Canadian National Railway: All Aboard

By David Berman

Canadian National Railway Co. (CNI) missed expectations when it reported its third quarter results on Tuesday – after extraordinary items are taken into account – and the stock was reflecting this disappointment on Wednesday.

In Toronto, the shares were down in late-morning trading, although they have rebounded nearly 40% since early March on hopes that the North American economy is turning around.

Here’s what analysts are saying about the stock.

Randy Cousins, BMO Nesbitt Burns: “Normally we would argue that a railroad is only as good as the customers on its rail line. CNR has demonstrated an ability to manage around difficult customer conditions (forest products and automobiles/Ontario).” He rates the stock with a “market perform” recommendation and a price target of $65.

Benoit Poirier, Desjardins Securities: “We maintain a cautious outlook for the rail sector, as shock absorbers are becoming headwinds, but we are very pleased with CN’s financial position and strong free cash flow generation. We continue to believe the stock is fairly valued at current levels. Hence, we are not yet prepared to adopt a more bullish stance on CN, as the company’s valuation remains relatively rich versus its historical range.” He rates the stock with a “hold” recommendation and a price target of $58.

Steve Hansen, Raymond James: “CN’s latest results underscore what we believe is likely to become an enduring theme, namely: operating leverage. The recent downturn has not been pleasant, to say the least, but it has clearly forced CN to aggressively manage both fixed and variable costs. Indeed, the company’s ability to post record operating metrics in the face of sharply lower volumes we believe is a testament to management’s operating prowess and ability to adapt.” He rates the stock with an “outperform” recommendation, but raised his target price to $64.50 from $60.

Comments

[Tyguy:]

how do you (or the street for that matter) typically look at the asset values of such companies (i.e. rolling stock, land, buildings etc)?

I was doing some rough calcs and at the beginning of the year you could buy CN shares for approx the value of the land and buildings (just to be conservative I assume rolling stock is worth zero in liquidation) they hold net of debt (inc cap lease). Maybe the stock never got that cheap...but the margin of safety, at first glance, would appear to be pretty high at levels in the 30s.

My only other thought with respect to the land is would it really be worth anything in the hands of another company outside the rail industry?. I know for a fact some of these Co's own big chunks of land in interesting spots that true jems. Example being large pieces of land (and islands) in the Muskoka Ontario cottage district (playground of the rich north of Toronto).

Anyways one to add to the list in case it pulls back. Would also point out a pretty sound pension position on the plus side but ownership restrictions which lowers probabilities for those taking takeout mults and values into consideration.

Nov 04 03:47 PM