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21 May 2009

No Light in Sight for Railways

The dramatic drop in North American rail shipments has continued into the second quarter with no end in sight.
 
While the Street remains upbeat about the potential for North America rail stocks to be the first to soar in the event of an economic recovery, it is less confident about what the coming months will hold due to the weaker-than-expected volumes.
 
In the first five weeks of the second quarter, carloads have been down by 22% at Canadian National Railway Co., and by 21% at Canadian Pacific Railway Ltd., compared with the same period last year.
 
Those declines are in line with their counterparts, but are outpacing the drops in shipments experienced by both in the first three months of the year.
 
James Foote, CN vice-president of sales and marketing, told a conference in New York yesterday that he has yet to receive any clear indication from CN's customers that a recovery is near.
 
"I, at this point, believe that we have bottomed," he said, "but I have no idea when that will begin to turn around."
 
Still, the weaker-than-expected performance so far has led to a downgrade of CN's stock by David Newman, a National Bank Financial analyst.
 
He said while he was confident in CN's long-term potential, he dropped his price target on it to $50 a share, from $57, and his rating to a "sector perform".
 
"Another tough quarter has yet to be reported, and we will await the arrival of tangible evidence of a recovery versus apparent signals before getting bullish again," he said in a note to clients.
 
Mr. Newman has a "sector perform" rating on CP as well, and a $41 price target.
 
William Greene, a Morgan Stanley analyst, said in a note yesterday he didn't expect rail volumes to bottom before the summer.
 
He said Norfolk Southern Corp. and other eastern rails, such as CSX Corp., would be hit especially hard during this quarter, due to the collapse of the coal market in Europe.
 
"In the interest of being conservative, we do not expect a strong recovery in rail volumes until 2011-12," he added.
 
Cherilyn Radbourne, a Scotia Capital analyst, also reduced her earnings estimates for CN and CP yesterday to 64 cents a share, from 89 cents, and 35 cents a share from 48 cents, respectively.
 
She blamed their weaker-than-expected performance for this quarter for the downgrade, but remained bullish on their long-term potential.
 
"We believe the stocks may be vulnerable to a pullback in the short term, given the outlook for [the second quarter], but observe that the market appears increasingly willing to look beyond near-term fundamentals," she noted.
 
"We also recognize that the railroads should be natural beneficiaries as investors continue to shift funds out of defensive and into early cyclical stocks and as cash on the sidelines re-enters the market."
 
Scott Deveau.
 
 
   
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