Earnings Preview: CP Railway Will Be Hit Harder than Canadian National - UBS

With the country’s largest railways set to report their first quarter earnings in two weeks time, Fadi Chamoun, UBS analyst, is predicting Canadian Pacific Railway Ltd. (CP) will be hit harder by volume declines in the first three months of the year than its larger rival, Canadian National Railway Co. (CNI).

CP, the country’s second largest railway, is expected to report earnings per share of C$.37 for the quarter on April 23, a 51% year-over-year decline. CP’s coal and potash shipments have been hit particularly hard during the quarter, and are expected to have led to up to a 21% volume decline compared to last year.

In addition, the railway issued 12.6-million shares during the quarter that is expected to dilute its EPS, compounding the negative impact of high operating/financial leverage, he added.

CN, on the other hand is expected to report earnings of C$.62 a share for the first quarter on April 20, up 1.4% from last year. Mr. Chamoun said he expects the railway to have offset up to a 14% decline in volumes during the quarter with pricing growth, a lower share count, and easier comparables to last year when the company took a C$.08 hit per share related to unusually harsh winter weather.

“We maintain our ‘buy’ rating on both railroads given inexpensive valuation and positive leverage to an expected economic recovery in late 2009,” said Mr. Chamoun, adding he prefers CN of the two.

Comments

[SSALarry:]

CN's earnings were hit hard be weather related issues in the first quarter last year, making for easier year to year comparisons. Although shipping related to housing, like timber, is way down, as is automobile related shipping, CN is also exposed to oil sands and to Asian shipping through the Port of Prince Rupert. This diversity of shipping should enable CN to navigate the downturn in the economy beter than other shippers. CN remains, in my opinion, the best run railroad around and a good long term investment, especially at current prices.

Disclosure - currently have no position, but have owned CN in the past.

Apr 07 07:42 AM