OTTAWA — Morgan Stanley Dean Witter & Co. trimmed earnings estimates yesterday for rail companies, including Canadian National Railway Co. and Canadian Pacific Railway Ltd., to reflect higher oil prices, the Globe and Mail reports.
CN dropped 50 cents to $75.25, while CPR eased 42 cents to $32.70, both on the Toronto Stock Exchange. On the New York Stock Exchange, Burlington Northern Santa Fe Corp. slipped 35 cents (U.S.) to $28.90. Norfolk Southern Corp. declined 77 cents to $21.95, while CSX Corp. dropped 81 cents to $36.24 and Union Pacific Corp. slid $1.58 to $57.37.
James Valentine, who follows the sector for Morgan Stanley, noted that the price of crude oil has risen slowly but steadily since bottoming in mid-January. In that period, the price of West Texas intermediate crude has risen to $28 on Tuesday from $18 a barrel. Yesterday, crude fetched $27.56.
“We suspect this issue is not in the Street estimates and may lead rail management to guide [second-quarter] estimates lower during [first-quarter] conference calls later this month,” Mr. Valentine said in a report released yesterday.
His firm remains cautious on the group, since current price/earnings multiples in the sector are at 20-year peaks and are based on “what are likely optimistic earnings forecasts, especially if oil prices stay north of $25” a barrel.
Mr. Valentine now assumes a $25 WTI for the foreseeable future, up from $20 a barrel. A $25 WTI price translates into a spot diesel price of approximately 75 cents a gallon for the major railways.
He also made small, additional earnings cuts for several of the companies for weaker-than-expected traffic in some goods.
Mr. Valentine lowered his estimate of CN’s 2002 profit to $3.35 a share from $3.45 and to $3.75 from $3.90 for 2003. Part of the reduction reflects an expectation that CN’s lumber shipments will fall up to 10 per cent beginning next month because of the the new softwood lumber import tariffs imposed by the United States. And he reduced his estimate for CPR to $1.40 from $1.45 for 2002 and to $1.80 from $1.90 for 2003.
The analyst also trimmed his estimates for Union Pacific, Burlington Northern and Santa Fe Railway Co. and CSX, but left them unchanged for Norfolk Southern.
Mr. Valentine, who lowered his ratings for four of the rail companies in mid-January because he thought most of the easy money from the early cycle rally had already been made, now says CN is “fairly valued” relative to other ground transportation issues. He notes that it is trading at the high end of its historic range. CPR is in a similar situation. So too are Omaha, Neb.-based Union Pacific and Burlington Northern of Fort Worth, Tex. But Norfolk, Va.-based Norfolk Southern is “richly valued,” he said. Its multiple based on forward consensus earnings — at 17.4 times — is well above CN’s 13 times and CPR’s 12.6.
Richmond, Va.-based CSX trades at about 14.6 times forward earnings, which is above the multiples the stock commanded before it took over Conrail in 1999.
Accordingly, Mr. Valentine has rated CN, CPR, Union Pacific, Burlington Northern and CSX as “equal weight.” An equal-weight rating indicates that the total return on the stock is expected to be in line with the industry over the next 12 to 18 months.
He has Norfolk Southern as an “underweight.”
Rail stocks attracted considerable investor attention last year with CN shares for example, climbing to $76.70 (Canadian) at the end of the year from $43 at the beginning. CPR, meanwhile, rallied to $32.10 at year-end from $24.28 in early October when the former Canadian Pacific Ltd. was broken into five separate companies. Since year-end, both issues have basically treaded water.