BMO Capital Markets has adjusted its outlook for Canadian National Railway (TSX:CNR: CN) (NYSE: CNR), reducing the price target to Cdn$178.00 from the previous Cdn$182.00. Despite this change, the firm maintained its Outperform rating on the stock.
The revision follows Canadian National Railway's recent update, where the company reduced its 2024 earnings per share (EPS) growth forecast from mid-to-high single digits to low single digits. Additionally, the railway operator adjusted its medium-term 2024-2026 guidance for EPS compound annual growth rate (CAGR) downward, from double digits to high single digits.
The analyst at BMO Capital Markets noted that the market had largely anticipated these developments. The current share price reflects a 9% discount compared to the five-year historical average, a 13% discount relative to the market average over the same period, and an even more significant discount when compared to its industry peers.
Despite the lowered expectations and the recent setbacks in execution that occurred in Q2/24, the analyst believes that the downside risk for Canadian National Railway's stock is limited at its current levels. However, it was also mentioned that the recovery of the stock's valuation could be a gradual process following the Q2/24 performance challenges.
In other recent news, Canadian National Railway experienced a second-quarter earnings miss, with earnings per share (EPS) of C$1.84 falling short of the anticipated C$1.92 by UBS and the consensus projection of C$1.93.
This was attributed to a revenue shortfall of C$48 million below forecasts and operating costs that were C$42 million higher than expected. As a result, UBS revised its price target for the company, reducing it to Cdn$189.00 from Cdn$202.00, while maintaining a Buy rating on the stock.
In recent developments, Canadian National Railway also revised its full-year EPS growth outlook, scaling it down from the originally projected 10% growth to a mid to high single-digit range. Operational challenges, such as congestion in the corridor to and from Vancouver and crew availability issues, further impacted the company's performance.
On a separate note, Canadian National Resources received an upgrade in its stock rating from National Bank Financial, moving from Sector Perform to Outperform. This upgrade was based on a favorable outlook on the company's potential performance, with a "reasonably constructive volume environment" and an increasing confidence in this year's grain harvest being key contributing factors.
InvestingPro Insights
As investors digest BMO Capital Markets' revised outlook on Canadian National Railway, it's beneficial to look at the company's financial health through key metrics provided by InvestingPro. With a market capitalization of $58.88 million USD, Canadian National Railway's valuation reflects the challenges it faces, as evidenced by a negative P/E ratio of -26.96, based on the last twelve months as of Q4 2023. This indicates that investors are currently unable to rely on earnings to justify the stock price.
Despite the negative earnings, the company's EBITDA growth was 33.84% in the same period, which could signal underlying business strength that might not be immediately apparent from earnings alone. Furthermore, the InvestingPro Fair Value estimate of $0.33 USD suggests a potential undervaluation at the previous close price of $0.29 USD, which aligns with BMO Capital Markets' continued Outperform rating.
Two InvestingPro Tips to consider for Canadian National Railway are:
- Monitor the EBITDA growth as a sign of potential operational improvement, which could lead to a reassessment of the company's value.
- Keep an eye on the stock's performance relative to its fair value estimate to identify buying or selling opportunities.
For more in-depth analysis, there are additional tips available on InvestingPro that can provide further guidance on Canadian National Railway's stock.
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