MMD

Weaker economy hitting Canada’s major transportation companies

Analyst says earnings estimates down 15 percent for several rail, airline and trucking companies


CN_train

MONTREAL: Canada’s major transportation companies are on the path to lower revenues and profits this year as they feel the pressure from a weakened global economic outlook, according to an industry analyst. Turan Quettawala of Scotia Capital downgraded his expectations for Air Canada’s stock price and reduced his earnings estimates for several rail, aerospace, airline and trucking companies by an average of 15 percent.

Although he has become more cautious, the analyst said he’s not assuming a deep recession. Scotiabank economists have predicted that if a recession does occur soon, it will likely be “shallow and short.” Even with a more pessimistic outlook, he said CN, CP and Bombardier represent good value because their shares have already adjusted. Quettawala said said the balance sheets of many companies are in reasonable shape and debt maturities have been pushed out.

Transportation sector stock prices are down 21 percent on average in the last three months, but would need to fall another 48 percent to reach 2009 lows. Quettawala downgraded the country’s largest carrier and upgraded its partner Chorus Aviation Inc, which operates regional airline routes on Air Canada’s behalf. Other analysts downgraded Air Canada much earlier. Walter Spracklin of RBC Capital Markets did so in January, when the shares were double where they are currently trading. In his report, Spracklin said his reduction in traffic and yield assumptions were less severe from WestJet than Air Canada because the Calgary-based carrier “has more flexibility on yields given its low-cost carrier nature.”

Although Air Canada has made “solid strides” in improving its long-term costs and risk profile, Quettawala said the changes “will matter little in the near term if we get into a recession.”

He believes Air Canada and WestJet Airlines will likely face lower profits although lower yields have been partially offset so far by reduced costs and fuel prices.

Canada’s railways are expected to face slower growth, but should be helped by a stronger Canadian gain crop, CN’s continued move to an intermodal format and slightly higher coal and potash volumes. In a recent railway report, Spracklin noted CN’s share price decreased only five percent last week after two large US coal producers reduced their shipment guidance. Earnings estimates in 2012 for trucking companies TransForce, Mullen Group and Contrans Group are expected to fall between three and 11 percent.