CANADIAN PACIFIC RAI

CP
Delayed Toronto Stock Exchange - 12:32 2022-12-05 pm EST
110.03 CAD -0.76%

National Bank Says "Grain Shifts From a Headwind to a Major Revenue Tailwind" for CN Rail and CP Rail

09/22/2022 | 01:11pm
(MT Newswires) -- Following a drought-stricken harvest in Western Canada last year, grain has been a significant volume headwind for CN and CP over the past four quarters. However, growing conditions in Western Canada improved dramatically this past Spring and Summer and as a result, based on estimates from StatCan and the latest crop assessment from Agriculture and Agri-Food Canada (AAFC), total production of major grain crops is anticipated to be 75.2 million metric tonnes, a 55.1% y/y increase and above with the five-year average prior to 2021-22 of 73.6 million metric tonnes.

In addition to the positive volume tailwind, both CN and CP revenue will benefit from a 12%+ increase in the regulated grain

shipping rates this crop year, National Bank writes.

Grain is set to be a material revenue growth tailwind for both CN and CP over the next 12 months, which will be a welcome offset should a recession materialize that potentially impacts other railroad volumes:

-- CP's revenue could be boosted by 8.9% just from Canadian grain. About ~21% of CP's total revenue last year was from grain of which 66% was from Canadian grain (regulated and nonregulated), so if the Canadian crop is up ~55% y/y, it would represent a 7.6% tailwind for CP's overall revenue. Plus, the regulated grain price for CP is up 12.7%, which would be another 1.3% overall tailwind just based on the rate regulated portion of CP's grain franchise (47% of grain revenue). Thus, over the next 12 months, grain revenue alone for CP could be an 8.9% revenue growth tailwind, all else equal.

- CN's revenue could be up 6.2% from Canadian grain. For CN, grain was ~13% of total revenue in 2021 of which ~75% is Canadian grain. Based on a 55% larger harvest, the potential overall revenue tailwind for CN could be ~5.4% over the next 12 months. Plus, CN will have a ~12% pricing tailwind on the regulated portion of its Canadian franchise (~51% of grain revenue) which adds another 0.8% for a total potential revenue tailwind of 6.2%, all else equal.

Still, National Bank is maintaining neutral stances on CN Rail and CP Rail.

"Notwithstanding our optimism on grain volumes, we maintain our neutral stances on both CN and CP as we remain cautious on the broader economic outlook. Should a more serious economic slowdown take hold, we would expect slowing volumes for both CN and CP in their respective intermodal franchises and other consumer-related segments. In addition, valuation multiples, which for CN and CP are well above U.S. Class I peers, could contract," analyst Cameron Doerksen says.

CN Rail is rated Sector Perform with a $173.00 target.

CP Rail is rated Sector Perform with a $105.00 target.

Price: 95.84, Change: -0.74, Percent Change: -0.77

MT Newswires 2022
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