(The following story by Brent Jang appeared on the Toronto Star website on April 24.)
TORONTO — Canada’s two largest railways are forecasting another year of stellar profit, but the freight carriers have yet to excite investors because of lingering concerns over growth prospects and the perception that U.S. railroads are a better bet.
Of the two Canadian carriers, analysts say Canadian Pacific Railway Ltd. is the stock to choose if investors are looking for a play on “bulk commodities” such as grain, fertilizer and coal.
Canadian National Railway Co. would benefit more than CPR if the U.S. economy rebounds because CN has greater exposure to moving extra lumber, should the U.S. housing sector bounce back, analysts say. CN would also thrive if there are increased consumer imports from Asia because it has tracks at the Port of Prince Rupert in British Columbia.
The key investment question is whether CN and CPR are poised to participate in the rally of railway shares south of the border. Analysts respond that the two Canadian stocks are likely to continue trading at a discount to the U.S. railways, and uncertainty over growth prospects could spell further weakness in CN and CPR shares before there’s a sustained rally.
Montreal-based CN and Calgary-based CPR have U.S. expansion plans, but they are far from becoming reality. CN said this week that it could take until next spring before it finds out whether the U.S. Surface Transportation Board will approve its acquisition of Elgin Joliet & Eastern Railway Co.
CPR expects that the regulatory board will issue a ruling by Sept. 30 on whether to approve the railway’s purchase of another U.S. regional carrier, Dakota Minnesota & Eastern Railroad Corp.
CN and CPR reported this week that wintry blasts in Canada disrupted shipments, contributing to weaker-than-expected profit in the first quarter and prompting a cut to profit growth estimates for 2008. Higher diesel prices and the stronger loonie also hurt.
Despite the first-quarter setbacks, CN and CPR have proven to be resilient amid the U.S. economic slowdown, both saying that they remain on track to set another record for annual profit.
But in a tale of two countries, CN and CPR shares haven’t kept pace with the sharp increases in stock prices enjoyed by U.S. carriers, said National Bank Financial Inc. analyst David Newman.
Burlington Northern Santa Fe Corp., Norfolk Southern Corp., Union Pacific Corp. and CSX Corp. have maintained a strong measure of “pricing power,” having the ability to charge premium freight rates even in the face of lower volumes of shipments in some cases, Mr. Newman said.
Shares in the four major U.S. railways began a three-month rally on Jan. 10, when U.S. Federal Reserve chairman Ben Bernanke vowed to cut interest rates in an effort to halt an economic slump. The American rail rally started to lose steam this week, with the selloff continuing yesterday, but even so, the four U.S. carriers have watched their shares climb an average of 28 per cent since Jan. 10. By contrast, CN has risen 16 per cent and CPR has increased 10 per cent.
Besides the currency woes and wicked Canadian winter, another explanation for the lagging stock prices of the Canadian carriers is that they don’t have as many opportunities as their U.S. rivals to renegotiate higher freight rates for expiring contracts, Mr. Newman said.
RBC Dominion Securities Inc. notes that the Dow Jones transport index, which includes the four major U.S. railways, has been showing strength. For some observers, the index is a leading indicator that a broad-based market rally is around the corner.
This week, however, the index has retreated along with U.S. railway stocks. Yesterday was a dreary day for North America’s Big Six railways as their stock prices all fell.
“Investors will jump on the rails far before the broader economy recovers,” Mr. Newman said. “But I think trading in the railways will be choppy. Buy on weakness in the rails.”