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We have reaffirmed our Neutral recommendation on Canadian National Railway (CNI - Analyst Report), reflecting its favorable position to reap benefits from improving demand and pricing trends along with planned investment programs and productivity enhancement measures. However, the current market volatility and competitive pressure are expected to weigh on the stock.

Why the Reiteration?

Montreal, Canada based Canadian National Railway is expected to witness growth across all its business segments in 2013. Merchandize will remain one of the prime revenue contributors, with gains in metals and automotive shipments. Automotives will continue to grow on higher North American auto production, which will boost steel production, consequently driving shipments in the Metals and Minerals category.

The company believes that improving operating efficiency along with growth in key markets will lead to mid single-digit carload growth in the coming quarters. The company also targets to maintain a modest operating ratio, given stronger volume growth at low incremental costs with productivity initiatives such as improving system velocity and fuel efficiency.

However, we were a bit disappointed with the company’s third quarter results. Earnings per share were in line with our expectation, but revenue failed to match the Zacks Consensus Estimate.

In the coming days, several headwinds such as competitive threats and uncertainties in the market condition of some of the product lines and downturn in the economy will likely limit the upside potential of the stock.

We see no earnings momentum for the stock over the last 30 days. The Zacks Consensus Estimates for the fourth quarter is currently pegged at $1.40 per share, reflecting a year-over-year increase of 8.60%.

Other Stock to Consider

Canadian Pacific Railway (CP - Analyst Report) is expected to perform impressively over the next few months based on volume additions, attractive tie-ups and healthy financial profile. It carries a Zacks #3 Rank (Hold rating).

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