On Friday, BofA Securities adjusted its stance on Canadian National Railway (TSX:CNR) (NYSE:CNI), shifting from a "Buy" to a "Neutral" rating. Alongside the downgrade, the firm also reduced the price target to $122.00 from the previous $129.00.
The decision comes after the railway company reported below-expectation third-quarter volumes and ongoing network performance issues following a labor lockout of conductors and engineers in August.
The analyst from BofA Securities cited the recent labor lockout and a four-day shutdown of Canadian National's network in Canada as key factors behind the downgrade.
These disruptions have led to a revision of earnings per share (EPS) estimates for the third quarter of 2024, as well as for the full years of 2024 and 2025. The new EPS forecasts are now set at C$1.64, C$7.26, and C$8.25, respectively, marking a decrease of 7%, 3%, and 3% from earlier projections.
The price objective has been recalculated based on a 20 times multiple of the anticipated 2025 earnings per share, which is a slight decrease from the previous 20.5 times multiple. This adjustment aligns with the midpoint of Canadian National Railway's historical valuation range, which spans from 18 to 22 times earnings.
The firm also acknowledged that Canadian National Railway has revised its own EPS growth outlook for 2024 to a slight decline of 0.3%, contrasting with an earlier forecast of a 2.0% increase. This revised guidance, which now predicts low-single digit growth, was issued on September 10, following a period marked by labor uncertainties and the aforementioned network disruptions.
Additionally, the company has indicated that third-quarter earnings will likely be affected by C$0.20 per share due to the labor issues and wildfires in Alberta.
In other recent news, CN Railway has been facing significant challenges, as highlighted by its recent Q2 2024 results which revealed lower than expected incremental margins. BMO Capital Markets, however, maintains its Outperform rating for the company, indicating potential for recovery despite the setbacks.
Concurrently, CN Railway and Canadian Pacific (NYSE:CP) Kansas City are experiencing disruptions due to a lockout of Teamsters union workers following unsuccessful labor negotiations. This unprecedented situation in the Canadian rail industry has led to a halt in operations, raising concerns about potential severe impacts on the nation's economy.
Recent developments also include the Canadian government's intervention in the labor dispute, proposing binding arbitration and urging an end to the stoppage. Despite the government's efforts, the Teamsters union has expressed its intention to continue the strike.
InvestingPro Insights
To complement the analysis provided by BofA Securities, recent data from InvestingPro offers additional context on Canadian National Railway's financial position. The company's market capitalization stands at $71.97 billion, with a P/E ratio of 18.25, suggesting a moderate valuation relative to earnings. This aligns with BofA's price objective calculation based on a 20 times earnings multiple.
InvestingPro Tips highlight that Canadian National Railway has maintained dividend payments for 29 consecutive years and has raised its dividend for 28 consecutive years. This consistent dividend history could be attractive to income-focused investors, especially given the current dividend yield of 2.19%. The company's impressive gross profit margins, as noted by InvestingPro, support its ability to maintain these dividends despite recent operational challenges.
However, it's worth noting that 16 analysts have revised their earnings downwards for the upcoming period, which corroborates BofA's decision to lower EPS estimates. This, combined with the InvestingPro Tip indicating that CNI is trading at a high P/E ratio relative to near-term earnings growth, suggests caution may be warranted.
For investors seeking a more comprehensive analysis, InvestingPro offers 13 additional tips on Canadian National Railway, providing a deeper understanding of the company's financial health and market position.
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