(The following article by Brent Jang was posted on the Globe and Mail website on January 24.)
TORONTO — Planes or trains, anyone? Investors wondering which of those two key transport sectors to place their bets on should keep a close watch on the price of oil and the health of Asian trade, analysts say.
With oil prices remaining at stubbornly high levels, that’s hurting airlines more than railways, which are able to pass on a larger portion of their fuel costs to customers through surcharges. As well, railways have hedged their diesel contracts to a greater extent than airlines have been able to shield themselves from soaring jet fuel prices.
As for trade with Asia, carriers are placing increased emphasis on their cargo operations, but it’s the railways that have the inside track on the freight boom in Asian imports of consumer goods and exports of North America commodities.
UBS Securities Canada Inc. analyst Fadi Chamoun said his firm is recommending that investors “overweight” railways in their portfolios. He has a “neutral” view on the two airline stocks that he covers — WestJet Airlines Ltd. and ACE Aviation Holdings Inc., parent of Air Canada and majority owner of the new Jazz Air Income Fund.
“In terms of transport stocks, we think the risk-reward scenario is better in the railroads,” Mr. Chamoun said. “There’s tight supply-demand for services in the railroad industry, whose earnings aren’t negatively affected that much by oil prices. But airlines are being hurt.”
Of the Big Six railways in North America, his favourites are Canadian National Railway Co., Norfolk Southern Corp. and Canadian Pacific Railway Ltd. He places them in a grouping above Burlington Northern Santa Fe Corp., Union Pacific Corp. and CSX Corp.
“Traffic numbers are very good in the airline industry, but we don’t like the valuations, given the risk of oil prices, and seat capacity will be increasing in 2006,” Mr. Chamoun said.
On the rail front this year, analysts are forecasting strong growth in shipments of goods moved in containers and bulk railcars. Ken Hoexter, an analyst with Merrill Lynch & Co. Inc., said the railway industry is entering the third year of its “renaissance,” beating back competition from trucking.
Walter Spracklin, an analyst at RBC Dominion Securities Inc., initiated coverage yesterday of Canada’s two largest railways, setting 52-week price targets of $105 for CN and $58 for CPR.
He said the North American sector is undergoing a “positive secular shift” because of bustling demand for rail services. And with income trusts now included in the S&P/TSX composite index, investors will increasingly compare transport companies, regardless of their corporate structure with trust units or common shares, said Mr. Spracklin, who previously covered business trusts, such as those in the trucking sector, exclusively.
Last Thursday, Bethlehem, Pa.-based Union Pacific was first out of the gate of the Big Six railways, reporting that its fourth-quarter profit nearly quadrupled to $296-million (U.S.) as it handled record volume of shipments.
The pattern of sparkling performances is expected to be followed today, when Montreal-based CN releases its fourth-quarter and 2005 financial results. Fort Worth, Tex.-based Burlington Northern and Richmond, Va.-based CSX are also to announce their results today.
Norfolk Southern of Norfolk, Va., is due to post its fourth-quarter results tomorrow, and Calgary-based CPR will round out the reporting by the major railways with its numbers next Tuesday.
David Newman, an analyst with National Bank Financial Inc., has a 52-week target price of $100 (Canadian) on CN. He forecasts that CN will post a fourth-quarter profit of $1.55 a share or 20 per cent higher than the same period in 2004.
Mr. Newman points out that the S&P rail index has outpaced the S&P 500 for five of the past six years, while CN has outperformed the market for six consecutive years.
He predicts that CN will earn $6.28 a share this year, up from his estimate of $5.54 a share for 2005.
Take the train eh
High oil prices are hurting airlines more than railways. As for trade with Asia, airlines are placing increased emphasis on their cargo operations, but it’s the railways that have the inside track on cashing in on the freight boom in Asian imports of consumer goods and exports of North America commodities.