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Mixed signs point to unsure future for CN and CP

With freight indicators mixed across sectors and the economy chugging along unspectacularly, railroad analysts will be especially listening for leads on two other stories when Canadian National Railway Co. and Canadian Pacific Railway Ltd. release their third quarter earnings Monday and Wednesday respectively.

Graham Hughes/The Canadian Press

With freight indicators mixed across sectors and the economy chugging along unspectacularly, railroad analysts will be especially listening for leads on two other stories when Canadian National Railway Co. and Canadian Pacific Railway Ltd. release their third quarter earnings Monday and Wednesday respectively.

One story is the impact of possible new rail regulation. The head of CN, Claude Mongeau, has been arguing ever more publicly that potential new rules could impose disruptive service contracts through third-party arbitration between railroads and its freight customers. Shipping associations say they just want to establish clear service contracts. But analysts don't like an unknown, as the industry waits.

The other story is CP's ongoing, still secretive restructuring. Its full unveiling isn't until early December, although the company has been announcing a number of executive changes, including three new vice-president appointments in its operations team last week. So far, the Street likes these hints of change, helping to buoy CP's share price.

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"We expect [new president and CEO] Hunter Harrison to bring valuable expertise and a sense of urgency to the company's turnaround," said TD Securities' Cherilyn Radbourne in a recent report. She adds, however, that "we have difficulty recommending CP [stock] as a Buy from current levels." She expects quarterly CP earnings per share of $1.29, up from adjusted EPS of $1.10 year over year. Her estimate for CN is $1.52, up from $1.38 per cent adjusted EPS year over year.

So even with mixed signs among recent freight indicators, rail watchers are noting many caveats when looking at rail stocks. So long as the discussion sticks to Canadian commodities, the picture is fairly positive, they say. When slowness in the U.S. commodities is factored in, the outlook is more mixed.

As National Bank analyst Cameron Doerksen noted in a recent report, "There has been some market concern about the impact of the U.S. drought on rail grain volumes, but CN and CP have greater exposure to Canadian grain," which has risen in production.

Or take coal. Mr. Doerksen added that Canadian coal carloads are up this year, despite the drop in the U.S. Canadian railroads are shipping more of the coal used for steel-making, rather than utility-bound coal shipped more in the U.S. He sees CN's third quarter coming in at $1.53, with CP posting $1.45 a share.

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Guy Dixon is a feature writer for The Globe and Mail. More

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