On the brink of an economic slowdown, Canadian National unveiled a record third quarter. (Photo: The Canadian Press)
What to do with Canadian National, Alphabet and Amazon titles? Here are some recommendations from analysts that are likely to move prices soon. Note: the author may have a completely different opinion than the one expressed.
Canadian National (CNR, $161.75): record quarterly and upward forecasts, but the title is expensive
On the brink of an economic slowdown, Canadian National announced a record third quarter and raised its annual forecast. “Rail is showing its resilience as so many other companies are lowering their outlook,” said Scotiabank’s Konark Gupta.
Net income increased 40% to $2.13 per stock, 4% above expectations and 6% above consensus thanks to network performance. Freight revenue, or freight revenue by revenue-revenue-tons, which measures the tonnage of carloads by the distance traveled in miles, rose 22%.
CN suffered the effects of a labor dispute in the United States and a strike at the Westshore coal terminal in Canada, but also benefited from the exchange rate, an improvement in the retirement solvency ratio, the fuel surcharge and the effect of share buybacks, the analyst said. The fuel surcharge alone would have added 15% to revenue, accounting for the majority of the overrun from his forecast, he estimates.
It must also be remembered that a year earlier forest fires and a loss on an investment had weakened the results, adds Konark Gupta.
While the operating ratio of 57.2% fell short of RBC’s target of 56.7%, this efficiency measure, which expresses expenses as a percentage of revenue, is the best since 2016, excluding the fee.
The fourth quarter also looks set to be solid thanks to the record grain harvest and the transportation of fertilizers, coal and vehicles. “Barges stuck in Mississippi may even give CN a better-than-expected fourth quarter, barring weather surprises,” the analyst said.
For 2022, CN is now targeting a 25% increase in earnings to $7.45 per share. share instead of the previously expected increase of 15 to 20%. Its free cash flow will also be above previous targets at $4.2 billion instead of the previous range of $3.7 to $4 billion.
“CN is focused on the performance and operation of its network, adjusting its rates for inflation and improving productivity. Although demand for intermodal transport of consumer products, chemicals and refined fuel weakens, demand for grain, coal and fertilizer should compensate,” predicts Konark Gupta.
Despite this solid picture, the analyst says he is playing it safe for 2023 due to the high valuation of Canadian National’s title at a time when the economic situation is worsening.
It raises its price target from $156 to $159 to align with new forecasts, but does not recommend buying the stock, which trades at a multiple of 19.8 times expected 2023 earnings, 21% more than the S&P 500 index’s valuation and 27% higher than the US Railroad rating. Historically, CN is worth 10% more expensive than its US peers.
Canadian National shares exceeded the target price at the open on October 26th.
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