Buy–Average 85.00 34,422BCE Inc. BCE Buy–Average 43.20 31,047TransCanada Corporation TRP Buy–Average 46.00 30,781Enbridge Inc. ENB Buy–Average 42.00 29,675Manulife Financial Corporation MFC Buy–Average 18.00 24,423Teck Resources Limited TCK.B Buy–Average 64.40 20,470Agrium Inc. AGU Buy–Average 106.30 13,690Eldorado Gold Corporation EGO Buy–Above-average US$23.25 US$9,126First Quantum Minerals Ltd. FM Buy–Above-average 30.55 9,059Tim Hortons Inc. THI Buy–Average 58.00 8,309Bombardier Inc. BBD.B Buy–Above-average 7.00 7,224Baytex Energy Corp. BTE Buy–Average 68.00 6,091Metro Inc. MRU Buy–Average 58.50 5,184Finning International Inc. FTT Buy–Average 34.00 4,853Dollarama Inc. DOL Buy–Average 46.50 3,343PetroBakken Energy Ltd. PBN Buy–Average 21.00 3,164Dundee Real Estate Investment Trust D.UN Buy–Average 39.00 2,912Precision Drilling Corporation PD Buy–Average 14.75 2,841Source: Desjardins Securities Portfolio Advisory Group in collaboration with Research analysts.

POSITION SEULEMENT