(The following story by David Berman appeared on the Globe and Mail website on September 10, 2010.)
TORONTO — Cherilyn Radbourne, an analyst at TD Newcrest, has cut her recommendation on Canadian National Railway Co. (CNR-T65.24-1.48-2.22%) to “hold” from “buy.” Blame it on CN’s recent share price appreciation.
We like to applaud analysts who adjust their recommendations rather than chase after rising share prices, but the strange thing here is that CN’s share price hasn’t exactly exploded. According to Bloomberg, the shares have risen 10.5 per cent since Ms. Radbourne’s first “buy” recommendation on the stock, in June. While that’s about twice the gain of the benchmark S&P/TSX composite index over the same period, it lags the industrials subindex by about a percentage point.
It appears that Ms. Radbourne prefers to measure CN by its performance this year, during which the stock has risen about 16 per cent. According to her numbers, that makes it the second-best performer among the so-called Big Five rail stocks.
She is reluctant to boost her target price on the stock – which is currently $77, or 18.5 per cent, above its level on Thursday afternoon – for two reasons.
1. The current target price is based on the stock trading at 15-times estimated earnings per share for the 12 months ending June, 2012. That’s a premium valuation to its peer average.
2. Her 2011 and 2012 forecasts for things like energy prices, volume growth and pricing gains assume a moderate economic recovery, which she believes are still appropriate.
“We believe that CN’s rail franchise offers above-average growth prospects, and we expect consistent execution by the CN management team to deliver strong incremental earnings growth as volume recovers,” Ms. Radbourne said in a note. “However, given the more modest implied upside to our target price, we are more comfortable with a HOLD rating at this time.”
The analyst also has “hold” recommendations on Union Pacific Corp. and Canadian Pacific Railway Ltd. She has “buy” recommendations on CSX Corp. and Norfolk Southern Corp.