Canadian National Railway's Valuation Is An Opportunity, Analyst Shifts To Bullish Outlook

Stifel analyst Benjamin J. Nolan upgraded Canadian National Railway Company CNI to Buy from Hold while reducing the price target to $120 from $132.

The analyst writes that 2024 was a lackluster year for rail equities, ending down 7% while the S&P rose 23%.

Notably, 2024 did not see strong volume growth for Class 1 railroads, as earlier expected, partly due to unforeseen disruptions and a weaker freight market, leading to just 2.2% volume growth, adds the analyst.

The analyst writes that he anticipates modest volume and pricing improvements in 2025, but it remains uncertain whether this will drive meaningful share price gains or multiple expansions.

The analyst says that Canadian National has faced persistent disruptions since May, with fourth-quarter RTMs estimated to have declined 3.2% year-over-year due to the Canadian port strike, despite a sequential volume increase of nearly 5%.

Consequently, Nolan expects fourth-quarter revenue to decline 2.3%, leading to full-year top-line growth of 1.4%.

Although the company lowered its guidance to low single-digit growth, the analyst says that fourth-quarter port disruptions may prevent it from meeting FY24 targets.

Nolan estimates FY24 EPS to decline 2.8% Y/Y to C$7.20 ($5.25), with OR improving sequentially by 160 bps to 61.5%, though deteriorating 256 bps year-over-year, leading to a full-year OR of 62.6% (down 180 bps) in fourth-quarter.

CN's stock underperformed peers, down ~14% since fourth quarter began, but this was not self-inflicted. The analyst sees room for upside in current valuations as the situation stabilizes and the company refocuses on growth initiatives.

Price Action: CNI shares are up 0.57% at $101.26 at the last check Thursday.

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