After approaching the $60 level in mid-May, shares of Canadian National Railway Co. (NYSE:CNI) have dipped nearly C$4 and could fall more if the second quarter turns out to be as weak as several analysts expect.
But one analyst thinks this short-term weakness could provide a buying opportunity.
David Newman at National Bank Financial advises clients to prepare to board the ‘Big Red Cash Machine’ for the long haul. He has an “outperform” rating and C$59 price target on CN Rail shares.
Weather-related issues and economic weakness in segments such as forest products, as well as exposure to the U.S. economy, have helped drive volumes down so far this quarter.
As a result, Mr. Newman lowered his second quarter earnings per share estimate to C92¢ from C$1.03, while his 2007 and 2008 projections were also reduced. UBS and RBC Capital Markets made similar moves last week.
“While it is important to not lose the forest for the trees when interpreting weekly carload metrics, as the quarter winds down without a meaningful rebound and continued challenges (e.g. floods in B.C.), we believe it is prudent to update our estimates accordingly,” he wrote.
However, Mr. Newman thinks trends like market share gains and pricing will continue to boost the rail sector. For CN Rail, an increased share buy-back could also help drive its shares higher.
Meanwhile, UBS is bullish on both Canadian National Railway Co. and Canadian Pacific Railway Ltd. (NYSE:CP). The firm’s analysts rate CP Rail a “buy” and raised their price target to C$85 from C$81.
Efficiency gains, favourable pricing, volume growth and better use of its balance sheet are some of the reasons cited for its optimistic outlook.
UBS did lower its second quarter earnings per share forecast for CP Rail to US$1.10 from US$1.14. It made a similar move with CN Rail last week, as did National Bank Financial on Thursday. However, its price target for CN Rail shares also moved up to C$73 from C$70.
CN Rail is highly leveraged to the North American economy, which is expected to recover in coming quarters, and the company should benefit from the opening of a container terminal in Prince Rupert in the fourth quarter, UBS said in a note to clients.
The stock also trades at an 11% discount to its peers based on 2008 estimates, the firm added, calling CN Rail “one of the highest quality industrial transportation companies in North America.”