1. finance
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Monthly World Markets Report
February 2015
Don’t Fear The Coming Dips
See Disclosures And Disclaimers at the end of
this report for disclosures, including potential
conflicts of interest. Complete research on any
equities mentioned in this report is available
from your Investment Advisor.
Unless otherwise noted, all prices quoted in
this report are as of the close of markets on
January 26, 2015.
CIBC Wood Gundy is a division of CIBC World Markets Inc., P.O. Box 500, 161 Bay Street, Toronto, Canada M5J 2S8 (416) 594-7000
Jan-15
Nov-14
CIBC World Markets Inc.
Disclaimers
Jul-14
CIBC World Markets Inc.
Research Rating System
Sep-14
8
May-14
Company Disclosures And
Disclaimers
Jan-14
CIBC World Markets Inc.
Economic Outlook
Mar-14
CIBC World Markets Inc.
Interest Rate Outlook
Nov-13
7
Sep-13
Hedging Foreign Exchange
Exposure
Jul-13
6
May-13
Canadian Equities:
Top Picks Of 2015
Jan-13
2
Mar-13
Inside This Issue
In the January issue of Monthly World Markets Report, we said that we expected the bull market to
continue in 2015 but with more volatility than we have been accustomed to in recent years. That
prediction began to play out in January. The S&P 500 Index experienced intraday swings (the
difference between the high and low of the day) of at least 1% in each of the 14 trading days in
January. By comparison, less than one third of the trading days in 2014 experienced 1% swings.
First, it is important to understand why investors are more nervous these days. One
reason is the ending of the U.S. central bank’s stimulus program — known as quantitative easing
(QE) — in October. Some investors fear that the markets will decline as they did after the end of
previous rounds of QE, even though the U.S. economy is on more solid footing this time around.
Economic softness in Europe, China and Japan is another key source of concern. While the
American economy has been a beacon of strength, in a world of global trade, it cannot diverge
from the economies of its trading partners indefinitely. The European Central Bank (ECB) has
enacted its own QE to try to stimulate the European economy but more action is likely needed.
And investor concerns could be further exacerbated if Greece’s newly elected party moves the
country closer to a debt default in the coming weeks.
Whether any of these concerns develop
Nervousness Becoming More Common
into problems that require material reductions in
corporate earnings estimates will only be known
Volatility Index*
25
over time. However, we are quite certain that at
some point in the future the U.S. market will
experience a long overdue, healthy, 10%-15%
20
correction. When investors are in the midst of
such a correction, it often feels like there is no
15
bottom. However, absent a major unforeseen
economic/exogenous event, we believe there are
good reasons why one should buy equities if
10
such a correction occurs.
First, global policy makers have made it
clear that they will step in to provide stimulus
*CBOE S&P 500 Volatility Index. Source: Bloomberg
should the tepid economic recovery show any
real signs of faltering. Second, overall, corporate
profit margins and balance sheets are healthy, which should act as a buffer should times get
challenging. Lower oil prices, while bad for the energy-heavy S&P/TSX Composite, should be a
net positive for the profit margins of companies in the S&P 500. Lastly, the 17.1x price-to-forward
earnings ratio on the S&P 500 Index suggests that valuation levels are still reasonable. Should
stocks retreat 10%-15% without a material reduction in earnings, they should be even cheaper.
If one believes, as we do, that we are in a structural bull market for U.S. stocks, then one
should view volatility as an opportunity, rather than a threat. Pullbacks will allow those with
resolve to buy good-quality companies when that correction takes place. While we are cautious
about the energy sector in the near term, as we believe oil prices will remain soft for the first half
of the year, we also believe Canadian equities should be bought on a pullback. For a potential
shopping list, this month we highlight CIBC World Markets Inc.’s 2015 Top Picks.
SUNIL BHARDWAJ, CFA, MBA
Investment Strategy Group
www.cibcwoodgundy.com
Investment Strategy Group Monthly World Markets Report
Top Picks Of 2015
CIBC asked its equity research analysts to identify those companies that they believe hold good promise for 2015. Below, we provide the
full list and highlight various names contained within it. Please note complete research on each of these companies is available from
your Investment Advisor and on CIBC Wood Gundy Online.
CIBC’s Top Picks Of 2015
Agnico-Eagle Mines Limited1,4,5
Agrium Inc.1,5
Air Canada
Alimentation Couche-Tard Inc.1,2,5
B2Gold Corporation1,4,5
Celestica Inc.1,5
CGI Group Inc.2
Eldorado Gold Corporation1,4,5
Element Financial Corporation
First Quantum Minerals Ltd.1,4,5
Gildan Activewear Inc.1,2,5
H&R REIT3
Manulife Financial Corp.
Milestone Apartments REIT1,3,5
Norbord Inc.1,5
Precision Drilling Corporation4
Pure Industrial Real Estate Trust3
Quebecor Inc.
Seven Generations Energy Ltd.4
Suncor Energy Inc.4
Whitecap Resources Inc.4
Symbol
AEM
AGU
AC
ATD.B
BTO
CLS
GIB.A
ELD
EFN
FM
GIL
HR.UN
MFC
MST.UN
NBD
PD
AAR.UN
QBR.B
VII
SU
WCP
Stock
Rating
SO
SO
SO
SO
SO
SO
SO
SO
SO
SO
SO
SO
SO
SO
SO
SO
SO
SO
SO
SO
SO
SW
M
M
M
M
M
M
M
M
M
M
M
M
M
M
M
O
M
U
M
M
M
Market
Price (C$)
12 To 18-month
Cap
26-Jan-15
Price Target
$40.78
US$33.00 / C$41.16
$8.5 bln
$18.8 bln $130.25 US$125.00 / C$155.93
$12.03
$16.50
$3.4 bln
$46.95
$52.00
$26.6 bln
$2.52
$4.00
$2.3 bln
$13.98
US$14.00 / C$17.46
$2.5 bln
$48.23
$53.00
$15.0 bln
$7.09
US$7.00 / C$8.73
$5.1 bln
$14.00
$18.00
$3.7 bln
$12.22
$28.00
$7.2 bln
$72.98
US$65.00 / C$81.08
$8.9 bln
$24.50
$25.50
$7.0 bln
$20.96
$24.00
$39.8 bln
$12.76
$13.50
$786 mln
$27.04
$34.00
$2.3 bln
$6.68
$11.00
$2.0 bln
$4.88
$5.25
$924 mln
$33.86
$33.00
$4.2 bln
$16.70
$22.50
$4.1 bln
$37.21
$45.00
$55.8 bln
$11.62
$16.00
$2.9 bln
Earnings Per Share (EPS)
2013A
2014E
2015E
US$2.87 US$2.92 US$2.64
US$7.35 US$5.55 US$7.54
$1.20
$1.76
$2.86
US$1.35 US$1.88 US$2.17
US$0.23 US$0.18 US$0.21
US$0.83 US$0.94 US$1.09
$2.80
$3.20
$3.51
US$0.53 US$0.49 US$0.33
$0.34
$0.53
$0.96
US$2.19 US$1.90 US$2.67
US$2.94 US$3.09 US$3.78
$1.79
$1.84
$1.86
$1.34
$1.51
$1.87
US$0.81 US$1.01 US$1.08
US$2.79 US$0.37 US$1.46
$1.57
$2.40
$1.62
$0.39
$0.36
$0.39
$1.73
$2.02
$2.25
N/A
$1.30
$1.69
$6.26
$6.08
$3.38
$1.86
$2.11
$1.73
P/E
2015E
12.4x
13.8x
4.2x
17.3x
9.6x
10.3x
15.1x
17.2x
14.6x
3.7x
18.9x
13.2x
11.2x
9.5x
14.8x
4.1x
12.5x
15.0x
9.9x
11.0x
6.7x
Dividend
Yield*
1.0%
3.0%
Nil
0.4%
Nil
Nil
Nil
0.3%
Nil
1.2%
0.9%
5.5%
3.0%
5.1%
3.7%
4.2%
6.4%
0.3%
Nil
3.0%
6.5%
SW – Sector Weighting; A – Actual for the fiscal year; E – Estimate for the fiscal year; N/A – Not Available; NM – Not Meaningful; R- Restricted; *Based on latest dividend, annualized.
1. Reports earnings in U.S. dollars. Agnico-Eagle Mines also trades on the NYSE under symbol AEM. Agrium also trades on the NYSE under symbol AGU. Celestica also trades on the NYSE under
symbol CLS. Eldorado Gold also trades on the NYSE under symbol EGO. Gildan Activewear also trades on the NYSE under the symbol GIL.
2. Earnings per share figures displayed are F2014A, F2015E and F2016E. Alimentation Couche-Tard’s fiscal year ends in April; its P/E is for F2016E. CGI Group’s fiscal year ends in September.
Gildan Activewear is transitioning to a calendar year end in 2016; the EPS displayed above assume a September year end.
3. Funds From Operations per Unit (FFO), P/FFO and Distribution Yield displayed in lieu of Earnings per Share (EPS), P/E and Dividend Yield, respectively.
4. Cash Flow per Share (CFPS) and P/CFPS displayed in lieu of Earnings per Share (EPS) and P/E, respectively.
5. Where applicable, price target, earnings for P/E, CFPS for P/CFPS and FFO for P/FFO are converted to Canadian dollars using a current exchange rate of 1.2474 C$/US$.
Agrium Inc. (AGU, C$130.25, Sector Outperformer)
Price Target: US$125.00 / C$155.93
Air Canada (AC, $12.03, Sector Outperformer) Price
Target: $16.50
CIBC analyst Jacob Bout believes agriculture fundamentals
remain solid for 2015. His outlook for the U.S. agriculture market
has improved dramatically over the past three to six months due
to a drought in South America and improved U.S. exports to Asia,
which are driving prices higher (particularly for corn).
This positive outlook bodes well for fertilizer producers.
Mr. Bout expects Agrium Inc. to outperform its peers as he
believes it offers the best growth and margin improvement within
the global fertilizer industry. The expansion of Vanscoy, the
company’s underground potash mine near Saskatoon, is expected
to be a key growth driver; the mine’s production was restarted in
December and is expected to ramp up over H1/2015, with
Agrium targeting 2.1 million tonnes for the year, versus
approximately 1.2 million in 2014.
Mr. Bout believes Agrium’s focus on growing its retail
business, which provides services directly to farmers, will
provide a more stable platform that is less cyclical than the
wholesale channel. At the same time, Agrium is focused on
cutting costs by improving asset utilization, reducing retail
working capital and enhancing capital efficiencies. Management
is targeting US$475 million of cost reductions by 2017.
Air Canada’s shares gained 60% in 2014, outperforming the
industrial sector, yet CIBC analyst Kevin Chiang notes that the
shares still trade at an enterprise value (EV) to 2016E earnings
before interest, taxes, depreciation and amortization (EBITDA)
multiple of 3.0x – roughly where they traded a year ago. He
believes further upside remains, as the airline is still early in its
long-term strategy of creating a more sustainable business model.
Mr. Chiang notes that there was a lot of investor
scepticism in early 2014 regarding Air Canada’s ability to execute
its strategic plan, given the amount of capacity being added by
Canadian airlines and a weakening loonie. But in 2014, the
Canadian airlines acted rationally and travel demand remained
robust enough to support the additional capacity. Moreover, Air
Canada was able to reduce its cost structure and expand its
margins despite the headwinds of the falling loonie.
Air Canada continues to expand its leisure offering and
focus on cost reductions. The airline should also benefit from the
weaker fuel price environment. In conjunction with these
positives, the potential for a new labour deal with its flight
attendants (similar to a deal struck with its pilots in December)
may provide an additional catalyst for the stock.
2
February 2015
Investment Strategy Group Monthly World Markets Report
Celestica (CLS, $13.98, Sector Outperformer) Price
Target: US$14.00 / C$17.46
Location, location, location. As the adage goes, where one buys a
property is often the most important driver of its future value.
This holds true for homes, shopping plazas, or, say, the
headquarters of a global electronics manufacturer.
Celestica Inc. designs, manufactures and assembles
electronic components for use in communications, computing and
consumer products. CIBC technology analyst Todd Coupland
views Celestica as a capital deployment story, pointing to two
potential ways investors can be rewarded. The company owns 60
acres of land in Central Toronto, which the company has applied
to have re-zoned for residential, office and retail use, with a target
approval date of May 2016. The construction of a Light Rail
Transit link that will run past the property may help the rezoning efforts and increase valuation. Mr. Coupland believes the
1000
800
600
400
F2016E
F2014
F2015E
F2013
F2012
F2011
0
F2010
200
F2009
Mr. Caicco expects acquisitions to also drive growth. He estimates
that even after considering the company’s upcoming acquisition
of U.S.-based The Pantry, announced this past December,
Couche-Tard should have a net debt-to-EBITDA ratio of only
1.4x. As such, he expects Couche-Tard to remain an active and
astute acquirer.
1200
$ mlns
Source: CIBC World Markets Inc.
3
Free Cash Flow Expected To Top $1 Billion
F2016E
F2015E
F2014A
F2013A
F2012A
F2011A
0.00
F2010A
0
F2009A
0.05
F2008A
10
F2008
0.10
20
F2007
0.15
30
F2006
0.20
F2005
0.25
U.S. Gas Margin
40
F2007A
Revenue (US$ blns)
Revenue
50
U.S. Gas Margin (US$/gal)
60
CIBC analyst Stephanie Price believes CGI Group Inc., Canada’s
largest IT outsourcer, will be in a prime position to pursue a gamechanging acquisition over the next 12 months. She notes that it
produces solid free cash flow and strong margins and trades at a
compelling valuation.
Ms. Price explains that CGI’s core business is stable, with
most of its earnings originating from long-term outsourcing
contracts. The company’s focus on performance and efficiency
helped it grow its earnings-before-taxes-and-interest (EBIT) margin
to 13% in 2014 — a solid 240 basis points above the industry average
and second only to Accenture, the world’s largest consulting firm.
Moreover, CGI’s annual free cash flow is nearing the $1 billion mark.
This strong cash flow generation could help CGI continue
its acquisition strategy, which Ms. Price believes could be a major
catalyst for the stock in 2015. In her view, an acquisition within
the U.S. commercial (non-government) space is most likely.
F2004
Consistent Revenue Growth
CGI Group Inc. (GIB.A, $48.23, Sector
Outperformer) Price Target: $53.00
F2003
CIBC analyst Perry Caicco believes convenience store and gas station
operator Alimentation Couche-Tard Inc. offers a compelling growth
story in a stable industry. He notes that today’s low oil price
environment benefits Couche-Tard as wholesale fuel costs typically
fall faster and further than retail prices, resulting in higher gas
margins. In addition, lower gas prices encourage more driving;
Couche-Tard has recorded eight consecutive quarters of samestore fuel growth in the U.S. Moreover, as the U.S. economy
continues to improve and consumers find themselves with more
cash in their pockets, Mr. Caicco believes Couche-Tard will likely
see increased merchandise sales. This is a welcome complement
to same-store fuel growth as Couche-Tard further transitions
towards a higher-margin fresh food offering. All together, the
positive tailwinds may result in expanded margins that more
than offset the impact of a continued secular decline in
tobacco sales.
land could be worth up to $200 million or about $0.75 per share
after tax. Pair this with about $300 million of excess cash on the
balance sheet and Mr. Coupland believes the company could
make an accretive tuck-in acquisition and/or announce a large
one-time share buyback via what is known as a Dutch Auction.
Such a move would not be unusual for Celestica as it bought back
$175 million of its shares via a Dutch Auction in 2012.
F2002
Alimentation Couche-Tard Inc. (ATD.B, $46.95,
Sector Outperformer) Price Target: $52.00
Source: CIBC World Markets Inc.
CGI trades at 13.9x C2016E earnings, roughly in line with the
industry average of 14x and a discount to Accenture at 16.3x.
Ms. Price expects the valuation gap to narrow throughout 2015
and believes that a higher multiple is justified by CGI’s strong
margins and stable cash flow generation.
Element Financial Corporation (EFN, $14.00, Sector
Outperformer) Price Target: $18.00
Element Financial Corp. provides equipment financing for the
transportation, construction, healthcare and franchise industries in
Canada and the U.S. The company’s stock ended 2014 relatively flat,
even though receivables per share saw an increase of roughly 130%.
CIBC analyst Paul Holden believes that this year Element
Financial will continue to post strong growth and that investors
will begin to price in the positive company performance.
Management expects originations to grow 43% to $6.5 billion in
February 2015
Investment Strategy Group Monthly World Markets Report
2015 and earnings per share (EPS) to grow approximately 87% to
US$0.99.
Earning Assets By Business Segment
Commercial
& Vendor
Finance
19%
Fleet
Management
60%
Aviation
Finance
10%
H&R REIT (HR.UN, $24.50, Sector Outperformer)
Price Target: $25.50
Rail Finance
11%
Source: Company reports, as of September 30, 2014
Mr. Holden believes that Element Financial’s U.S. exposure will
be a benefit to the company given a positive outlook for U.S.
capital equipment spending. Roughly 58% of Element’s earnings
originate in the U.S. and of the $6.5 billion in originations
expected in 2015, over 75% are slated to come from south of the
border.
Mr. Holden notes that Element trades at a very reasonable
valuation of 14.6x 2015E EPS, versus its 22.8x forward earnings
multiple a year ago. The company’s peers trade at a lower
average multiple (13x) but Mr. Holden believes the growth
picture for these firms is not as promising. He believes there is
good upside to the stock should management execute on its
guidance and the forward multiple remains firm.
Gildan Activewear Inc. (GIL, $72.98, Sector
Outperformer) Price Target: US$65.00 / C$81.08
CIBC analyst Mark Petrie believes Gildan Activewear Inc. is a
best-in-class apparel manufacturer with a low cost of production
in the Caribbean. The company has captured more than 70% of
the U.S. wholesale basic activewear market and is growing its
retail presence.
Revenue Growth By Operating Segments
$1,900
Branded Apparel
Printwear
US$ mlns
$1,700
$1,500
$1,300
$1,100
$900
H&R REIT (H&R) owns a portfolio of office, retail and industrial
properties in Canada and the U.S. CIBC analyst Alex Avery
believes the portfolio provides a highly stable collection of highquality assets that generate strong, predictable cash flows. The
REIT has a long average lease term of 9.8 years and only 4.2% of
its total rentable area has leases that will expire in 2015, giving the
REIT very low potential exposure to weakening property market
conditions. In addition, its re-financing risk appears low as the
average remaining term on its mortgages is 6.4 years. With its
EBITDA providing interest coverage of 2.7x, its capital structure
also appears conservative.
Geographic Breakdown Of Assets
Region
Ontario
United States
Alberta
Quebec
Other
Total
Gross Leasable Area
(mln sq. ft.)
Properties
20.6
109
16.2
293
10.2
42
4.5
19
4.1
31
55.5
494
% of Total Gross
Leasable Area
37%
29%
18%
8%
7%
100%
Source: CIBC World Markets Inc.
Mr. Avery believes H&R’s growth opportunities stem from
contractual rent increases and recycling capital opportunities –
that is, selling fully valued properties and re-investing the
proceeds in more attractive ventures. Recently, H&R sold a 50%
interest in a $1.4 billion industrial property portfolio, comprising
approximately 5% of its assets; management plans to invest the
proceeds in higher-margin properties. Relative to most Canadian
REITs, Mr. Avery believes H&R represents a low-risk, highquality investment opportunity for investors seeking upside and
an attractive yield, currently 5.5%.
Norbord Inc. (NBD, $27.04, Sector Outperformer)
Price Target: $34.00
$700
$500
2012A
2013A
2014A
2015E
2016E
Source: Company reports and CIBC World Markets Inc.
Mr. Petrie notes that after working through some internal
manufacturing issues and higher cotton input prices last year
Gildan is back on track for growth in 2015. The price of cotton has
fallen 40% from its peak in March 2014 but because Gildan prepurchased its cotton when prices were higher, it has not yet
benefited from the decline. However, Mr. Petrie believes that the
4
lower cotton input price will work its way through the
production cycle and will lower overall manufacturing costs
starting in the second half of 2015.
Mr. Petrie notes that Gildan continues to gain market share
and new accounts across multiple channels, brands and products.
He views Gildan’s valuation as attractive, as its trailing price to
earnings multiple has increased only 17% since early 2011. This is
significantly less than the 50% expansion in the average multiple
for its peer group over the same period. Mr. Petrie expects
Gildan’s valuation to catch up with that of its peers in 2015.
Norbord is an international producer of wood-based panels with
sales in excess of US$1 billion and operations in North America
and Europe. In December 2014, Norbord announced plans to
merge with competitor Ainsworth Lumber. CIBC analyst Mark
Kennedy believes that the merger, expected to be completed in
the first quarter of 2015, will create a truly global Oriented Strand
Board (OSB) company that will benefit from growing demand for
OSB in Europe and Asia.
February 2015
Investment Strategy Group Monthly World Markets Report
In North America, the OSB market has been oversupplied as the
sluggish U.S. housing recovery has failed to keep up with mill
restarts that added 24% to OSB manufacturing capacity over the
past two years. Mr. Kennedy believes that an expected increase in
U.S. housing starts will be able to absorb all of the restarted OSB
capacity by the end of 2015. Should housing starts increase to
1.15 million this year, he forecasts that Norbord will trade close to
his $34.00 price target by year-end. With a potential further uptick
in housing starts to 1.3 million in 2016, he foresees an eventual
share price closer to $40.00.
Pure Industrial REIT (AAR.UN, $4.88, Sector
Outperformer) Price Target: $5.25
Pure Industrial REIT (Pure) has ownership interests in 170
industrial properties, comprising 15.9 million square feet of gross
leasable area in Canada and the U.S. Its portfolio is focused on
single-tenant industrial assets (accounting for roughly 71% of
rental income) with long-term leases (average remaining lease
term is seven years). CIBC analyst Brad Sturges believes Pure’s
long-term leasing and debt strategies (matching lease terms with
debt maturities) have the potential to create greater cash flow
stability over time.
Property Portfolio Composition
Other, 7%
U.S., 13%
Ontario, 38%
top pick within the Telecommunications & Cable Services sector
for 2015. His positive view on the company is driven by a number
of compelling fundamentals, including the company’s position in
the North American market as one of only two cable companies
that can offer a robust four-product bundle which includes cable,
landline, Internet and wireless services.
With most of the heavy lifting for its wireless network
build-out in Quebec behind the company and a wireless division
which is showing positive earnings momentum, Mr. Bek expects
to see strong prospects for free cash-flow growth in the medium
term. In addition to sound fundamentals, Quebecor shares trade
at an EV/2015E EBITDA multiple of only 6.4x, which is below
that of its peer group at ~7.4x. While a discount is warranted, in
his opinion, given the company’s lower-than-average liquidity
and yield, Mr. Bek feels the current valuation gap is excessive and
expects it to continue to narrow in 2015.
Suncor Energy Inc. (SU, $37.21, Sector
Outperformer) Price Target: $45.00
CIBC analyst Arthur Grayfer believes that Suncor Energy Inc. will
remain profitable and flexible, even with oil prices trading near
six-year lows. He maintains that the company’s suite of
downstream assets in Canada and the U.S. will enable it to
capture Brent pricing on 95% of its production. This would allow
Suncor to generate the highest cash flow per barrel within the
senior energy space in 2015 at $29.00 per barrel (Bbl) (assuming
CIBC’s base case assumption with oil prices at US$55.00/Bbl)
compared to the large-cap group average of $17.00/Bbl.
A Resilient Earnings And Cash Flow Profile
$7.00
Earnings per share
Cash Flow per share
B.C., 21%
$6.00
Alberta, 21%
Source: CIBC World Markets Inc.
While Pure continues to grow through acquisitions, the REIT is
also exploring internal value-creation initiatives such as
expansion, development or redevelopment projects within its
existing portfolio; Mr. Sturges believes this has the potential to
drive above-average growth in adjusted funds from operations
(AFFO). Meanwhile, the sale of non-core assets could provide
liquidity and further improve the REIT’s portfolio quality. He
believes the potential addition of Pure to the S&P/TSX
Composite Index, if the REIT meets the index’s size requirements,
should also provide an additional catalyst for its unit price. With
the REIT’s strong cash flow predictability, potential for aboveaverage AFFO growth and 6.4% yield, he believes Pure represents
an attractive investment opportunity.
Quebecor Inc. (QBR.B, $33.86, Sector
Outperformer) Price Target: $33.00
Although shares of Quebecor Inc. outperformed the S&P/TSX
Composite Index in 2014 by 13.4%, CIBC analyst Robert Bek has
maintained his Sector Outperformer rating and identified it as his
5
$5.00
$4.00
$3.00
$2.00
$1.00
2012A
2013A
2014E
2015E
Source: CIBC World Markets Inc.
Mr. Grayfer notes that the company maintains a strong financial
profile, with a 2015E net debt/cash flow ratio of 2.3x and a 2015E
total payout ratio of 164% (once again assuming CIBC’s base case
assumption of US$55/Bbl oil for the year) versus the large-cap
group averages of roughly 3.5x and 173%, respectively. This
should enable Suncor to remain vigilant and flexible during
prolonged periods of energy price weakness. In addition to the
compelling fundamentals, Mr. Grayfer also highlights that Suncor
trades at a 2015E EV/debt adjusted cash flow ratio of 13.3x, a
discount to the integrated peer group average multiple of 15.2x.
MICHAEL O’CALLAGHAN, MBA, CFA; JASON CASTELLI, CFA;
BRAD BROWN, CFA; NADEEM KASSAM & RICHARD WOO
Investment Strategy Group
February 2015
Investment Strategy Group Monthly World Markets Report
Hedging Foreign Exchange Exposure
January was a reminder that volatility is not reserved solely for
equity markets; currencies can also be subject to unexpected
movements. The Swiss National Bank shocked financial markets
when it abandoned its currency peg versus the euro; fears of
Greece abandoning the euro caused the euro to hit all-time lows;
and, the Bank of Canada surprised most observers when it cut its
key interest rate, sending the loonie lower. There are, of course,
strategies to reduce such currency risk and protect any gains that
may result from recent U.S. dollar strength.
A foreign exchange (FX) forward is a contract between
two parties to exchange specific currencies at a specified date in
the future at a pre-determined exchange rate. FX forwards may be
used by individual investors and businesses.
Consider a Canadian who has just bought a home in the
U.S., with the deal closing in several months. If the client does not
want to buy the U.S. dollars today and fears the greenback might
appreciate against the loonie, an FX forward will allow the
homebuyer to enter a transaction today to purchase the necessary
U.S. dollars at a locked-in exchange rate on the date the funds are
needed.
Forwards are also an effective hedging solution for
Canadian companies that import or export goods. A business that
exports goods to the U.S. may have concerns that the Canadian
dollar could rally against the greenback if the price of oil
rebounds from its current six-year low. FX forwards allow the
business to lock in rates today to convert the U.S. dollars to
Canadian on the date the funds are expected to be received. This
allows the business to lock in future costs and revenues, protect
its profit margins, and better forecast future earnings.
Forward rates differ from current (spot) exchange rates
due to interest rate differentials between the two countries. If
interest rates in Country A are higher than in Country B, Country
A’s currency, in theory, is expected to depreciate; an investor is,
therefore, indifferent between investing in Country A (where he
would earn a higher interest rate but whose currency will
depreciate) or Country B (where the interest rate earned would be
lower but the currency would appreciate). Currently, short
interest rates are higher in Canada than the U.S., and, thus,
forward rates reflect a declining Canadian dollar.
USDCAD Forward Rate Quotes
Term
1 month
3 months
6 months
Spot Rate = 1.2530 CAD per USD
Forward Points
All-In Forward Rate to Sell USD
4
1.2534
14
1.2544
25
1.2555
Source: Bloomberg, as of January 28, 2015
Example: Hedging A U.S. Dollar Equity Portfolio
Forwards can also be used to hedge the currency exposure of
foreign investments. The U.S. dollar has risen 18% against the
loonie since last summer. Consider an investor with a
6
US$1 million portfolio of U.S. stocks. The investor can lock in
these gains via FX forwards. A sample hedge would look as
follows:
Today
Spot = 1.2530 USDCAD

Sell US$1 million six-months forward @ 1.2555 USDCAD
In Six Months
Spot = 1.2400 USDCAD
Six-month forward rate to Sell USD = 1.2425 USDCAD

Deliver on expired forward without selling equities - Buy $1 million
USD @ spot 1.2400 USDCAD
- C$15,500 gain from sale at 1.2555 USDCAD and purchase at
1.2400 USDCAD
- Wish to maintain hedge without liquidating assets

Extend Hedge – Enter six-month forward to Sell USD @ 1.2425
USDCAD
Note that while the client has made money on the spot
transaction to deliver funds for the Forward expiry, the U.S.
assets are now priced at 1.2400 USDCAD, lower than before at
1.2530 USDCAD. Therefore, the client has hedged his portfolio
since a move down in the U.S. currency (which would reduce the
Canadian dollar value of the portfolio) is offset by the gain
generated by the FX forward. Keep in mind that if the U.S. dollar
had instead appreciated to 1.2600 USDCAD, the spot transaction
to buy U.S. dollars would present a loss, while the assets will
have gained in Canadian dollar terms on the strengthening of the
greenback.
Below is a graphical representation of the five major
Canadian banks’ USDCAD forecasts for 2015. The wide range of
forecasts highlights the difficulty in predicting future exchange
rates. FX forwards are a tool to help investors shield profits, lock
in costs in advance, and reduce portfolio return uncertainty.
Forecasts For CAD/USD
CIBC
TD
BMO
Royal Bank
Scotiabank
Avg
1.30
1.28
1.26
1.24
Avg
1.2132
1.22
Avg
1.20 1.1864
1.18
Avg
1.2044
Avg
1.2116
1.16
1.14
Q1 2015
Q2 2015
Q3 2015
Q4 2015
Source: CIBC World Markets, as of January 28, 2015
CIBC Wood Gundy is the first Canadian brokerage to be able to
offer FX forwards to its clients. These transactions may be booked
as short as one week or as long as six months and can be executed
against all major currencies as long as the U.S. dollar or Canadian
dollar are in the currency pair. Please speak with your CIBC
Wood Gundy Investment Advisor to learn more.
HANNA NAIMAN
Wealth Solutions Group, Capital Markets Trading
February 2015
Investment Strategy Group Monthly World Markets Report
CIBC World Markets
Interest Rate Outlook
Interest Rates (%) – End of Qtr
Canada
3-month T-Bill
U.S.
Canada
10-year Gov’t Bond Yield
U.S.
US$/C$
CIBC World Markets
Economic Outlook
26-Jan-15 Jun/15
0.61
0.45
0.01
0.30
1.47
1.70
1.82
2.65
0.80
0.77
Dec/15
0.50
1.10
2.00
2.90
0.78
Economic Outlook
Real GDP Growth (% Chg)
Consumer Price Index (% Chg)
Canada
U.S.
Canada
U.S.
2013A 2014E 2015E
2.0
2.4
1.9
2.2
2.4
3.2
0.9
1.9
0.5
1.5
1.6
0.7
Source: CIBC World Markets
Source: CIBC World Markets
Price Target Calculations
For price target calculations for the equities featured within this report, please see the full research reports available from your Investment
Advisor and on CIBC Wood Gundy Online: https://www.woodgundy.cibc.com/wg/index.html
Disclosures And Disclaimers
Companies Mentioned In This Report That Are Covered By CIBC World Markets (Prices as of 26-Jan-15)
Agnico-Eagle Mines Limited (2g, 7) (AEM-NYSE, US$32.71 Sector Outperformer)
Agrium Inc. (2a, 2b, 2c, 2e, 2g, 6c, 7) (AGU-NYSE, US$104.50, Sector Outperformer)
Ainsworth Lumber Co. Ltd. (7) (ANS-TSX, C$3.49, Sector Outperformer)
Air Canada (2g, C38) (AC-TSX, C$12.03, Sector Outperformer)
Alimentation Couche-Tard Inc. (2g, 7, 12) (ATD.B-TSX, C$46.95, Sector Outperformer)
B2Gold Corporation (2g) (BTO-TSX, C$2.52, Sector Outperformer)
Bank of Montreal (2a, 2c, 2e, 2g, 3a, 3c, 6c, 7) (BMO-TSX, C$78.14, Sector Performer)
Bank of Nova Scotia (2g, 3a, 3c, 6c, 7) (BNS-TSX, C$63.49, Sector Performer)
Canadian Imperial Bank of Commerce (2a, 2c, 2e, 2g, 3a, 3c, 6a, 6c, 7, 9, CD37) (CM-TSX, C$92.59, Not Rated)
Celestica Inc. (2g, 3a, 3c, 6a, 12) (CLS-NYSE, US$11.23, Sector Outperformer)
CGI Group Inc. (2g, 7, 6c, 12) (GIB.A-TSX, C$48.23, Sector Outperformer)
Eldorado Gold Corporation (2g, 7) (ELD-TSX, C$7.09, Sector Outperformer)
Element Financial Corporation (2a, 2c, 2e, 2g, 7, 8, 9) (EFN-TSX, C$14.00, Sector Outperformer)
First Quantum Minerals Ltd. (2g, 7) (FM-TSX, C$12.22, Sector Outperformer)
Gildan Activewear Inc. (2g, 7) (GIL-NYSE, US$58.57, Sector Outperformer)
H&R REIT (2g, 3a, 6c, 7) (HR.UN-TSX, C$24.50, Sector Outperformer)
Manulife Financial Corp. (2a, 2c, 2e, 2g, 6c, 7) (MFC-TSX, C$20.96, Sector Outperformer)
Milestone Apartments REIT (2a, 2c, 2e, 2g, 6c) (MST.UN-TSX, C$12.76, Sector Outperformer)
Norbord Inc. (2g) (NBD-TSX, C$27.04, Sector Outperformer)
Precision Drilling Corporation (2g) (PD-TSX, C$6.68, Sector Outperformer)
Pure Industrial Real Estate Trust (2a, 2c, 2e, 2g) (AAR.UN-TSX, C$4.88, Sector Outperformer)
Quebecor Inc. (2g, 12) (QBR.B-TSX, C$33.86, Sector Outperformer)
Royal Bank of Canada (2a, 2c, 2e, 2g, 3a, 3c, 6c, 7) (RY-TSX, C$75.31, Sector Outperformer)
Seven Generations Energy Ltd. (2a, 2c, 2e, 2g) (VII-TSX, C$16.70, Sector Outperformer)
Suncor Energy Inc. (2a, 2c, 2e, 2g, 6c, 7) (SU-TSX, C$37.21, Sector Outperformer)
TD Bank (2a, 2b, 2c, 2d, 2e, 2g, 3a, 3c, 6c, 7, 8) (TD-TSX, C$52.45, Sector Outperformer)
Whitecap Resources Inc. (2a, 2c, 2e, 2g, 6c) (WCP-TSX, C$11.62, Sector Outperformer)
Companies Mentioned in this Report that Are Not Covered by CIBC World Markets Inc. (Prices as of 26-Jan-15)
Accenture (ACN-NYSE, US$89.08, Not Rated)
The Pantry Inc. (PTRY-OTC, US$36.75, Not Rated)
Key To Important Disclosure Footnotes:
1
2a
2b
2c
2d
2e
2f
2g
3a
3b
7
CIBC World Markets Corp. makes a market in the securities of this company.
This company is a client for which a CIBC World Markets company has performed investment banking services in the past 12 months.
CIBC World Markets Corp. has managed or co-managed a public offering of securities for this company in the past 12 months.
CIBC World Markets Inc. has managed or co-managed a public offering of securities for this company in the past 12 months.
CIBC World Markets Corp. has received compensation for investment banking services from this company in the past 12 months.
CIBC World Markets Inc. has received compensation for investment banking services from this company in the past 12 months.
CIBC World Markets Corp. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months.
CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months.
This company is a client for which a CIBC World Markets company has performed non-investment banking, securities-related services in the past 12 months.
CIBC World Markets Corp. has received compensation for non-investment banking, securities-related services from this company in the past 12 months.
February 2015
Investment Strategy Group Monthly World Markets Report
3c
4a
4b
4c
5a
5b
6a
6b
CIBC World Markets Inc. has received compensation for non-investment banking, securities-related services from this company in the past 12 months.
This company is a client for which a CIBC World Markets company has performed non-investment banking, non-securities-related services in the past 12 months.
CIBC World Markets Corp. has received compensation for non-investment banking, non-securities-related services from this company in the past 12 months.
CIBC World Markets Inc. has received compensation for non-investment banking, non-securities-related services from this company in the past 12 months.
The CIBC World Markets Corp. analyst(s) who covers this company also has a long position in its common equity securities.
A member of the household of a CIBC World Markets Corp. research analyst who covers this company has a long position in the common equity securities of this company.
The CIBC World Markets Inc. fundamental analyst(s) who covers this company also has a long position in its common equity securities.
A member of the household of a CIBC World Markets Inc. fundamental research analyst who covers this company has a long position in the common equity
securities of this company.
6c
One or more members of Investment Strategy Group who was involved in the preparation of this report, and/or a member of their household(s), has a long position in
the common equity securities of this company.
7
CIBC World Markets Corp., CIBC World Markets Inc., and their affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued
by this company.
8
A partner, director or officer of CIBC World Markets Inc. or any analyst involved in the preparation of this research report has provided services to this
company for remuneration in the past 12 months.
9
A senior executive member or director of Canadian Imperial Bank of Commerce ("CIBC"), the parent company to CIBC World Markets Inc. and CIBC World
Markets Corp., or a member of his/her household is an officer, director or advisory board member of this company or one of its subsidiaries.
10
Canadian Imperial Bank of Commerce ("CIBC"), the parent company to CIBC World Markets Inc. and CIBC World Markets Corp., has a significant credit
relationship with this company.
11
The equity securities of this company are restricted voting shares.
12
The equity securities of this company are subordinate voting shares.
13
The equity securities of this company are non-voting shares.
14
The equity securities of this company are limited voting shares.
CD37 CIBC World Markets Inc. is a wholly-owned subsidiary of Canadian Imperial Bank of Commerce. Canadian Imperial Bank of Commerce is a related issuer of
CIBC World Markets Inc.
C38 The Class A shares of Air Canada are variable voting shares. The Class B shares of Air Canada are converted to Class A shares if they become held by a
person who is not a Canadian.
CIBC World Markets Research Rating System
Abbreviation
Stock Ratings
SO
SP
SU
NR
R
Sector Weightings**
O
M
U
NA
Rating
Description
Sector Outperformer
Sector Performer
Sector Underperformer
Not Rated
Restricted
Stock is expected to outperform the sector during the next 12-18 months.
Stock is expected to perform in line with the sector during the next 12-18 months.
Stock is expected to underperform the sector during the next 12-18 months.
CIBC does not maintain an investment recommendation on the stock.
CIBC World Markets is restricted*** from rating the stock.
Overweight
Market Weight
Underweight
None
Sector
Sector
Sector
Sector
is expected to outperform the broader market averages.
is expected to equal the performance of the broader market averages.
is expected to underperform the broader market averages.
rating is not applicable.
**Broader market averages refer to the S&P 500 in the U.S. and the S&P/TSX Composite in Canada.
"Speculative" indicates that an investment in this security involves a high amount of risk due to volatility and/or liquidity issues.
***Restricted due to a potential conflict of interest.
"CC" indicates Commencement of Coverage. The analyst named started covering the security on the date specified.
This report is issued and approved for distribution to clients in Canada by registered representatives of CIBC Wood Gundy, a division of CIBC
World Markets Inc., Member of the Canadian Investor Protection Fund and Member of the Investment Industry Regulatory Organization of
Canada, and by its affiliates via their registered representatives. This report is not authorized for distribution in the United States. This
document and any of the products and information contained herein are not intended for the use of private investors in the United Kingdom.
This report is provided for informational purposes only and does not constitute an offer or solicitation to buy or sell any securities
discussed herein in any jurisdiction where such offer or solicitation would be prohibited.
The securities mentioned in this report may not be suitable for all types of investors. This report does not take into account the
investment objectives, financial situation or specific needs of any particular client of CIBC Wood Gundy. Recipients should consider this report
as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any,
as a substitution for the exercise of independent judgment of the merits and risks of investments. CIBC Wood Gundy suggests that, prior to
making an investment decision with respect to any security recommended in this report, the recipient should contact one of our client advisers
in the recipient’s jurisdiction to discuss the recipient’s particular circumstances. Non-client recipients of this report should consult with an
independent financial advisor prior to making any investment decision based on this report or for any necessary explanation of its contents.
CIBC Wood Gundy will not treat non-client recipients as its clients by virtue of their receiving this report. Past performance is not a guarantee
of future results, and no representation or warranty, express or implied, is made regarding future performance of any security mentioned in
this report.
Information, opinions and statistical data contained in this report were obtained or derived from sources believed to be reliable, but CIBC
Wood Gundy does not represent that any such information, opinion or statistical data is accurate or complete (with the exception of
information contained in the Important Disclosures section of this report provided by CIBC World Markets or individual research analysts), and
they should not be relied upon as such. All estimates, opinions and recommendations expressed herein constitute judgments as of the date of
this report and are subject to change without notice.
Nothing in this report constitutes legal, accounting or tax advice. Since the levels and bases of taxation can change, any reference in this
report to the impact of taxation should not be construed as offering tax advice on the tax consequences of investments. As with any
investment having potential tax implications, clients should consult with their own independent tax adviser.
© 2015 CIBC World Markets Inc. All rights reserved. Unauthorized use, distribution, duplication or disclosure without the prior written
permission of CIBC World Markets is prohibited by law and may result in prosecution.
8
February 2015