(The following story by David Pett appeared on the National Post website on November 25.)
OTTAWA — Canadian National Railway Co. or Canadian Pacific Railway Limited?
According to RBC Capital analyst Walter Spracklin, investors should opt for the former, but don’t expect an easy ride for either railroad, he says, the road ahead is going to be a bumpy one.
Starting with CN, Mr. Spracklin said volume growth for the company will drop by 3.7% down from his previous forecast of 2.4% positive growth. He also reduced his estimated pricing increases for the railway from 5% to 3.2% and lowered his 2009 earnings per share estimate from $4.05 to $3.82.
“The adjustments that were made to our volume estimates are reflective of our decision to be conservatively prudent with our base forecasts given the broader macroeconomic environment,” Mr. Spracklin said in note clients, lowering his target multiple on CNR to 14x (from 15x), resulting in a new target price of $54 (from $60). Despite the price target cut, Mr. Spracklin maintained his “outperform” rating on the stock.
“We believe CNR’s strong relative operating performance will result in more limited downside versus its peers – resulting in a premium multiple,”
The analyst also made changes to his CP Rail forecast given the macro climate. He reduced his volume growth to negative 3% down from positive growth of 2.5% and now assumes a pricing increase of 2.7% down from 5.0%. His 2009 EPS estimate goes from $4.50 to $4.18.
To reflect his opinion that CP brings “heightened risk” when compared to CN, Mr. Spracklin reduced his CP target multiple from 14 times to 13 times. His new price target is $63 down from $54 and his “sector perform” rating remains unchanged.
“While the current return to our target price is attractive, we believe it is too early to recommend the shares, given the level of uncertainty that is prevalent in the markets today,” he wrote.