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CP Rail poised for an earnings miss, RBC warns

The government moved quickly to end a strike by 4,800 CP Rail engineers and conductors last May by passing back-to-work legislation.

Nathan Denette/The Canadian Press

These are some of the key analyst actions on the Street today

RBC Dominion Securities analyst Walter Spracklin is girding investors for a possible earnings miss when Canadian Pacific Railway Ltd. reports its third quarter next month.

Weakness in shipments of agricultural products, especially for Potash, and "non-core" cost pressures, are likely to lead to disappointing headline results, said Mr. Spracklin in a research note today. He bases his new outlook on recent company presentations and management discussions, and reduced his third-quarter earnings per share forecast for CP to $1.20 from $1.43. That's well below the Street consensus of $1.36.

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If RBC's forecasts come true, it may mark a bit of a rough start for Hunter Harrison's new role as chief executive officer. He took over as top boss in late June after U.S. hedge fund Pershing Square Capital Management LP won a bitter proxy fight against CP.

But Mr. Spracklin doesn't believe the earnings disappointment will temper investor optimism about Mr. Harrison. The CEO has only been with the company for a short time, after all, and much of the expected earnings miss will be due to one-time events, Mr. Spracklin said.

Instead, he expects Mr. Harrison's presentation at an investors day in December to recharge enthusiasm over the stock and possibly ignite a rally.

"Further, we continue to have strong conviction in CP's long-term prospects, as the company continues to make progress on operating initiatives and is executing on growth in strategic markets," such as energy, Mr. Spracklin said. "In this context, we reiterate our outperform rating and $86 price target on CP." He also left his earnings forecasts for 2013 and beyond unchanged.

RBC isn't alone today in urging caution in the transportation sector. UBS analyst Kevin Crissey downgraded his ratings on several U.S. railways, noting the massive drop in coal volumes as natural gas prices plunge will now be followed by soft agricultural demand for rail cars because of the poor grain harvest in the U.S.

CSX Corp., Norfolk Southern Corp., and Union Pacific Corp. were all downgraded by UBS to "neutral" ratings.


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BMO Capital Markets analyst Bert Powell upgraded mobile equipment seller Wajax Corp. to "market perform" after the company's shares declined more than 10 per cent since mid-August. "Overall, the end-market fundamentals for equipment continue to be solid, and at the current price we believe the stock is more appropriately priced in the context of its peers," said Mr. Powell.

Upside: Mr. Powell maintained a $44 price target.


H&R Real Estate Investment Trust's "current valuation does not fully reflect the quality of its cash flows, its superior earnings visibility and a clear path to continued distribution increases," said National Bank Financial analyst Heather Kirk. She initiated coverage with an "outperform" rating, believing the stock should trade at a higher valuation than peers because of its extended operating history, institutional-quality portfolio and low-payout ratio.

Upside: Ms. Kirk set a $28.35 price target.


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New Flyer Industries Inc. reported that a significant order of 90 buses has been delayed by a customer's review process. But New Flyer also said that outstanding and in-process bids for its services have almost tripled in the past year, suggesting "upside potential for NFI's delivery rate and profitability," commented Canaccord Genuity analyst David Tyerman.

Upside: Mr. Tyerman raised his price target to $8 from $7.25 and maintained a "hold" rating.


CML Healthcare Inc.'s much-anticipated growth strategy wasn't quite what Canaccord Genuity analyst Neil Maruoka was hoping for. "We believe that the modest scope and relative lack of details to be underwhelming for investors who may have been looking for larger, more impactful initiatives," he commented. "We believe that CML becomes a 'show me' story as focus now shifts to execute and tangible results."

Upside: Mr. Maruoka cut his price target to $9.50 from $10.75 while maintaining a "hold" rating.


For more analyst actions, breaking investing news and exclusive analysis, follow Darcy Keith on Twitter at #eyeonequities

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About the Author
Investment Editor

Darcy Keith is The Globe and Mail's Investment Editor. He has been a business journalist since 1992 and joined the Report on Business in 2010 from Yahoo! Canada, where he was the senior editor of finance. More


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