Railways are often perceived as a good investment early on during an economic recovery, when shipping volumes start to ramp up to meet better demand for goods and commodities. Later on in the cycle, however, their performance can start to wane.
Shipping volumes have already recovered quite briskly since bottoming out in mid-2009. So is it too late to catch a ride on the railroad recovery express?
CIBC World Markets Inc. analyst Jacob Bout doesn't think so. Today, he upgraded Canada's two biggest rail carriers in the belief a second leg to the recovery in volumes is looming. He argues the more beat-up sectors that are still sluggish - such as automotive, building materials and forest products - are now poised to bounce back.
Mr. Bout upgraded both Canadian National Railway Co. and Canadian Pacific Railway Ltd. to "sector outperformer" from "sector performer."
For CN, he hiked his target price by $10 to $80 and rolled out a new estimate for 2012 earnings per share of $5.14. That assumes volume and pricing growth of close to 4 per cent year-over-year, which he sees achievable at both rail carriers.
Mr. Bout notes CN has benefited from growing market share among grain shippers and less volatile intermodal volumes. Its metallurgical coal volumes have been weak, but the company has a longer-term opportunity to service Teck Resources Ltd.'s northern mines in Western Canada. He also likes CN's prospects when it comes to benefiting from improved U.S. volumes as the economic recovery there gains traction.
CP's price target, meanwhile, was raised by $11 to $78, with Mr. Bout expecting 2012 earnings per share of $5.03. CP continues to see strong growth in bulk commodities, like metallurgical coal and potash, and should be able to boost operating performance through improving the efficiency of its network, he said.
One day after Air Canada was downgraded by RBC Dominion Securities Inc., its archrival WestJet Airlines Ltd. has received a vote of confidence by CIBC's Mr. Bout. He raised he price target by $1 to $17, and maintained a "sector performer," rating, encouraged by WestJet's new reservation system that should open the door to code-sharing deals with several other airlines.
And while the analyst community is fretting over contentious labour agreements that will soon come up for negotiation at Air Canada, there's no such worry at WestJet. "WestJet presents a 'safer' airline to invest in, given its strong balance sheet, lack of unionized work force, and the initiation of a dividend and share buyback," Mr. Bout said in a note.
Looking for a tech stock that still has some good upside potential? Canaccord Genuity suggests you take a look at Juniper Networks Inc. , which is one of its "top picks" stocks. Analyst Paul Mansky hiked his target today by $3 to $42 and maintained a "buy" rating, citing indications the Internet infrastructure provider's strategy is building momentum. "At the same time, service provider demand remains brisk, while enterprise share is growing. Coupled with elevated focus on profitability, we view Juniper as carrying additional multiple and estimate upside in 2011," Mr. Mansky said in a note.