Weak U.S. Economy Spells Trouble for Canada's Railways

The weakening U.S. economy is expected to put the brakes on further share price appreciation for Canada's major railways, according to Blackmont Capital analyst Avi Dalfen.

Mr. Dalfen downgraded his earnings estimates and price target on both Canadian National Railway Co. (CNI) and Canadian Pacific Railway Ltd. (CP) in a note to clients on Thursday, "due to increased economic and market valuation risk."  

He trimmed his 2008 EPS estimate for CN Railway by C$0.06.6 to C$3.50 and cut his 2009 estimate by C$0.14 to C$3.83.  Mr. Dalfen's price target on the stock falls from C$60 to C$57 and his "hold" rating remains unchanged.

"CN Rail's performance is highly leveraged to the U.S. economy," he said in a note to clients adding that forestry products, which account for 20% of CN Rail's revenues are impacted by the slowing demand from the U.S. housing industry for Canadian wood products.

CP Rail also faces increased risk from the threat of recession stateside, Mr. Dalfen said, even though it is the least exposed of all class I rails to the U.S. economy. Also, he added that CP Rail's acquisition of DM&E increases capex requirements at a time of increasing economic risk.

His lowered his 2008 and 2009 EPS estimate(s) for CP Rail by C$0.09and C$0.17.5, respectively to C$4.33 and C$4.79. He continues to rates CP Rail shares a "hold" with  new price target on the stock of C$75 down from C$76.