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Canadian railway companies downgraded to 'hold'

The industry’s volumes have been negatively affected by tough grain comparatives

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Conditions are likely to improve a little in the current quarter

Canaccord Genuity has downgraded Canadian National Railway (TSE:CNR) to ‘hold’ from ‘buy’ ahead of the company’s third quarter results.

The broker’s projected one year investment return has slipped to a single digit percentage – 4.8%, including the dividend, which yields 1.6%.

It continues to expect solid growth from the railway, as the sector rebounds and the company benefits from self-help initiatives, but it reckons the expected growth is now priced in.

The company’s and the industry’s volumes have been negatively affected by tough grain comparatives, slowing crude-by-rail and other energy-related deliveries, lower coal shipments and slower intermodal growth due to the economy, the broker asserts.

Conditions are likely to improve in the coming quarter but not overly much, thanks to a number of end markets being subdued or uncertain.

The broker has trimmed its price target to C$83 from C$84.

Meanwhile, sector peer Canadian Pacific (TSE:CP) gets the same treatment, moving from ‘buy’ to ‘hold’, with the price target cut by C$5 to C$215.

The reasons for the downgrade are much the same as for Canadian National.

“We believe that CP has attractive growth opportunities over the longer term and that these may appeal to certain long-term investors: we currently expect low double-digit EPS growth over the long term from real GDP plus volume growth, inflation plus pricing, moderate operating improvements and share buybacks,” the broker said.

 

Quick facts: Canadian National Railway Company (CN)

Price: 120.82 CAD

TSX:CNR
Market: TSX
Market Cap: $85.76 billion
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