Keeping Pace with Rail Stocks

Never run after a moving train. That’s sound advice for anyone who has arrived late at a station, but it also serves as investment advice now that railway stocks have surged from their lows.

The S&P 500 railroads index has risen 18.5% this year and is more than 80% above its low earlier this year. In Canada, Canadian National Railway Co. (CNI) has risen about 37% from its low and Canadian Pacific Railway Ltd. (CP) has risen 57%.

“Our framework remains conservative, as we believe the market is under-appreciating the risk of a long, drawn out recovery,” Matthew Troy, an analyst at Citigroup, in a note to clients. “With rails typically outperforming six months around an economic trough...we’re now approaching the end of that traditional window without a material volume recovery beyond ‘easy comparisons.’”

He raised his target prices on six railways, including Canadian Pacific and Canadian National – but he maintained "hold" recommendations on most names in the sector due to cuts in his estimated earnings in the second half of 2009 and into 2010. Part of his skepticism comes from ongoing weakness in the coal market, which accounts for 25% to 30% of all rail traffic.

There are a couple of exceptions though. He remained upbeat on Norfolk Southern Corp. (NSC), maintaining a “buy” recommendation on the stock. He estimated that the shares could rise another 14% from their current levels, based on his expectation that the shares will trade at a higher valuation.

He also raised his recommendation on Burlington Northern Santa Fe Corp. (BNI) to “hold” from “sell,” due to its cost cutting measures – leaving Canadian Pacific as his only “sell” recommendation even as he boosted his target price on the stock to $44 (U.S.) from $34. The shares traded at $48.65 on Wednesday afternoon in New York (they also trade in Toronto), or about 10% above his target price.

Comments

[Jake2:]

"He cut earnings estimates for 2009 by an average of 5 to 6 percent for Canadian National Railway Co., CSX Corp., Norfolk Southern Corp. and Union Pacific Corp."
The above quote is from the same story on rails. Note the lower earnings estimate on NSC. Lower earnings but higher stock price? Such "discrepancies" give one pause. Due diligence. No matter who you are reading, read more, and take it all with a grain of salt.

Sep 24 01:46 AM