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Canadian transportation sector to stay strong in 2013: CIBC report

MONTREAL, Que. -- Canada's railway, airline and trucking sector earnings should stay strong this year despite forecasts of modest economic growth on both sides of the Canada-US border, according to a report from the Canadian Press.



MONTREAL, Que. — Canada’s railway, airline and trucking sector earnings should stay strong this year despite forecasts of modest economic growth on both sides of the Canada-US border, according to a report from the Canadian Press.

Sluggish economic growth wasn’t able to slow Canadian transportation stocks last year, which outperformed the TSX benchmark with a return of 21%.

Further gains are expected in 2013 even though real GDP growth is forecast at 2% in the US and 1.7% in Canada, according to CIBC World Markets.

“Despite the share price move among the transportation equities in 2012, we still see more upside this year, reflecting the industry’s earnings resiliency and cash flow generation,” Jacob Bout wrote in a report.

CIBC analysts have upgraded price targets for a string of companies, including Canadian National Railway, Canadian Pacific Railway, WestJet Airlines and TransForce.

It expects Montreal-based CN to focus on capturing “a disproportionate share of freight volume growth” instead of realizing any material improvements to its industry-leading operating efficiency.

Two intermodal customers have already switched to CN while rival CP simplifies its intermodal train design and trims the number of destinations. CN is also well-positioned to double its carloads in crude and export coal and to reap the benefits of a US housing recovery, said Bout, who also noted there was a risk that chief operating officer Keith Creel could jump to CP to become heir to CEO Hunter Harrison.

After a honeymoon year that saw it install a new board and CEO, they Calgary-based CP Rail is “heading towards a year of execution in 2013,” the report added.

CP has already announced the closure of terminals and hump yards, returned thousands of railway cars and locomotives and cut 1,700 positions. But the railway still has more work to do despite the risks of labour disruption and curtailed revenue growth.

Cameron Doerksen of National Bank Financial said the market will remain patient for a while but the railway needs to show “tangible improvement” in its operating ratio in 2013. He said CP’s current share price already prices in that its operating ratio will fall to the mid-60s in 2016.

“Expectations for CP are very high and failure to meet earnings estimates could lead to a pullback in the stock,” he wrote in a report.

Meanwhile, industry observers expect the airline industry will improve as it continues to constrain capacity growth and increase prices.

The International Air Transportation Association recently raised its forecast for global airline profits to US$8.4 billion this year. That would represent a 25% increase from what it expects to have been earned in 2012. Profits are expected to rise even though fuel prices are predicted to be at similar levels as in 2008 when the industry lost US$26 billion.

Meanwhile, trucking capacity is expected to get tighter, in part due to a driver shortage that is forecast to widen in the second half of the year.

“We believe this will support freight rates despite the weak economy and any pickup in volumes will result in significant upward pressure on pricing,” Bout said.

But Walter Spracklin of RBC Capital Markets said weak economic activity in the fourth quarter resulted in soft prices and volumes for freight carriers. His estimates for 2013 and 2014 remain unchanged but he has tempered his fourth-quarter revenue forecasts for several trucking firms.

Several analysts say industry leader TransForce should continue to expand its profits due to synergies and efficiencies from the integration of Loomis Express and other acquisitions.


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