(The following story by Leonard Zehr appeared on the Globe and Mail website on September 24.)
TORONTO — Softer economic growth through at least the first half of 2008 combined with a stronger Canadian dollar mean revenue and profit forecasts for Canada’s two railways are gearing down.
“Slowing GDP growth equals lower carload volumes,” the brokerage points out. It is lopping 5 per cent off Canadian National Railway Co.’s profit this year and 8 per cent next year, while Canadian Pacific Railway Ltd.’s bottom line suffers by 1 per cent this year and 4-to-5 per cent next year.
UBS analysts explain that CNR’s cut is deeper on account of its higher exposure to the foreign exchange factor and the forest products segment, where the strong loonie could force shipping volumes to suffer.
CPR fares slightly better because of a favourable outlook for some of its bulk commodities as well as modest exposure to forest products, the add.
UBS’ “buy” ratings stay in place at both railways. If a combo of lower interest rates and a pick up in economic growth in 2008 unfolds, then UBS would expect the sector’s “valuation multiples to expand to 15 times earnings as the market begins to discount a recovery in volumes and earnings.”