By Sam Boughedda
On Tuesday, Deutsche Bank analyst Amit Mehrotra added Canadian National (NYSE:CNI) and Canadian Pacific (NYSE:CP) to the firm's Catalyst Call Buy list.
Speaking on railway company Canadian National, Mehrotra said that "with respect to the upcoming 2Q reporting season, we are most bullish on the set up for Rails. Our updated calibration of Rail volumes points to +7.3% average volume growth yoy in 2H (vs. down 1% in 2Q); even assuming no growth off 2Q levels, 2H volume growth would be +3.9% yoy on average."
He added that the combination of higher volume, peaking fuel prices, and improving service are positive for prospective profitability, and they see the potential for certain Rails to exit 2022 at record profitability levels.
"We also believe growth in grain volumes in 2H can be significantly above expectations. This is a very profitable business that has potential to be a big differentiating factor for Canadian Rails."
Regarding railway firm Canadian Pacific, the analyst shared a similar sentiment, stating they are forecasting a "modest EPS beat at CP for 2Q - with EPS of C$0.96 vs. consensus of 92c."
"But with 2Q results, we think the 2H volume and mix opportunity can become increasingly clear. For example, we estimate CP carloads will be + 11.6% yoy in 2H (vs. down 2.1% in 2Q). Evening assuming no growth of 2Q levels, 2H growth will be +7%...the best of all Class 1 Rails (followed closely by CN). We also anticipate mix tailwinds as we see potential for grain volumes to increase 50% in 4Q yoy. This should allow CP to achieve a big inflection in OR at the end of the year (potential for sub-55%), with these benefits carrying through to 2023."