TD Newcrest Upgrades Canadian National Railway (CNI) to Buy

July 22, 2008 9:35 AM EDT

TD Newcrest upgrades Canadian National Railway (NYSE: CNI) from Hold to Buy.

The firm believes that CNI's Q2/08 results were decent given the quarter’s headwinds. Also, the firm is encouraged that that management maintained its full-year EPS guidance.

The firm said, "Implicit in CN's guidance is the expectation for the beginning of an economic recovery to occur in H2/08, which is arguably a potential risk. Notwithstanding this risk, as highlighted in Exhibit 2, CN has already begun to experience improving volume trends (H1/08 carloads decreased 0.6% versus a Q3/08-to-date increase of 2.5%), comps become easier and shipments through Prince Rupert should benefit from the addition of a second weekly vessel. Moreover, CN appears poised to realize a level of additional productivity gains with the completion of re-configuration efforts at the company's Memphis Yard. Finally, the pricing environment appears to remain favorable, as CN continues to target yield improvements at the high end of the 4% to 5% range. Still, it is worth noting that increased compensation expenses versus H1/07 could be a notable headwind in H2/08."

In summary, the firm said, "Although the state of the current macro economic environment remains an ongoing risk, we believe H2/08 earnings growth should improve and view the stock as offering decent value at current levels."Canadian National Railway Company, together with its subsidiaries, engages in the rail and related transportation business in North America."

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