Canadian National Keeps On Track

We are maintaining our Hold on Canadian National Railway Company (CNI) as well as our $52 target price. CN will report second quarter results on July 21. We are retaining our diluted EPS estimates at $3.52 for 2008 and at $3.98 for 2009. We expect results to reflect the effects of recent poor weather in the Midwest, higher fuel costs and a stronger Canadian $, though pricing should continue robust.

We expect volume growth in key segments combined with strong pricing power to drive revenue growth over the near term. Specifically, in intermodal, the opening of the Prince Rupert Intermodal Terminal in the third quarter of 2007 will allow CN to leverage the potential of the growing container trade between Asia and North America.

In 2008, CN plans to invest approximately C$1.5 billion, of which more than C$1.1 billion will be focused on track infrastructure. Equipment spending, targeted to reach approximately C$140 million in 2008, will include the acquisition of new fuel-efficient locomotives, as well as improvements to the existing fleet. CN also expects to spend approximately C$250 million on facilities to grow the business.

The company recently announced a 10% increase in its quarterly dividend for 2008 to C$0.23 from C$0.21 per share. In the first quarter, the company repurchased 7.3 million shares for a total cost of C$370 million.

But the company's long-term growth prospects are tied to uncertainties such as growth in the U.S. and Canadian economies and grain production. Moreover, CN anticipates continued weak market conditions in a number of segments. Its inability to successfully integrate acquisitions and achieve synergies could cause earnings to fall short of expectations.

Read the full analyst report on CNI

Read the full analyst report on CN