TORONTO — Investors pulled back the throttle on Canadian railway stocks yesterday after a Morgan Stanley analyst trimmed his earnings estimates for next year because of lower projected auto production, the Globe and Mail reported.
After the brokerage firm’s auto analyst lowered his auto production forecast for next year to a 6-per-cent decline year over year, analyst James Valentine lowered his estimates on North American railway operators, saying slower auto production has a direct impact on the railway companies’ auto-hauling volumes.
Shares of Canadian National Railway Co. slipped $1.25 to $66.50 yesterday, while Canadian Pacific Railway Ltd.’s stock fell 30 cents, closing at $32.20.
“Railroad stocks are not especially cheap nor especially expensive, which is why we recommend investors be selective if they should want exposure to the sector,” Mr. Valentine said in a note to clients.
He maintained his “overweight” recommendation on CN, but trimmed his 2003 earnings estimates by 15 cents to $5.30 because of “expectations for lower shipments of finished vehicles, as well as lower auto-related shipments of chemicals, metals and inbound parts.”
Mr. Valentine doesn’t believe CN will feel as much of a decline in auto volumes as others in the sector because he says a new Nissan plant in Mississippi is set to begin truck production next May.
“Despite the reduction in 2003 auto production volumes, we have a high level of confidence that [CN] is taking its game to the next level by targeting more service-sensitive customers in an effort to drive up pricing while simultaneously growing its revenues,” Mr. Valentine said.
In a separate note, Mr. Valentine trimmed his 2003 earnings estimates on CP by 15 cents to $2.80, but maintained his “overweight” recommendation.
Mr. Valentine said the negative impact to CP is less than that to eastern U.S. railways because CP has lower relative exposure to automotive revenue and a higher exposure to foreign facilities, which are increasing production capacities.
He recommends CP for investors looking for mid-capitalization transportation exposure with a “longer-term investment horizon.”
UBS Warburg Inc. analyst Peter Rozenberg said volume weakness continues and this may hurt the railway sector. For example, he said coal transportation appears to have “deteriorated” in the fourth quarter.
Mr. Rozenberg said the auto sector is a bigger concern for the railways, particularly heading into 2003. While Canadian volumes remain strong, U.S. auto volumes are showing signs of weakness, he said.
The performance of railway stocks in the second half of the year has been mixed, said Randy Cousins at BMO Nesbitt Burns Inc. “The common characteristics of the best-performing stocks are positive fundamental momentum and a stable earnings outlook,” Mr. Cousins said. “Conversely, the laggards are struggling to grow the top line and/or improve the operating ratio.”
Although both CP and CN saw a small decline in their operating ratios in the third quarter, Mr. Cousins said “they remain the two lowest-cost major railroads on the continent.”