* Q1 results allay fears over debt covenants
* Analyst says stock trading at "significant discount"
* Linamar shares gain over 42 percent (Updates share price; in U.S. dollars unless noted)
TORONTO, May 5 (Reuters) - Shares of Linamar Corp (LNR.TO) surged over 42 percent on Tuesday, reaching their highest since mid-November, as analysts hiked forecasts for the auto parts maker a day after it reported stronger-than-expected results.
Linamar reported a diluted loss from continuing operations of 1 Canadian cent per share and said it was on track with plans to cut costs and pay off debt.
Peter Sklar, an analyst at BMO Capital Markets, said in a note that he had expected a loss of 24 Canadian cents per share, while the average market forecast had been for a loss of 20 Canadian cents a share.
"We are revising our forecasts to reflect higher than expected cost savings from restructuring activities," he said, adding that lower production volumes would partially offset those gains.
Shares in Linamar closed up C$1.91 at C$6.40 on the Toronto Stock Exchange.
Including special items, Linamar reported a first-quarter loss of 19 Canadian cents a share. It said its results were hurt by pre-tax severance costs of C$4.4 million and goodwill impairment of C$11.7 million.
Based on the results, BMO raised its 2009 forecast for Linamar to earnings of 25 Canadian cents a share, from a loss of 41 Canadian cents a share. It revised its 2010 earnings forecast to C$1.22 from 71 Canadian cents a share.
Linamar's share price has taken a beating due to the global decline in auto sales, and weakened further after some analysts suggested the company might not be able to meet its debt obligations when $80 million in notes comes due in October.
But Linamar's winning of C$100 million in takeover business and unwinding of C$30 million in working capital investment in the first quarter helped put that fear to rest.
"We now believe that Linamar will have more than adequate liquidity and will not come close to breaching its debt ratio covenant," said Sklar.
BMO raised its target share price to C$6 from C$3.
CIBC analyst Michael Willemse raised his target to C$6 from C$4.75. "Linamar continues to trade at a significant discount to peers," he said in a note.
RBC Capital Markets analyst Nick Morton raised his price target to C$6 from C$4.
All three of the banks rated the stock "outperform."
$1=$1.175 Canadian Reporting by John McCrank; Editing by Frank McGurty