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CN Rail upgraded on rare valuation opportunity

CN Rail is coping with volume headwinds that have driven carloads down 3.4 per cent and revenue ton miles down 7.5 per cent so far in the second quarter

Canadian National Railway Co.’s 14-per-cent pullback since Feb. 1 and material underperformance versus United states equity indexes have the stock trading below 16x estimated earnings per share for 2016. That’s within the lower 1 / 2 of its three-year historical range along with a significant discount to the S&P 500.

This is a rare occurrence, especially in the past 5 years given the underlying strength from the railway sector. CN historically trades in a 2x multiple premium to the S&P, but happens to be trading in a 0.7x discount.

As an effect, Raymond James analyst Steve Hansen thinks a good buying opportunity has surfaced. He upgraded CN to outperform from market perform, while leaving his $81 price target around the stock unchanged.

The company is coping with volume headwinds which have driven carloads down 3.4 per cent and revenue ton miles down 7.5 percent so far in the second quarter, but Hansen expects the worst will start to pass within the third quarter. That’s due to the more seasonal and transient nature of things such as Canadian and U.S. grain shipments.

The analyst also slightly trimmed his EPS forecasts, and now anticipates $1.04 in Q2 (down from $1.06), $1.09 in Q3 (down from $1.12) and $4.09 for the full year (down from $4.15).

Nonetheless, he believes the current weakness in CN shares “has established an attractive risk-reward access point for long-term investors.”