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Analysts continue to ratchet down forecasts for railways

Freight trains in a rail yard in Calgary

JEFF MCINTOSH/JEFF MCINTOSH/CP

More analysts are tempering their enthusiasm for the Canadian railways in the face of an increasingly problematic economy.

RBC Dominion Securities Inc. Walter Spracklin downgraded Canadian Pacific Railway Ltd. - albeit to a still bullish rating of "outperform." He previously had it as a "top pick" - RBC's highest recommendation.

"With leading indicators pointing to a weaker macro environment, as well as a slower-than-anticipated ramp in CP's operating performance, we are moderating our rating," Mr. Spracklin wrote in a research note. "We continue, however, to have a positive view on CP's prospects over the next three years and consider the valuation as attractive at current levels."

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He warned of a "choppy" third quarter at CP amid softer volumes in grain and intermodal shipments, as well as the delayed impact of flood-related network disruptions from earlier in the year. He now expects third-quarter earnings per share to come in at $1.17, instead of $1.11.

But he maintained a $73 price target, liking the stock's current valuation. Trading at 11.3 times his 2012 estimated earnings per share, CP is at the low end of the Class 1 railways historical trading range of 10.0 times to 15.0 times, he said.

Canaccord Genuity analyst David Tyerman is feeling less optimistic, today cutting his price target on CP by $6 to $60, partly because he thinks weak equities markets will increase the company's pension deficit. Nevertheless, he still rates the stock as a "buy."

His target on Canadian National Railway Co. also got a haircut, to $79 from $84, largely because of the sluggish economy. But he believes strong volumes plus a lower share count should produce 12 per cent earnings-per-share growth for the third quarter.

"We continue to believe that CNR is an excellent stock for investors looking for rock-solid performance and good growth prospects," Mr. Tyerman wrote in a research note.

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In the wake of Sinopec's acquisition of Daylight Energy Ltd., Canaccord Genuity analyst Brian Kristjansen suggests investors should now keep an eye on Celtic Exploration Ltd. . "We view Celtic's massive resource potential and focused and low-cost production base to be highly attractive as a foreign takeover target," he said.

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Upside: Mr. Kristjansen raised his price target to $38 from $34.25 and reiterated a "buy" rating.

EOG Resources Inc. should be able to hit the mid-point of its 2011 liquids production guidance thanks to growing output in the Bakken region and strong operating performance at its Eagle Ford assets in Texas, said Canaccord Genuity analyst John Gerdes. "Given EOG has been in the penalty box for almost a year following its late 2010 guidance reduction, we believe achievement of liquids production guidance should be read positively and generate stock price outperformance,"

Upside: Mr. Gerdes maintained a "buy" rating and raised his price target by $1 to $158.

Enbridge Inc. is acquiring a 57.6 per cent interest in phases one and two of the Cabin gas plant development near Fort Nelson, B.C., under a $900-million deal with EnCana Corp. The project "fits Enbridge's investment profile of highly contracted assets, with growth potential as volumes grow out of the Horn River basin," commented CIBC World Markets Inc. analyst Paul Lechem.

Upside: Mr. Lechem raised his price target by $1 to $35 and maintained a "sector perform" rating.

DragonWave Inc. has been slow to cut costs and investors should hold off buying the stock until Sprint or another major contract win is announced by the provider of microwave solutions for mobile networks, said CIBC World Markets Inc. analyst Todd Coupland. The company recently reported a loss in the second quarter and isn't expecting to break even until early fiscal 2013, he noted.

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Downside: Mr. Coupland slashed his price target to $3 from $7 while downgrading the stock to "sector underperformer" from "sector performer."

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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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