Strengthening Dollar Offsets Loss at Canadian Railways

Lower volumes are in the cards for both Canadian National Railway Co. (CNI) and  Canadian Pacific Railway Ltd. (CP) but a strengthening U.S. dollar will offset some of the bottom line damage, says UBS analyst Fadi Chamoun.

Mr. Chamoun said in a note to clients:

In light of deteriorating economic fundamentals we have further lowered our volume assumptions for CN Rail and CP Rail to recessionary levels. However, the resulting negative impact on earnings is cushioned by the positive effect of a strengthening US$ relative to the CAD. On balance, our EPS forecasts for CN Rail and CP Rail are only modestly lowered.

His CN earnings forecast drops from C$4.04 to C$4.01 per share in 2009 and from C$4.67 to C$4.55 in 2010. His estimate for CP earnings, meanwhile, fall from C$5.06 to C$4.83 in 2009 and from C$4.67 to C$4.55.

The analyst said pricing growth is sustainable in the range of 4-5% for the railroads, noting pricing growth has been accelerating since the fourth quarter of 2007, despite weakening volumes.

He maintained his "buy" rating on both CN and CP. but lowered his CP price target from C$80 to C$77 due to his lowered future earnings estimate. His price target on CN remains unchanged at C$61.

He wrote:

With valuation at the low end of historical trading ranges, in our view the stocks offer a very attractive risk/reward.

Comments

[thunder1980]

Good article defining a well run Company. CN has consistently exhibited quality leadership delivering on the Company's mission to provide an unsurpassed level of service. The current stock price is well below it's true value.