CN RAIL UPGRADED, CP RAIL KEEPS OUTPERFORM RATING

Clear divergences have emerged between Canadian Pacific Railway Ltd. and Canadian National Railway Co., according to Raymond James analyst Steve Hansen.

While improved Canadian rail traffic in the fourth quarter helped both companies, Hansen noted that CN is “strongly outperforming,” as he upgraded the stock to outperform from market perform.

The analyst also raised his target price on CN shares to $ 104 from $ 94, while maintaining an outperform rating and $ 230 price target on CP.

Hansen highlighted CP’s crude- by- rail portfolio, which saw a sharp decline in fourth quarter traffic, and CN’s repatriation of grain volumes that were reportedly lost in the prior year, for the widening gap.

However, he does expect this phenomenon to fade, as bulk commodities like grain, potash and coal regain momentum, and outsized headwinds such as crude-by-rail become less of a drag.

“Not everything went to plan in Q4 2016; however, pleasant upside surprises emerged with respect to iron ore, met coal, and frac sand,” Hansen told clients. “Taken together, after more than a year of steep volume declines, we believe the return of volume growth will bring with it demonstrable benefits (i.e. operating leverage).”

He also suggested the possibility of additional tailwinds, such as the pension expense relief that comes with higher interest rates, and lower tax rates under Donald Trump and a Republican Congress.

CN shares climbed 16.4 per cent in the first half of 2016, and CP rose 12 per cent, as Canadian rail traffic rebounded from its second quarter lows.