Odlum Brown Analyst Sees Upside in CP and CN Rail

Canadian National Railway Co.(CNI) and Canadian Pacific Railway Ltd. (CP) remain interesting plays for investors, according to an industry watcher who sees continued upside for the railway operators, in spite of problems that have recently hurt the industry.

Odlum Brown Limited analyst Stephen Boland likes both CN and CP, but for different reasons. In a note to clients he said:

We like CNR because it is the best-in-class operator at a below average valuation, and we like CP because it has good global exposure and a solid opportunity for efficiency improvement.

He gave a buy rating to both stocks, maintaining a price target of C$65 for CN, and lowering it for CP to C$77.50. Beyond the current issues besetting the industry, the analyst sees increasing demand, improving competitiveness versus the trucking industry, longer trade routes and better efficiency.

CN recently posted strong second-quarter results of C$0.90, down 5% year-over-year C$0.03 ahead of consensus estimate. Mr. Boland said revenue increased 4%, to C$2.1-billion, and also noted that CN’s $300-million acquisition of the Elgin, Joliet and Eastern Railway [EJ&E] seemed to be progressing well after an initial pushback from local residents in the Chicago area.

CP posted disappointing second-quarter numbers, with earnings per share falling by 17%,to C$0.97, or C$0.03 below consensus estimates. However, Mr. Boland said has substantial room for improvement and also pointed out that its C$1.5-billion acquisition of Dakota, Minnesota & Eastern Railways [DM&E] seems to be progressing well, and would give CP extra international reach, and scope for greater efficiency.