National Bank downgrades CN Rail after 15% stock run-up

Canadian National Railway Co. is benefitting from the “very strong” operating performance in the midst of an inadequate volume environment, but National Bank has downgraded the stock following a 15 percent run-up from the January lows.

“Although we believe CN ought to be a core holding for long-term investors, we are lowering our rating to Sector Perform from Outperform based on valuation,” analyst Cameron Doerksen wrote in a note to clients.

Despite the downgrade, Doerksen raised his price target for CN to $78 from $77, slightly underneath the $80 range it was trading at Tuesday.

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The stock is now trading at 17.4x current-year earnings, that is consistent with its five-year average.

If the stock pulls back to the low $70 range, Doerksen said he would suggest buying.

The bank also increased its target price on Canadian Pacific Railway Ltd. to $186 from $182 and maintained its Outperform rating, pointing out the stock is trading at a discount to CN despite stronger projected earnings growth this season.

Overall, National Bank expects the Canadian railroads to report “flattish” full-year revenue as strength in intermodal and forest products volume is offset by weakness in metallurgical coal, potash and grain.