Railway on track for rally
July 30, 2008
BRENT JANG - TRANSPORTATION REPORTER
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Analysts say CN, and to a lesser extent CPR, positioned to gain ground
on U.S. rivals.
If the battle between Canada's two largest freight carriers were a
reality TV show, Canadian National Railway Co. would be out-manoeuvring
Canadian Pacific Railway Ltd. for votes from Bay Street judges.
Analysts say that expansion prospects look brighter at Montreal-based CN,
which is counting on the U.S. Surface Transportation Board to approve
its $300-million (U.S.) purchase of Elgin Joliet & Eastern Railway Co.
CN wants to use EJ&E's strategically important tracks in suburban
Chicago and avoid the train gridlock of the city's core. With its own
tracks at the Port of Prince Rupert in British Columbia, CN is
positioned to gradually increase the volume of imported consumer goods
from Asia that head to its Memphis terminal, as well as boost exports of
commodities at the B.C. port.
RBC Dominion Securities Inc. analyst Walter Spracklin rates CN an
"outperform," setting a 52-week price target of $60, or 10.6-per-cent
higher than yesterday's close of $54.26 (Canadian) on the Toronto Stock
Mr. Spracklin views Calgary-based CPR as having an uphill climb, giving
it a "sector perform" rating, and cutting its 52-week target price to
$68 from $73. The new target is a 5.2-per-cent gain from CPR's close
yesterday of $64.65.
CN's second-quarter profit of $459-million slightly exceeded analysts'
estimates. But CPR's $155-million profit in the second quarter fell
short of expectations, as the railway suffered from a weakening economy,
flooding in the U.S. Midwest and a fuel surcharge system that hasn't
been recovering as much of diesel costs as other freight carriers have
been able to collect from shippers, industry analysts say.
Since mid-July, CN has been on a roll, with its stock price jumping 19
per cent, compared with CPR's increase of 6 per cent. Analysts say that
both companies are positioned to gain ground on the four major U.S.
railways, which enjoy higher valuations, based on price-to-earnings
CN's P/E ratio is 13.6 times next year's earnings per share and CPR's is
13.3 times, compared with an average of 15.1 times for the four largest
U.S. railways, Mr. Spracklin noted.
CN has greater exposure to forest products and the United States than
CPR, so when lumber shipments pick up and the American economy rebounds,
CN will reap the benefits, Mr. Spracklin said. "There's excitement
surrounding the Port of Prince Rupert, which is serviced only by CN," he
said in an interview.
A snag is the Surface Transportation Board's announcement last Friday
that it will take until early 2009 to rule on the EJ&E transaction,
longer than what CN had forecast.
Still, CN chief executive officer Hunter Harrison said yesterday that he
sees a light at the end of the regulatory tunnel. "We are confident that
appropriate mitigation solutions can be developed that would allow this
transaction to move forward," Mr. Harrison said in a statement.
CN's plans to buy Chicago-area tracks are a safer bet to become reality
than CPR's long-term strategy to expand into Wyoming coal, analysts say.
CPR expects to win regulatory approval by Sept. 30 for its $1.5-billion
(U.S.) acquisition of Dakota Minnesota & Eastern Railroad Corp.
If approved, CPR and its partners could invest up to $6-billion for
expansion into the Powder River coal basin in Wyoming. Compared with the
capital outlay by CN to reduce bottlenecks in the Chicago region, CPR
and others would be making a massive coal gamble - amounting to nearly
60 per cent of the railway's total stock market value, analysts say.
While an efficiency drive this fall at CPR should help cut costs, CN is
seen as the less-risky bet for now. National Bank Financial Inc. analyst
David Newman rates CN an "outperform," with a 52-week target price of
$57 (Canadian). Mr. Newman kept CPR as a "sector perform," but lowered
its 52-week target to $67 from $73.
Of course, judges don't always see eye-to-eye. For instance, UBS
Securities Canada Inc. analyst Fadi Chamoun places both CN and CPR in
his "buy" category, maintaining a 52-week target price of $61 for CN and
$80 for CPR.
Tale of the tape
Canadian National Railway: (CNR-TSX)
$54.26, up $1.23
Canadian Pacific Railway: (CP-TSX)
$64.65, up $1.15
DOUGLAS COULL; SOURCE: THOMSON DATASTREAM