(CanWest News Service circulated the following story by Paul Delean on July 25.)
MONTREAL — Canada’s fast-moving rail stocks lost a bit of steam Tuesday in the wake of unremarkable second-quarter earnings from both Canadian Pacific Railway Ltd. and Canadian National Railway Co.
CP was down 3.6 per cent to $83.60, while CN dropped 5.5 per cent to $57.03.
Still, both stocks show solid advances in 2007 and double-digit gains going back 12 months, and some analysts are convinced the setback is temporary.
Canadian Pacific, the nation’s second-largest railroad, reported Tuesday it made $257 million in the second quarter ended June 30, down from $378 million a year earlier, when it benefited from a $176-million tax reduction.
On Monday, Canadian National reported profits of $516 million for the second quarter, down from $729 million a year ago. It, too, had benefited from a substantial tax advantage of $250 million in 2006.
Christopher Sears, vice-president of research at MacDougall MacDougall and MacTier, said the numbers for both companies — particularly CN — were quite good, considering the exceptional tax situation a year ago.
Tuesday’s correction in their stock prices was not unexpected, considering the Toronto Stock Exchange as a whole was down sharply and both CN and CP shares spiked a week ago after CP revealed it had been the target of a takeover bid from Brookfield Asset Management.
“In the grand scheme of things, this is a bump on the road,” Sears said.
CP stock went from $77.05 to $89 last week and even with Tuesday’s drop is trading above where it was a week ago. It’s gained 32 per cent in the past year.
CN, which traded below $52 in January, got as high as $60.65 last week.
Mark Chaput, portfolio manager for Investors Group and its senior industrial analyst for North America, said CP stock is a bit more vulnerable because of the takeover premium it now carries, but the rail sector overall has excellent prospects.
“They have turned into an infrastructure play,” he said. “With congestion on the highways in Canada and the U.S., a shortage of available truck drivers, and more and more Asian imports coming in, these companies have never had such pricing power. Higher crude [oil] costs make them more attractive because they’re more efficient and it’s cheaper for customers than trucks.”
But Matt Pugsley, in a research comment for the Bank Credit Analyst, said he expects railroads to underperform the broad market because “financing costs in this capital-intensive industry have increased at a time when revenue growth prospects still appear minimal.”
He said the industry “remains exposed to the main sources of economic drag,” and “the latest producer price report showed that rail pricing power continues to slide in absolute terms . . . The steady decline in the ability of the industry to raise selling prices is symptomatic of persistent weakness in overall rail car shipment growth.”
Canadian Pacific is sticking with revenue-growth projections of four to six per cent in 2007 and profit increases of nine to 12 per cent. CN has lowered its forecast earnings growth to five per cent from 10.
CP has outpaced CN significantly in stock appreciation over the past 12 months, which led some analysts to recommend taking profits on CP and switching to CN.