In the battle of the railroads, there's been a clear victor so far this year in shareholder returns. Canadian National Railway stock has gained nearly 7 per cent year-to-date, while shareholders of rival Canadian Pacific Railway have had to be content with a return of barely more than 2 per cent.
While that kind of outperformance may have some thinking CP is due for a catch-up, two analysts are offering views on why this may be a trend set to continue.
RBC Dominion Securities Inc. analyst Walter Spracklin upgraded his rating on Canadian National to "outperform" from "sector perform," commenting that market share gains are heading its way. "We expect investor sentiment to shift in favour of CNR within the rail segment and as such we are recommending a switch into CNR," Mr. Spracklin wrote in a note to clients.
He believes that CNR's industry-leading operating ratio will lead to "material market share gains by improving its service levels," rather than having to compete on pricing. Meanwhile, he says CNR's industry-leading free cash flow generation will open the door to attractive new investment projects, perhaps outside its traditional markets.
He also thinks the company's high quality, lower-risk profile will start to trump the higher risks of its competitors. "In 2010, investors migrated toward rail stocks that exhibited strong earnings growth through operating leverage gains. However, going forward, we believe the era of strong earnings beats may be passing as we see evidence of slowing price increases, moderating volume growth and less significant operating leverage gains," he said.
Mr. Spracklin has a $77 price target on CNR.
Scotia Capital Inc. analyst Turan Quettawala upgraded CNR to a "1-Sector Outperform" rating. He echoed Mr. Spracklin's comments that CNR is best placed in the sector, as "top-line growth slows on the back of a gentler economic tailwind."
"CNR's recent outperformance has bridged the valuation gap between it and CP. However, we see more upside for CNR on one-year-out basis with a one-year target price of $80 a share," Mr. Quettawala said. He rates CP a notch lower, with a $78.50 one-year target.
While Kinross Gold Corp. reported higher resources than expected at its Tasiast project in Africa, it is facing higher capital expenditures and operating costs than what TD Newcrest analyst Greg Barnes had modelled. He suggests cost inflation is becoming an issue at the company, which forecast overall lower production, and higher cash costs, than he had expected for this year.
Downside: Mr. Barnes downgraded Kinross to a "hold" from a "buy" and lowered his price target by $3 (U.S.) to $21.
Finning International Inc.'s share price "is already pricing in a lot of cyclical upside and provides limited room for error in the context of a consensus expectation that the company will match its prior peak earnings per share in 2011," cautions TD Newcrest analyst Cherilyn Radbourne.
Downside: Ms. Radbourne downgraded the stock to a "hold" from a "buy," but raised her price target by $2 to $32, citing strong revenue growth trends.
Taseko Mines Ltd. has approved a third-phase expansion at its Gibraltar mine in British Columbia, which should boost annual copper production by 50 per cent. In addition to impressive near-term growth plans, Canaccord Genuity analyst Orest Wowkodaw likes the company's strong balance sheet, attractive relative valuation and significant leverage to the red metal.
Upside: Mr. Wowkodaw raised his price target by 75 cents to $7.75.
Sun Life Financial Inc. stock outperformed Manulife Financial over the past three years, but Canaccord Genuity analyst Mario Mendonca sees this era coming to an end, given that Manulife has reduced its sensitivity to macro factors. "We no longer see a significant advantage to owning SLF over MFC," he said.
Downside: Mr. Mendonca downgraded Sun Life to "hold" from "buy" but raised his price target by $2 to $35 to reflect the transition to IFRS accounting measures.
Darcy Keith