UBS Cuts CN and CP Rail Estimates

Earnings at Canadian railways are expected once again to be hit by severe winter weather and high fuel prices in March, issues that were exacerbated by lowered freight rates for Canadian grains during the course of the month.

After already lowering his first quarter earnings estimate once this year, UBS analyst Fadi Chamoun said Thursday he was further reducing his outlook on both Canadian National Railway Co. (CNI) and Canadian Pacific Railway Ltd. (CP).

UBS is now expecting CN to post earnings per share of C$0.60 in the first quarter, down from C$0.64, and C$3.58 per share for the year, down from C$3.62. His price target was also cut to C$62 from C$65 per share after he reduced CN’s P/E target multiple to 14.5 times from 15 times.

Mr. Chamoun also lowered his earnings estimate for CP to C$0.70 in the first quarter, down from C$0.80, and to C$4.68 for the year, down from C$4.72. His price target and P/E multiple for the railway remains unchanged and he kept his “buy” rating on both stocks.

Mr. Chamoun said in note to clients that:

Canadian railroads have outperformed the market year-to-date by a wide margin. Given weak near-term results further out-performance may be unlikely in the near-term. On a 12-month basis, however, we think the investment merits remain favourable provided the economy recovers and EPS growth re-accelerates in 2009.