MONTREAL — According to the Canadian Press, a leading brokerage firm has rolled back its profit and share-price outlook for Canadian National Railway Co. as a result of the weak Canadian grain harvest. UBS Warburg believes the railway’s pro-forma earnings per share will drop by about two per cent in the second half of this year compared with the second half of 2001, as a result of the soft economy and weaker than expected grain conditions.
However CN’s earnings for 2002 will still be about five per cent higher than last year, thanks to the contribution of Wisconsin Central which was acquired last October, says UBS Warburg.
The firm is projecting earnings per share of $5.17 for the year, down from the $5.40 UBS was previously expecting.
Projected earnings for 2003 are also dropping, to $5.48 from $6. However, if grain volumes grow back to those of 2001, earnings should jump by 16 per cent to $6.04.
Analyst Peter Rozenberg believes the company is sound, and its revenue, margins and valuation should improve in the second half of 2003 if grain and the economy recover.
Rozenberg rates the stock a buy, calling for CNR shares to reach $73 during the coming year, down from his previous target of $85. “We believe the company has strong fundamentals in the context of an economic recovery.”
On the cautious side, “a decline in U.S housing and a decrease in significant sales incentives in automotive could also moderate the growth in CNR’s other businesses.”
CN chief executive Paul Tellier revealed on Sept. 4 that revenue from grain, one of the main commodities transported by CN, will fall by an estimated $170 million this year – and possibly more – as crop yields shrink because of drought on the Prairies.
Rozenberg is calling for the railway’s operating ratio – operating expenses as a proportion of revenue – to erode to 69.5 per cent this year, compared with the industry-leading 68.5 per cent achieved in 2001.
CN shares (TSX:CNR) dropped $1.11 to $62.30 on the Toronto Stock Exchange Tuesday. The stock has a 52-week range between $85.53 and $51.