Originally recommended on May 6/02 (IWB #2218) at C$25.95 (split-adjusted). Closed Friday at C$55.50, US$51.61.
CN reported a respectable third-quarter profit and money managers heaved a sigh of relief. The nation's major railway is a barometer for the economy and any unpleasant surprises could have stalled the stock market recovery. In the event, CN racked up operating earnings of 97c a share, down from $1.07 a year ago but ahead of the 89c per share that analysts were expecting.
The really good news, though, is in the top line numbers vis-à-vis the second quarter. Carload volumes were up 11% and revenue ton miles up 4% over the previous period. That prompted outgoing CEO Hunter Harrison to say that he thinks the worst is behind us. He went on to point out that the latest weekly freight statistics also show a slow but steady comeback. Then, as if to demonstrate his confidence, Harrison ordered 70 new locomotives as part of a $1.5 billion capital expenditure program.
It all sounds very encouraging. When you study the third-quarter numbers, however, there are still some big question marks. Our robust loonie is creating a strong headwind for CN. This time last year the C$/US$ exchange rate was 83c per U.S. dollar. Today, as you know, we are approaching parity. A one cent difference in foreign exchange costs CNR about two cents in earnings. It's a vivid example of the problem facing all Canadian companies.
CN is also facing lower grain rates. Auto and lumber shipments remain soft.
That having been said, the company is now lean and mean. It is generating solid cash flow and has a strong balance sheet. Any improvement in business will spur earnings. We could see a profit of $3.40 a share this year followed by as much as $4 in 2020.
Action now: CN Railway remains a Buy at $55.50 with an increased target of $65. I will revisit the stock if it dips to $48.
Burlington Northern Santa Fe (NYSE: BNI)
Originally recommended on May 12/08 (IWB #2818) at $103.47. Closed Friday at $97.23. (All figures in U.S. dollars.)
Burlington Northern also turned in better than expected third-quarter results. Operating earnings were $1.36 a share, a sharp drop from $1.91 in 2008 but more than the $1.28 consensus estimate. Here again there were clear indications that the second quarter of 2009 may have been the bottom. Carloads were up almost 5% and average revenue per carload increased 3.4% quarter-over-quarter. Total revenues jumped more than 8% from the second quarter. The trend is in the right direction - certainly Warren Buffett thinks so.
In an unexpected move, Buffett's company, Berkshire Hathaway, which already owns 22.6% of Burlington Northern Santa Fe, is offering to buy the rest of the railway for $26 billion. The bid is a little complicated and provides for each share of BNI to be converted into $100 cash or an equivalent amount of Berkshire stock subject to a "collar", whereby the value of each Berkshire share received is fixed at $100. In addition, the entire deal is 60% cash and 40% stock and subject to proration. In other words, you may elect to receive all cash but end up with some Berkshire stock if most people want their money. The deal is expected to close in the first quarter of 2010.
My suggestion is that unless you really want to take a position in Berkshire, it's best to opt for all cash and sell any shares that you receive. Otherwise, you are going to end up with an odd stake in what is essentially Buffett's personal corporation. That may not be a bad thing (in fact, Berkshire Hathaway is an active IWB recommendation) but it's always best to consciously buy equities after some basic research rather than acquire them through a takeover. The bid itself, incidentally, is very attractive. A price of $100 a share is a 31% premium to the market and 7.5% above our $93 target for BNI. There is no possibility of a competing offer.
Personally, as a firm believer in railways, I am sorry to see Burlington disappear. Trains are increasingly efficient, climate friendly, surprisingly responsive to computers, and have locked-in markets. Most important, they are not building any new railways.
So I am proposing to replace BNI on our list of recommendations with Norfolk Southern Corp. (NYSE: NSC) currently trading at US$52.07. Third-quarter earnings beat expectations and we should see a profit of about $2.80 a share this year with an improvement to the $3.75 range in 2010. I will provide a full analysis next time.
Action now: Tender Burlington Northern shares for cash at $100. Buy Norfolk Southern at $52.07.
Potash Corporation of Saskatchewan (TSX, NYSE: POT)
Originally recommended on Jan. 28/08 (IWB #2804) at C$133.98, US$132.74. Closed Friday at C$103.75, US$96.25.
Over at Potash Corp., the third-quarter numbers and resulting guidance were both very disappointing. The world's largest potash producer earned 82c a share (the company reports in U.S. currency) versus a consensus forecast of 81c. That was at the bottom of management's revised projection of 80c to $1.20 issued as late as September. A year ago, Potash made $3.93 a share.
In fairness, investors had braced themselves for some bleak results. Faced with a global slump, farmers are deferring purchases as long as possible. People were, however, shocked by CEO Bill Doyle's depressing forecast. He admitted that his predictions have been consistently wrong and he is now not sure when we will see an improvement in demand. Global exports of potash fell 72% in the first six months of this year.
My concern is that management no longer seems to have a grip on the situation. At the same time, it's interesting that the stock actually strengthened on the day Doyle spoke.
There are persistent rumours, fuelled by the Bank of America, about a bid by BHP Billiton Ltd. for the company. A price of US$125 a share has been mentioned but this is pure speculation. Based on fundamentals, the Street has a C$115 target on the stock. I would postpone any new commitments.
Action now: Potash Corp. remains a Hold.
Toromont Industries (TSX: TIH, OTC: TMTMF)
Originally recommended on Aug. 31/09 (IWB #2932) at C$22.68. Closed Friday at C$26.24, US$23.75.
Toromont Industries had a reasonably good third quarter although many investors were unhappy with a 26% year-over-year drop in revenues. Actual earnings came in at 49c a share versus 56c in 2008 but well above the mean estimate of 45c. The truth is that people were hoping Toromont's sales would reflect an improvement in the Canadian construction industry. Instead, management reported that this business was stable.
The big news here is that the company has made an unfriendly bid for Enerflex Systems Income Fund, a supplier of equipment to the oil and gas industry. The deal is going to cost Toromont $597 million, half in cash, but it could add as much as 20c a share to earnings in 2010 and beyond. Assuming that the purchase is completed, we could see a profit of about $1.75 a share in 2009 followed by close to $2 next year. Indications are that while the third quarter was the bottom of this cycle for the equipment industry there is going to be no snap back. TIH should participate fully in a steady but unspectacular recovery.
Action now: Toromont remains a Buy at $26.24 with a revised target of $29. I have set a $20 revisit level.
SNC-Lavalin (TSX: SNC, OTC: SNCAF)
Originally recommended on May 8/06 (IWB #2618) at C$32.45. Closed Friday at C$47.35, US$40.62 (Oct. 30).
SNC-Lavalin is due to report shortly and I will update in detail the stock next time. For now, though, the company is firing on all cylinders and we should see earnings of at least $2.40 a share in 2010. The stock is now trading at $47.35, up 46% from our original recommendation and well through its $38 target.
Action now: The shares still have upside potential and remain a Buy with a new target of $53.
Gordon Pape is the best-selling author/co-author of many acclaimed investment books, including the recently-published Sleep-Easy Investing (Viking Canada ). He is also publisher and editor of five investment newsletters, including the Internet Wealth Builder, Mutual Funds Update, The Income Investor, and The Canada Report, which was created specifically for U.S. residents interested in investing in Canada . He is a columnist for several magazines and websites and a frequently quoted media source. He has been a featured speaker at numerous events including the World Money Show in Orlando . His websites can be found at www.BuildingWealth.ca and www.TheCanadaReport.com
Rate This Article: |
  |