(The following story by Jonathan Ratner appeared on the National Post website on November 27.)
OTTAWA — The years of railroads posting stellar earnings growth are over, according to UBS analyst Rick Paterson, who issued a warning Thursday to those with a vested interest in the rails.
“Any rail suggesting 2009 volumes will be ‘OK’ or ‘flat’ is in fantasy land, and this should be a red flag to investors,” he said in a note to clients. “All rails should be preparing for the worst (hoping for best optional). Get the knives out.”
The current economic downturn and the volatility in commodity pricing is wreaking havoc on North American rail volumes. Canadian volumes were down last week by 8% year over year, led by a 25% decline in metals and a 23% decline in auto shipments. U.S. volumes were up 6.6%, due to easy comparables given Thanksgiving fell on the Thursday in 2007.
After being able to offset the imploding housing and auto industries with improved pricing and productivity in recent years, Mr. Paterson says the “game is over in 2009.”
He said he expects a “material, rather than modest” volume declines and a deceleration in pricing. The key differentiator will be companies who recognize and accept the extent of these declines, and who most rapidly react by cutting their costs accordingly.
Despite the negative outlook, he has a “buy” rating on Canadian Pacific Railway Ltd., CSX Corp., Union Pacific Corp., Norfolk Southern Corp., Burlington Northern Santa Fe Corp. and Canadian National Railway Co. CP and CSX offer the largest potential upside based on his price targets.