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Broker wrap: Get on board Coach, Jefferies exhorts

Last updated: 10:12 10 Aug 2016 EDT, First published: 05:12 10 Aug 2016 EDT

Luxury handbag maker

The fourth quarter of Coach Inc’s (NYSE:COH) financial year marked a turning point for the luxury handbags maker, in the view of Jefferies.

For the first time in more than three years both like-for-like sales and operating margins were up year-on-year, and the broker believes the company is now poised to capitalise on this momentum as the sector stabilises.

The turnaround is gaining traction, the broker maintains, and he fundamentals are set to improve, driven largely by the company’s self-help initiatives.

“Bucking the broader luxury trend, performance was also solid internationally, with mainland China and Europe both seeing DD [direct distribution] sales growth in constant currency,” the broker noted.

The price target is US$53, versus the current share price of just over US$40, and the recommendation is “buy”.

Canadian renewable power generation outfit TransAlta Renewables Inc (TSE:RNW) issued second quarter results that were ahead of the market consensus.

The advice from broker Raymond James is: come for the dividend; stay for the growth.

The broker, which has upped its share price target to C$15.25 from C$14.50 following the quarterly update, likes the stock for its attractive and growing dividend, its strong forecast free cash flow and good visibility on drop-down acquisitions from its sponsor company, TransAlta Corp (TSE:TA).

“While we do not expect any further drop down transactions until the completion of the South Hedland Project in mid-2017, we see potential for RNW to add significant scale over time with an estimated 1,300 MW [megawatts] of renewable and gas assets at TransAlta Corp. available for drop down,” said Raymond James’s energy team.

“This would add to RNW’s already large 2,470 MW footprint and, given the mix of these assets, would also increase RNW’s proportion of renewable power leading to an expanded trading multiple, in our view. We also note the company has guided to a 6-7% dividend hike in mid-2017 (our estimates support this forecast) which would add to the already attractive 6.2% dividend yield, above the peer group average of 5.1%,” the team added.

Signs of the apocalypse are fading at controversial Canadian pharmaceuticals company Valeant Pharmaceuticals International Inc (TSE:VRX, NYSE:VRX), according to Canaccord Genuity.

Although the fallen pharma giant reported a slight miss on the bottom line with its second quarter results, the broker has faith that management is making progress turning around the business, though new chief executive officer Joseph Papa must continue to build credibility while he gets his feet under the desk, and this will only happen in Canaccord’s view through execution and delivery of targets.

The company is seeking to slash its debt mountain to head off the prospect of breaking its banking covenants, and has identified around $8bn of assets it could potentially sell. Even so, with Canaccord’s underlying earnings (EBITDA) estimates towards the bottom end of the range of analyst forecasts, the broker believes it has limited breathing room and will seek to modify its covenants in the near-term.

“Despite the slight miss in Q2, Valeant has reiterated its full-year guidance. We expect the company will deliver, albeit at the low end of the range, and see potential room for growth next year with new drug launches, the reacceleration of Xifaxan, and the identification of cost savings,” Canaccord said, as it stuck with its ‘hold’ recommendation and upped its price target to US$31 from US$28.

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