(The following story by Scott Deveau appeared on the Financial Post website on August 31, 2009.)
OTTAWA — While Canada’s top tier railways remain relatively inexpensive at current levels, the recent run-up in Canadian Pacific Railway Ltd.’s stock led to a downgrade Monday at UBS.
The rail sector is currently trading at a discount to the levels they were during the previous recession in 2001.
While volume declines have been much more precipitous during this downturn – down 19% compared to 3% last time – as volumes start their recovery to peak levels in the 2012-2013 timeframe, earnings will certainly follow, according to Fadi Chamoun, UBS analyst.
“We expect unit costs to decline as volumes recover in coming years, and pricing growth of 3-4% to continue,” he said in a note to clients Monday. “These factors in tandem, we believe, should underpin strong EPS growth.”
In this context, Mr. Chamoun raised his price target for Canadian National Railway Co. to $62, from $57 a share previously, and maintained his “buy” rating on the stock.
He also raised CP’s price target to $58, from $53 previously, but because of the recent run up in the CP’s shares, he downgraded the stock to a “neutral” from a “buy.”
“We believe the recent outperformance of CP’s stock has largely discounted progress towards structural cost reductions, and the expected normalization of bulk volumes over the next 12 to 18 months,” he added.