TSX Commentary » Canadian National Railway Company

Canadian National Railway CNR buy on intrinsic value

admin — Wed, 27 Jan 2010 17:37:00 +0000

Veritas Research: Canadian National Railway CNR
Buy, Intrinsic Value Estimate: $65.50
CN’s same store (same-car) pricing came in at 4% in the quarter with the company guiding to expectations of 4% for 2010. While this is lower than expectations of 4-5%, it is in line with the overall slowdown in pricing growth seen at other rails. Veritas believes the deceleration can be attributed to economic conditions and the fact that substantial excess capacity still exists on all the networks. The company also noted that it has priced 80% of its book for 2010. CN announced both a new share buy-back and an increase in the dividend of 7% to $1.08 per share. The buy-back of 15 million shares translates into roughly $835 million of cash returned to shareholders at today’s price and could potentially reduce the total share count by 3%. While this represents a smaller amount compared to previous years, it reflects the company’s expectations for solid cash generation in the coming year and is in contrast to CP’s previous announcement to fund its pension plan. While the decline in pricing is a negative, Veritas’s initial preference for CN was based on the downside protection the stock offered in a scenario where prices weakened. Consequently, Veritas is still positive on CN, but plans on following up with an update in due course. Veritas maintains its intrinsic value estimate of $65.50.

Canadian National Railway CNR Reports Lower Than Expected Results Q409 2010 Guidance

admin — Wed, 27 Jan 2010 17:34:26 +0000

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.

CIBC top picks for 2010

admin — Wed, 13 Jan 2010 16:24:36 +0000

Top Picks Of 2010
Ticker Company Rating Price Target
VNP 5N Plus, Incorporated Sector Outperformer $7.50
BPP BPO Properties Ltd. Sector Outperformer $21.00
CNR Canadian National Railway Company Sector Outperformer $65.00
EGO Eldorado Gold Corporation Sector Outperformer US$20.00
EMP.A Empire Company Limited Sector Outperformer $59.00
FM First Quantum Minerals Ltd. Sector Outperformer $115.00
FNV Franco-Nevada Corporation Sector Outperformer $46.00
MIC Genworth MI Canada Inc. Sector Outperformer $30.00
HR.UN H&R REIT Sector Outperformer $19.00
MN March Networks Corp. Sector Outperformer $7.00
PAAS Pan American Silver Corp. Sector Outperformer US$41.00
SJR.B Shaw Communications Sector Outperformer $24.00
SU Suncor Energy Inc. Sector Outperformer $44.00
TKO Taseko Mines Limited Sector Outperformer–Speculative $5.90
TOT Total Energy Services Sector Outperformer $8.00
TRP TransCanada Corp. Sector Outperformer $42.00

Source: CIBC World Markets Inc.

CNR Strike Effectively Ends But Negotiations Continue

admin — Thu, 03 Dec 2009 16:38:15 +0000

On Wednesday afternoon, CNR and the Teamsters Canada Rail Conference (TCRC) reached an agreement that would end the five-day strike and return ~1,700 locomotive engineers to work. The agreement with the labor union brings the railroad and the TCRC back to the table for mediation for a period of one week. During this time, the two parties will try to reach an agreement on work rules and pay and benefits. However, if an agreement is not reached, the parties will enter binding arbitration. If CNR and the TCRC do not reach an agreement within one week, they will go to arbitration to resolve the wage and benefit issues. JPM believes a 2% wage increase is the most likely outcome that would be favorable. JPM does not believe the strike had a meaningful impact on the stock over the last several days and so the resolution of the strike is unlikely to be a major driver of the stock. Nevertheless, JPM views the quick end to the strike as a positive for CNR because they avoid a more significant negative impact to their customer base. Although there was some disruption to CNR’s train service, CNR likely maintained ~70-80% of its normal train schedule over the past several days.

CNR Q309

admin — Wed, 21 Oct 2009 16:17:05 +0000

CNR reported operating EPS of $0.94, which compares to RBC CM’ estimate of $0.88 and consensus of $0.89. The variance was due to a $0.04 casualty reserve benefit and a lower effective tax rate (27% vs. RBC CM’ 30% forecast). A notable achievement in the quarter was that the 20% exchange-adjusted y/y decline in revenue was matched by a 20% reduction in costs – driven by good cost control and excellent operating efficiency metrics. While volumes remain challenged, management reiterated its optimism on certain product segments: 1) steel, iron ore, and chemicals improving sequentially; 2) met coal demand growing; 3) U.S. grain crop above average with Canadian outlook improving; and 4) intermodal helped by Prince Rupert traffic and steady domestic markets. Going into 2010, 55%-60% of the company’s contracts have been locked in at pricing in the 4%-5% range. RBC CM’ target price remains unchanged at $61. It maintains its Sector Perform, Average Risk rating.

Q3/09 Results – Operating Efficiencies

admin — Wed, 21 Oct 2009 16:04:01 +0000

CN reported Q3/09 FD EPS from continuing operations of $0.94 versus our
estimate of $0.87 and consensus of $0.89.
CN’s ability to continue to drive down costs
resulted in better-than-expected earnings. CN’s operating ratio was 62.7%.
While CN continues to see improvement in its operating ratio, given the
high fixed cost nature of rail operations, a pick up in volumes should result
in a further improvement in operating metrics. CN noted it could easily
handle another 5%-10% in volumes without additional headcount.
We are proponents of the rails as a vehicle to play the economic recovery.
CN is our top pick given:

1) its proven track record with the EJ&E acquisition
and Harrison Yard improvements expected to continue to drive down costs;
2) CN is more levered to the economy;
3) attractive valuation.

CNR Harrison Yard

admin — Mon, 28 Sep 2009 21:12:23 +0000

CNR hosted a site tour of its newly reconstructed rail classification yard in Memphis, Tennessee. Prior to the overhaul, the old Johnson yard was inefficiently run, consisting of two separate yards with low productivity and limited capacity. Post refurbishment, increased capacity and productivity enhancements are expected to generate cost savings that management estimates in the “tens of millions” (annually). Given the upside capacity and projected cost savings, it is RBC CM’ assessment (at this juncture) that the $100MM for this project was money well spent. The key revenue opportunity will come from the almost doubled volume capacity and increased service levels. Currently operating at 1,100 – 1,200 cars per day, the new site now has the capacity to go to 1,800 – 2,000 cars per day. The realignment of two inefficient yards into one single yard has resulted in a significant reduction in crew assignments. As a result, manpower savings are in the 30-40% range at the new yard. CNR’s strategic investment opportunities point toward solid growth potential over RBC CM’ investment horizon. With the heavy lifting done on the expense side, RBC CM sees the company as being poised to offer solid execution on these growth opportunities, resulting in strong free cash flow generation. While RBC CM continues to rate CNR Sector Perform based on one-year relative returns, it continues to view the company as a core holding.

Canadian National Railway Company Bottoming out?

admin — Sun, 26 Jul 2009 23:34:29 +0000

CN reported Q2/09 FD EPS from continuing operations of $0.76 (in line with
consensus) versus $0.90 last year. GAAP FD EPS was $0.82, but this
included a deferred income tax recovery $28 million ($0.06/share).
Operating ratio was up one point to 67.3%.

CN noted that rail volumes appear to have hit a bottom, with CN posting
m/m volume growth (echoing comments made by CSX). While we do expect
H2/09 volumes to improve versus the first half of the year, we are likely to
see a slower ramp with a full recovery being pushed out into 2010.

While the Teck/CP negotiations went to FOA (final offer arbitration), we do
not expect an increase in shippers seeking to go down this route to settle
contracts. There have been no changes to the Canadian rail regulation and
captive shippers have always had the opportunity to go to FOA.