(The following story by Jonathan Ratner appeared on the National Post website on December 17.)
OTTAWA — While Canadian National Railway Co. has so far declined to update its 2008 outlook, UBS analyst Fadi Chamoun is predicting a difficult year ahead.
The country’s largest railway said it would delay updating its outlook for next year during its third quarter results due to the volatility of the dollar. Mr. Chamoun, however, said he expects a slowing U.S. economy, a strong loonie, and a continued decline in the forestry product volumes to weigh on the railroads earnings in the coming year.
“CN Rail will face another challenging year in 2008,” Mr. Chamoun said, adding that he expects a moderate earnings growth at the railway of about 8% year-over-year, compared to the previous estimate of 10%.
However, 2008 won’t be all bad news. The Port of Prince Rupert is expected to add another $100-million in revenue over the course of the year. Pricing power remains robust and any interest rate cuts or signs that the U.S. economy is avoiding a full-blown recession is expected to bring some “much needed relief” to the company’s valuation.
“While today’s conditions are clearly less than ideal for CN Rail… We believe that structurally improved competitiveness of the railroads coupled with ongoing return enhancing investments in efficiency should underpin solid earnings growth and value creation over the cycle,” Mr. Chamoun said in a note to clients.
He reiterated his ‘buy” rating on the stock, but adjusted his 12-month price target to $66, down from $68.
The analyst added that he expects the railway to update its outlook for 2008 late next month when they report their fourth quarter earnings on Jan. 22. He said he expects management to forecast “mid-single-digit” earnings per share growth of about $3.50 a share, down from consensus of $3.77.