retail strategy

Volume 23, N°8, august 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

message fRom the geNeRal maNageRbruno desmaraisviCe-PreSident And generAl MAnAger Full ServiCe BrokerAge EuropE

The outline of a comprehensive pan-

European banking union, similar to what

we have in Canada and the US, was finally

announced at the end of June.

Although Europe has made some progress

over the last month, policy makers are

still not moving fast enough to deal with

serious bank and sovereign debt problems.

Infighting among the 17 member nations

has prevented concrete details from

emerging as much as a month after the

21st emergency eurozone summit. This

means it will likely take months before the

much needed reforms are put in place.

Hence, eurozone worries, centred on Spain

and Greece especially, will likely continue to

overhang the markets. Spain is in the difficult

position of having to cut unsustainable deficits

while also raising 100 billion euros to bail out

its banks. At the end of July, 10-year Spanish

bond yields spiked through 7.5%, a level at

which it becomes increasingly difficult for any

government to borrow in the debt markets.

This situation highlights the urgent need for a

banking union where all EU nations share the

burden of backstopping the banks.

Greece continues to struggle with its

austerity program, risking the International

Monetary Fund aid payments needed to

avoid a debt default that could lead to its

quick exit from the eurozone. However,

the EU will likely avoid a disastrous break-

up. The all-powerful European Central

Bank (ECB) President Mario Draghi said on

July 26, “the ECB is ready to do whatever it

takes to preserve the euro. And believe me,

it will be enough”.

ChinaChina’s GDP growth slowed to 7.6% year-

over-year in the second quarter from 8.1% in

the first quarter. However, the strong increase

in lending activity in June suggests that its

growth should bottom this summer, then

rebound as borrowed money is put to work.

unitEd StatESThe US economy has also slowed in

2012, making the historically high US

unemployment rate of 8.1% the main

issue in the November presidential election.

Ben  Bernanke confirmed that the Federal

Reserve (Fed) “is prepared to take further

action” to bring down this number. If US jobs

growth continues to be weak, we believe

the Fed will roll out a third quantitative

easing program in September in the form of

mortgage debt purchases. This would drive

mortgage rates even lower than the current

record lows of 3.6%.

“Stocks have shown resilience over the last month because they have become

very cheap vs bonds, their competing asset class.“

Someone you can count on!

The international situation has been

problematic for several months now,

with Greece in a downward spiral, Italy

on the brink, and now Spain joining

the ranks of too many European

countries in serious financial difficulty.

Hardly a cheerful picture, especially

when you consider the problems we’re

experiencing at the provincial level,

particularly the impasse our government

finds itself in following its negotiations

with the student associations. Although

it’s hard to be optimistic, there are some

encouraging signs, so we mustn’t give

up hope. Certainly not.

Now more than ever, your Investment

Advisor is the person who can answer

your questions, ease your concerns

and, especially, reassess and align your

investment strategies so that they take

into account your investor profile and

current economic conditions.

Enjoy the rest of the summer!

EDITORIAL (continued) REcOmmEnDATIOns

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BOMBARdIER INC.

YAMANA GOld INC.

0204060

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Jul-11 Oct-11 Jan-12 Apr-12 Jul-12

It is record-low mortgage rates that are

spurring the emerging recovery in US

housing after a five-year depression. Prices

have increased 7.9% year-over-year, the

largest gain since 2005, which eases the

burden of struggling US consumers and

makes banks more profitable as there are

fewer defaults on mortgages.

Over the past month, US bond yields have

fallen 20 basis points (bps) to a record low

as capital continues to flee Europe. More

importantly, with a continuing “need for

yield” from investors, corporate bond

yields have fallen even more, plunging

30 bps this month to new record lows. All

companies with debt are benefiting from

corporate borrowing costs that are down

136  bps (25%) from last year, but the

biggest beneficiaries are stable companies

with high debt levels such as REITS, utilities

and telecoms that can continue to refinance

debt at significantly lower rates.

rElativE yiEldSAt the time of writing, there is a positive

spread of 75 bps between record-low

US bond yields of 1.40% and the S&P 500

yield of 2.15%, a situation only seen for a

few days in December 2008 and January

2009 when dividends were being slashed. In

contrast, dividends are now up an attractive

15% year-over-year.

North of the border, 10-year government

bond yields have fallen to a record low of

1.58% with the global slowdown while the

TSX currently yields ~3.15%. The TSX–bond

spread is now over 150 bps, the biggest

spread since World War II. Of note, 67%

of TSX companies and 81% of TSX market

capitalization now yield more than 10-year

Canadian government bonds.

Contrarian analySiSDespite record-high bond prices (low yields),

strategists in general have increased their

bond allocation to record highs. Likewise,

despite cheap valuations, equity funds also

have a record allocation to cash. In both

cases, previous record allocations occurred

at or near stock market bottoms.

Contrarian investing suggests going against

prevailing market trends and sentiment,

particularly when these hit multi-year

extreme levels. Thus, we believe stocks will

rise as negative sentiment and funds flows

turn more positive toward stocks, while

record-high bond valuations (with record-

low yields) are at risk given extremely

positive sentiment toward bonds after a

32-year bond bull market.

invEStmEnt StratEgy Stocks have shown resilience over the last

month because they have become very

cheap vs bonds, their competing asset

class. We continue to advocate owning a

core portfolio composed mainly of high-

yielding stocks—REITs, utilities, telecoms

and pipelines—to which we recommend

adding a smaller but riskier component

comprised of growing companies (pref-

erably with a dividend yield greater than

2% to provide protection) in the financial,

technology, industrial, consumer discretion-

ary, transportation and gold sectors. Also,

we have become more positive on the oil

& gas and oil & gas services sectors as we

believe oil prices have probably bottomed at

US$79 per barrel. n

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Jul-11 Oct-11 Jan-12 Apr-12 Jul-12

RATING BUY–ABOVE-AVERAGE RISKTarget $6.00Symbol BBD.BSector Transportation & AerospaceRecent price $3.83Total potential return 57%52-week range $3.30–6.42Market cap $6,603mYear-end Dec-31Adjusted EPS 2012E US$0.36 2013E US$0.52P/E 2012E 10.6x 2013E 7.4xDividend yield 2.6%

Sources: Desjardins Securities, company reports, Bloomberg

RATING BUY–ABOVE-AVERAGE RISKTarget US$22.00Symbol AUY, YRIExchange NYSE, TSXSector GoldRecent price US$14.07, $14.30Total potential return 59%52-week range US$12.35–18.16Market cap US$10,496mYear-end Dec-31Reserves 18.6m ozsResources 23.9m ozsAdjusted EPS1 2012E US$1.35CFPS2 2012E US$1.86Dividend yield 2.6%

1 From continuing operations 2 Before changes in working capitalSources: Desjardins Securities, company reports, Bloomberg

3

Recommendations

Volume 23, n°8, august 2012 2-3

Sources: Desjardins Securities, company reports, Bloomberg

BOMBARdIER INC.

YAMANA GOld INC.

n Bombardier outpacing Embraer and atr on the regional

aircraft order front so far in 2012

n transportation division provides a support level of ~uS$3.50/share

n attractive dividend yield of 2.6%

Bombardier (BBD) is an international, diversified manufacturing com-

pany that operates within two segments, Aerospace and Transportation.

In contrast to poor booking activity last year, Bombardier Aerospace post-

ed a solid first half of the year in 2012 as its recent marketing campaigns

(Nordic Aviation Capital, WestJet, NetJets) are starting to pay off. The back-

log is now much sounder and we estimate it is meeting management’s

guidance for four out of five aircraft families (vs one out of five at the end of

2011). In our view, this is very positive as it provides strong revenue visibility.

Moreover, we believe momentum in Aerospace will continue to build,

given BBD’s strong booking activity as additional marketing campaigns are

scheduled in the US (Delta, SkyWest, US Airways, American Airlines). Most

of the orders should be placed in 2013 (unlikely this year) and will depend

on airline negotiations with labour unions in connection with the right to

operate larger regional jets and on the ability to secure financing.

Positive news on the development of the CSeries aircraft is a key cata-

lyst, in our view. Bombardier continues to aim for first flight in late 2012

and entry into service in 2013, whereas we believe the market is already

pricing in a delay of six months (the flight control system is the main

concern).

Operations in the Transportation division continue to perform well and,

based on our calculations, provide a support level of ~US$3.50/share—

which should significantly reduce downside risk for the shares. Booking

activity remains solid and there is a strong pipeline of opportunities;

management remains committed to achieving EBIT margins of 8.0% in

2013 (we forecast 7.8%).

Given the aforementioned factors, we maintain a constructive view

on Bombardier. At current levels, we believe the stock offers an at-

tractive value for investors and dividend yield of 2.6%.

We rate Bombardier Buy–Above-average Risk with a $6/share target,

which is derived from an average of four valuation methods and

includes a value of US$1.20/share for the CSeries program.

n Forecast cash costs of uS$485/oz gEo in 2012 below the

industry average

n Expected production increase of 27% year-over-year in 2013

with the start-up of new operations

n proposed acquisition of Extorre’s 2.4m oz Cerro moro project

should provide further production growth in 2015–16

Yamana Gold Inc. is a Canadian-based gold producer focused on

Latin America, with significant production, development and ex-

ploration properties, and land positions in Brazil, Chile, Argentina,

Mexico and Colombia.

The company’s key assets include the El Peñón, Gualcamayo and

Chapada mines, which provide the bulk of 2012 production of

1.21m ozs GEO (gold-equivalent ounces). Furthermore, produc-

tion recently commenced at the Mercedes mine in Mexico at a rate

of 120,000ozs GEO per year. The company is considering increas-

ing throughput, which it expects will allow production to surpass

130,000ozs GEO per year in 2013.

Yamana also operates the Chapada copper-gold mine in Brazil, with

annual production of 145-150m lbs of copper, and holds a 12.5%

equity interest in the Alumbrera copper-gold mine in Argentina.

With these assets, the company is poised to benefit from a

potential increase in copper prices in the event of a global

economic recovery.

Thanks to its portfolio of stable or growing operations and its focus

on organic growth, the company has outperformed many of its

peers during the recent economic turmoil. With a diversified asset

base and significant near-term production growth, Yamana is cur-

rently our preferred large capitalization gold producer.

Our net asset value for Yamana is US$14.88/share. Our target price

of US$22.00/share is derived by applying operational multiples of

1.6x to El Peñón and Chapada, 1.4x to the remaining mines and

1.3x to the development assets.

BENOIT POIRIER, CFA, ANALYST

BRIAN ChRISTIE, ANALYST

DesjarDins securities top 25

Volume 23, n°8, august 2012 4

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NOTE: All information (including prices and returns) as at July 23, 2012

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

Toronto-Dominion Bank (The) TD Top Pick–Average 97.50 71,990Bank of Nova Scotia (The) BNS Top Pick–Average 65.00 58,690Brookfield Asset Management Inc. BAM Top Pick–Average US$40.00 US$20,565TransForce Inc. TFI Top Pick–Average 22.00 1,596Algonquin Power & Utilities Corp. AQN Top Pick–Average 7.75 1,095Royal Bank of Canada RY Buy–Average 66.50 74,432Potash Corporation of Saskatchewan Inc. POT Buy–Average 58.00 39,171Canadian National Railway Company CNR Buy–Average 88.00 37,967Enbridge Inc. ENB Buy–Average 43.00 32,767BCE Inc. BCE Buy–Average 43.20 32,075Teck Resources Limited TCK.B Buy–Average 52.45 17,482Yamana Gold Inc. AUY Buy–Above-average US$22.00 US$10,496Cameco Corporation CCO Buy–Average 33.75 8,847First Quantum Minerals Ltd. FM Buy–Above-average 28.00 8,240Tim Hortons Inc. THI Buy–Average 60.00 8,205Bombardier Inc. BBD.B Buy–Above-average 6.00 6,603CGI Group Inc. GIB.A Buy–Above-average 27.00 6,164SNC-Lavalin Group Inc. SNC Buy–Above-average 54.00 5,780Metro Inc. MRU Buy–Average 59.00 5,319Baytex Energy Corp. BTE Buy–Average 68.00 5,068Vermilion Energy Inc. VET Buy–Average 59.00 4,596Dundee Real Estate Investment Trust D.UN Buy–Average 39.00 3,898Finning International Inc. FTT Buy–Average 33.00 3,865CAE Inc. CAE Buy–Average 14.00 2,610PetroBakken Energy Ltd. PBN Buy–Average 21.00 2,247Source: Desjardins Securities Portfolio Advisory Group in collaboration with Research analysts.