KORNER REPORT / Canadian Stock Exchanges - 1
Toronto Stocks End Mixed
Recovering commodity prices continued to lift gold, oil and mining stocks, but it wasn't enough Monday as the first North American stock market rally of 1999 came to an end. Toronto stocks ended mixed on Monday on market uncertainty over earnings results about to be posted by blue chip companies later this week.
After a 5.9 per cent rally last week, the TSE 300 composite index closed at 6,842.31, down 26.62 points or less than half a percentage point. The Dow Jones industrial average -- which gained five per cent last week -- finished the day 23.43 points lower at 9,619.89.
"From time to time the excesses have to pause," said Larry Wachtel, market analyst at Prudential Securities. "But it isn't like we're getting clobbered here."
In New York, the Dow Jones Industrial Average was down 23.43 points, or 0.24 percent, to 9619.89. The blue-chip index did manage to rebound from a 110-point loss earlier in the afternoon but was unable to make it back to positive territory.
While most broad-market indexes were lower, the technology-heavy Nasdaq composite rose to its seventh consecutive record high, fuelled by sharp gains in technology stocks including Intel and Dell Computer, and Internet shares like Amazon.com, Yahoo! and Infoseek.
"It just gets more incredible every day," Barry Hyman, senior equity analyst at Ehrenkrantz King Nussbaum.
Blue-chip stocks were dragged down by a softer U.S. dollar, which began last week to gain prominence as a concern in the stock market because it is pushing interest rates higher.
Higher interest rates generally are not good for stocks because they raise corporations' operating costs and could cut into earnings.
Market watchers blamed the early dip in profit taking as investors sought gains from the redhot market activity in recent sessions.
"I think people are focusing on the earnings coming out in Canada and the U.S. this week. People are waiting to see what direction earnings will take," said Todd Kapala, investment specialist at Priority Brokerage.
U.S. computer chip manufacturer Intel Corp. should set the tone once it reports its quarterly earnings Tuesday morning, Kapala said.
Laidlaw Inc. of Burlington, Ontario, reports its quarterly results Tuesday as well. The company is North America's largest healthcare transportation, school bus and municipal transit service firm.
Canadian computer graphics maker ATI Networks Inc. reports its earnings on Thursday.
The Toronto Stock Exchange's key 300 Composite Index ended down 26.69 points, or 0.39 percent, to 6842.24. Volume was light at 112.3 million shares worth C$1.91 billion. Trading was showing a positive bias, however, as advancers topped decliners 523 to 495 with another 265 issues unchanged.
The TSE 100 lost 2.28 points to 419.09
The TSE's new SP/TSE 60 index was down 2.73 points, or 0.68 percent, to 397.35.
"It's been a really rocking start to the year so I think people are a little freaked out. When you see the TSE leading the charge, it's just such an anomaly and people just have to figure out what's driving that: is it the currency, the resource stocks and should you get into them," said Joe Canavan, president of Synergy Mutual Funds.
"People are looking more for safety right now, they're buying a lot of gold and we saw a bit of an increase in the oil and gas sector," Kapala said.
Signs of a recovery in energy and commodity prices continued to underpin Canada's currency which closed up at C$1.5055 ($0.6642). It ended 1998 at C$1.5333 ($0.6522).
Questions as to whether the commodity and energy price gains will be sustained are counterbalanced by the memories of last month's profit warnings by major blue-chip companies such as Coca Cola, leaving traders wondering what steps to take next.
Overall in Toronto, 10 of the TSE 300's 14 subindexes ended lower.
The gold and precious metals sub-group rose 1.69 percent. Barrick Gold Corp. was up 20 cents at $32.40, while Placer Dome Inc. hit $20.10, up 55 cents.
Mining and minerals also reported a 1.05 per cent gain, hot on the heels of Friday's whopping 7.41 per cent surge, thanks to improving metals prices. Alcan Aluminium gained 15 cents to $46.15, while Rio Algom Inc. gained 35 cents to $18. Pan American Silver Corp. gained 75 cents to $9.75.
Oil and gas also managed a 0.66 per cent gain. Oil prices jumped on cold weather and dwindling supplies.
A 5% jump in crude prices yesterday sparked speculation oil may finally be bouncing back from the bottom of the barrel.
"Indications are the worst is over," said Peter Linder, oil and gas analyst with CIBC Wood Gundy. "The ball was rolling against us for a long time, but now it seems to be rolling in favour of higher prices."
Yesterday's rise saw February futures increase to $13.75 a barrel on the New York Mercantile Exchange before closing the day at $13.45 for a 38 cent gain. Benchmark West Texas Intermediate jumped 45 cents to close the day at $13.53 US per barrel.
That's the highest price since November, and a sign the battered oil market may finally be on the upswing.
"I'd say $11.50 or $12 is rock bottom now," said Martin Molyneaux of First Energy Capital Corp., which revised its forecast over the weekend to $15 per barrel from $16 - but expects oil to end the year better than $17.50.
Tough times in the oilpatch have forced companies worldwide to cancel more than 30% of their capital expenditures over the past year, Molyneaux said. And that alone will help drive prices upward as supplies dwindle.
"I think we've seen the worst," agreed John McColl, director of portfolio strategist for Scotia Capital Markets, the investment arm of the Bank of Nova Scotia.
"We're not going to see $24 a barrel anytime soon, but the psychology has changed,"
And while crude still sits almost 20% lower than it did this time last year, it's been gaining steadily since Jan. 1 - a long-awaiting improvement for a city that still depends heavily on the energy sector.
"I think it's a bit of euphoria that we're starting the year with," said Teresa Courchene, TD Bank's director of economic research.
And Courchene is not holding out much hope for the good news to continue.
"Even if we get a small rally, commodity prices are not going to reverse the huge losses suffered last year."
Economist Lloyd Atkinson described the commodity upswing as a possible "head fake" where prices soar for a brief period of time, only to drop back to new lows.
"I don't know if this is another head-fake," said the chief investment officer at Perigee Investment Counsel in Toronto.
Analysts agreed yesterday that rebounding oil prices are a hot and cold reaction to the chilly return of winter across Canada and the re-heating of tensions in the Middle East as the latest feud between Iraq and the United States continues.
"With oil prices coming back, that's very reassuring for Alberta oil producers," said Courchene, who noted that a return to $11 US a barrel prices would have disastrous effects on Canada's oilpatch.
After nearly a year suffering from an overburdened market, U.S. inventories last week had their biggest drop in 18 years. If that holds up, it could be very good news for producers
"That's been one albatross that's kept prices down for a long time," Linder said. "If inventories improve, prices will come back."
Conglomerates joined commodities and energy stocks on their march into higher territory, gaining 0.21 percent.
Communications and media stocks fared the worst on the day, losing 1.34 per cent. Southam Inc. lost a nickel to $25.15, while Rogers Communications B shares slipped 40 cents to $16.70.
Utilities also fell 1.07 per cent as BCE Inc. slipped 85 cents to $61.25, while pipelines fell 0.77 per cent.
The heavily weighted financial services secyor slumped 0.74-percent.
Among industrials, BII Enterprises gained $2.10 to $7.60, ATI Technologies $0.40 to $18; CIBC lost $0.55 to $40.65.
Among mines, Armada fell $0.06 to $0.09, Dia Met Class A $0.70 to $16.30.
There were no dividends declared Monday. Among companies reporting earnings:
Celanese Canada Ltd.: Twelve months ended Dec. 31, 1998, $74,397,000, $1.83 a share; 1997, $82,806,000, $2.03 a share. Revenue: 1998, $696,465,000; 1997, $796,533,000.
International Datashare Corp.: Six months ended Nov. 30, 1998, net loss $236,000, net loss $0.01 a share; 1997, net loss $1,045,300, net loss $0.06 a share. Revenue: 1998, $3,115,700; 1997, $1,997,100.
Loews Cineplex Entertainment Corp.: Three months ended Nov. 30, 1998, net loss $12,106,000, net loss $0.21 a share; 1997, net loss $5,412,000, net loss $0.26 a share. Revenue: 1998, $211,414,000; 1997, $85,942,000.
Hot Stocks
Ignoring warnings that an earnings storm is brewing, investors continued piling aboard Canada's major airlines yesterday.
Canadian Airlines Corp. (CA/TSE) sprang up 52c or 23%, and managed to hang on to those gains to close at $2.70.
Air Canada (AC/TSE) stock jumped as much as 55c or 7% but retreated to close up 25c at $7.45.
Both carriers' shares have run up lately. Only last month Canadian hit a 52-week low of $1.68 and Air Canada was barely bobbing above $6.
Neither airline could account for the activity and even analysts found themselves groping for a precise explanation.
"It's people looking for an opportunity -- things had been knocked down a bit here -- but it does not reflect the fundamental situation that's facing these companies," said Ted Larkin, an analyst at HSBC Securities.
Mr. Larkin noted that the buying was mostly retail, meaning it was small investors pushing the stock rather than large institutions.
Jacques Kavafian, an analyst at Yorkton Securities Inc., agreed the stocks' depressed prices made them attractive. "They're not [bargains] any more. I think they reflect the short-term to medium-term prospects of the companies," he said.
Both analysts posited that there is a spillover effect from the United States, where airline shares have rocketed since the beginning of the year, propelled by a surprisingly resilient economy and cheap fuel prices that saved carriers $2-billion (US) last year.
The top four U.S. airlines' shares have returned an average 17.1% since Jan. 1, according to Standard & Poor's airline index.
In Canada, both carriers began 1998 with great promise but are now due to report losses for the year. This is doubly disappointing since Air Canada earned a record $2.35 a share in 1997 -- including extraordinary gains -- and Canadian posted a record of sorts by earning 12c, its first profit in a decade.
Mr. Larkin estimated Air Canada, which is to report on Feb. 3, will lose 20c a share for 1998 while he expects Canadian will announce a loss of 25c when it reports on Feb. 10.
Mr. Kavafian is calling for Air Canada to lose 45c and Canadian about $1 for the year.
Claude Proulx, an analyst at Nesbitt Burns, expects Air Canada to lose 25c and Canadian $1.05 in 1998.
Moreover, things aren't expected to get better any time soon.
Mr. Larkin said Air Canada is facing wage pressures after it gave pilots a 9% raise over two years following a devastating 13-day strike in September.
That compares unfavourably with the 9% over three years agreed to at the major railways and has set high expectations among Air Canada's other unions, all of which have contracts coming due, he said.
Consequently, he projected Air Canada will earn about 70c a share in 1999, less than earlier expected.
Further dampening expectations for the airlines is the low Canadian dollar because expenses are primarily denominated in U.S. funds. Canadian, for example, estimates that each cent change in the exchange rate affects costs by $9.5-million.
For Canadian, the struggle isn't expected to get any easier and the loss for 1999 will increase over last year, said Mr. Kavafian. The carrier is making significant outlays to refurbish ageing planes and the fight for market share, with its attendant low yields, will continue.
Another industry observer said Canadian's four-year recovery program is in trouble and that the carrier is about $140-million off its 1998 revised plan, which called for a $90-million annual profit but will instead yield a $40-million loss.
Troubles in the industry are also affecting smaller carriers. Royal Aviation Inc. lost $2.6-million (14c) in the most recent quarter ended Oct. 31 versus a profit of $9.7-million (70c) a year earlier, and fellow charter Transat A.T. Inc. is also expected to report lower results. Even upstart WestJet Airlines Ltd. has said the market is tough, but it's still expected to double fourth-quarter profit.
I.S.G. Technologies Inc. (ISO/TSE), up 20c to $6.20, on volume of 6,895 shares.
The shares of the Mississauga, Ont.-based imaging software firm hit a 52-week high of $6.50 yesterday in thin trading.
I.S.G has a joint venture with Carl Zeiss Inc., called Surgical Navigation Specialists Inc., whereby the firm supplies the underlying software for a Zeiss microscope. Other "large credible companies" are also participating in the venture, including Phillips Medical Systems Inc., said Michelle Weise, analyst at Canaccord Capital Corp.
Ms. Weise said the firm is entering a "critical period" now in terms of seeing how well the joint venture will perform. Her target price of $6.20 is under review, but she still rates the shares a "speculative buy", saying the downside for the shares is limited because of its existing businesses that are growing above 15% annually.
Intel Corp. (INTC/NASDAQ), up $9 3/4 (US) to $139 7/16 (US), on volume of 26 million shares.
The world's largest computer-chip maker's shares rose 13% in anticipation of stronger than expected earnings, to be released after the markets close today.
The optimism is being pinned on a robust holiday season market for personal computer sales.
Analysts polled by First Call Corp. predict per share earnings of $1.07 (US) a share, up from 96c (US) in the year-earlier period.
Lehman Brothers analyst James Barlage raised his 12-month target on the shares to $180 from $135.
America Online Ltd. (AOL/NYSE), up $20 1/16 (US) to $165 (US), on volume of 14.1 million shares.
The online service provider got a boost from Merrill Lynch & Co. analyst Jonathan Cohen, after he raised his 12-month target price to $195 (US) with a long-term rating of "buy".
Mr. Cohen said in a research note that the firm's fourth-quarter earnings -- to be reported on Jan. 27 -- will "likely exceed" 14c (US) a share, and the company will have over 17 million members.
Potash Corp. of Saskatchewan Inc. (POT/TSE), up $3.50 to $108, on volume of 202,999 shares.
The fertilizer giant's shares jumped on the news that it was in talks to acquire a majority stake of holding company Israel Corp.
Potash Corp., already the world's largest producer of potash with mines in Canada and the United States, is interested in the holding company's 52% interest in potash producer Israel Chemicals, in which the Saskatchewan-based firm bought a 9% interest last month.
Veritas DGC Inc. (VTS/TSE), up $3.50 to $25.50, on volume of 2,000 shares.
Less than a year ago the oilfield services firm, which specializes in seismic data collection, traded at $70, but rumours that it was a takeover candidate never materialized and the sector was hit with a sustained decline in commodity prices, said Fred Mutalibov of Southwest Securities Inc.
"Now there is some optimism that we may see some slight improvement in oilfield services and that we have already passed the bottom," said Mr. Mutalibov.
New natural gas pipelines between Canada and the U.S. Midwest will increase the exploration in Alberta and British Columbia, which is good for seismic data firms, he said. He rates the shares "accumulate" with a 12-month price target price around $27.50.
Not unlike the mountain climbers in its recent release Everest, Imax Corp. stock reached its peak recently -- but the expedition was short-lived.
Analysts say the stock may have been pushed to a record high by investors anticipating a big Hollywood studio deal the large-format filmmaker promised would come by the end of 1998. They are still waiting. Proof the market may really be that fussy about deadlines is in the numbers. On Jan. 4, the first trading day of the new year, the stock (IMX/TSE) reached its 52-week high of $51 and a close of $49.25. But it seems to be dropping every day a deal is not announced. It closed at $45.50 yesterday, down 50¢. The 52-week low is $26.75.
In the United States, the shares (IMAXF/NASDAQ) closed at a high of $32 3/8 (US) on Jan. 4. Yesterday it fell 1/8 to close at $30 1/4 (US).
Company executives were not available for comment now, but in the past have been adamant the "right" deal would be made soon.
Toronto-based Imax's business is leasing its specialized equipment for the large-screen format it pioneered, as well as making and distributing movies. It was in talks this fall with Walt Disney Co.'s Miramax Films, which executives said didn't involve the rumoured sale of a major equity stake. Speculation started after chief executives Richard Gelfond and Bradley Wechsler signed new contracts until 2001 that traded pay cuts ifor more stock options.
Whether the tenuous Miramax deal will be signed is unclear. But Imax has also been negotiating directly with Disney, producers of animation hit A Bug's Life, and DreamWorks SKG, of Antz fame, to produce films using Imax technology. A few years ago, Imax began making deals such commercial theatre chains as Famous Players, a division of Viacom Inc., understanding that theatre expansion was key to its growth. It has gone from using screens in science centres and museums to owning or leasing 180 theatres in 24 countries.
While landing "the deal" is everything in the entertainment industry, analysts believe investors will stay with the stock because of the company's unique and well-known format and its movie-business presence. "What we like about it is it is a growing consumer brand name and is gaining recognition around the world," said Steven Bernard, an analyst with Everen Securities in Chicago.
The name is said to be recognized by more than 80% of Canadian households, and more than 70 million people a year worldwide see its films.
A record backlog of orders for theatre systems is also good for Imax. In a report dated Dec. 18, Mr. Bernard said the company left the third quarter ended Sept. 30 with a record backlog of 84 units worth $195-million (all figures in U.S. dollars).
"With an average life in backlog of two to 2 1/2 years, we estimate the current backlog (71 leased units) could generate well over $2 in EPS," Mr. Bernard wrote.
The company reported record earnings for the third quarter of 23¢ a share, a 27% increase from 18¢ a share during the same period in 1997. Revenue rose 22% to $43.8-million from $35.9-million.
For the nine months the company earned 57¢ a share, a 30% rise from 44¢ a share in the year-earlier period and revenue was up 18% at $122.8-million from $103.9-million. Higher systems revenue was the reason for the increases.
A survey of eight analysts polled by First Call Corp. estimate Imax's profit for the fiscal year ending Dec. 30 to rise 84¢ a share from 68¢. The estimate for 1999 is $1.10. Mr. Bernard recently dropped his earnings estimate to 81¢, after he said it would take a $3.8-million charge in its fourth quarter, as a result of a decision to pay off a series of senior notes ahead of time. The charge comes after a recent public offering that raised $195.5-million used to redeem notes paying a higher percentage, buy back preferred stock, and fund future growth.
Mr. Bernard maintains his "outperform" recommendation on the stock, its highest rating, and sees the success of Everest and the pending release of the 3D animation film Cyberworld, as a "catalyst to send the stock higher."
Everest, a documentary that follows three climbers to the mountain's summit, has taken in more than $60-million worldwide at the box office since its release in March -- a feat in itself. The only other large-format film to do the same took 22 months. The film, produced for less than $7-million, was described in trade journal The Hollywood Reporter as "the fastest success in the history of giant-screen cinema," and a challenger of To Fly, which has grossed $150-million since its release in 1976.
But Mr. Bernard and other analysts acknowledge Imax has issues that make some investors nervous, including accounting questions that have plagued Canadian companies such as Livent Inc. and Philip Services Corp. "There are certain people out there who will not buy the stock because of the accounting," said one analyst who did not want to be named.
At issue are changes in Imax's leasing policy in recent years. Some analysts are bothered by the fact that Imax gets most of its money before theatres are built. Companies that want to build a theatre and lease Imax equipment pay an upfront fee based on the present value of a lease that will last up to 20 years. Imax also receives ongoing royalties.
"They do the accounting by the book, it's whether or not you agree with the book, that's the question É I think they are making a mountain out of a molehill," said Mr. Bernard. Instead, he is cautious about whether Imax can continue to expand and how well its films will do at the box office. He said the company is taking a risk by going into the film production business where it has little experience.
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