TSX Commentary

Canadian National Railway (CNR) – $55.68 – Reports Lower Than Expected Results – Some 2010 Guidance Provided
Sector Perform, Average Risk, Price Target: $60.00 (prev. $61.00)
Q4/09 operating EPS came in at $0.90 vs. $1.12 last year and RBC CM’s $0.98 estimate. There were a number of extraordinary challenges in Q4, including: 1) a strike; 2) a major derailment; 3) cold weather conditions; 4) a stronger $CAD; and 5) higher WTI. The Board announced a 7% increase to the dividend to $0.27/share as well as a new share buyback program of up to 15MM shares. These moves underscore CNR’s superior cash flow generation. Management is projecting “double digit” EPS growth, which RBC CM interprets as 10-12%. This is somewhat below RBC CM’s prior 2010 forecast. RBC CM is lowering its 2010 and 2011 EPS estimates to reflect the lower guidance. RBC CM’s 2010 estimate goes to $3.70 (from $3.92) and its 2011 goes to $4.00 (from $4.39). The 2010 growth of 14% compares with management’s guidance of “double digit growth”. Despite the lower earnings estimate, RBC CM is making only a modest change to its target (to $60 from $61), as it is increasing our target multiple to 15x (from 14x) given the improving economic conditions, better visibility and CNR’s strong comparative operating performance. Based on the relative returns to our target, RBC CM is maintaining its Sector Perform rating.