A number of analysts have changed their price recommendations and targets on Canadian National Railway (TSX: CNR) in the last week after the company presented a strategic plan to improve operating income and operating ratio for 2022. In particular, National Bank raised its 12-month price target to C $ 151 for C $ 144 and BMO Capital Markets relaunched coverage of the name with a target price of C $ 155 and market performance rating.
Canadian National currently has 19 analysts covering the stock with a 12-month average price target of C $ 154.64, up 6%. Of the 19 analysts, 3 have strong buys, 6 have buys, and the other 10 have holding ratings. The highest on the street is $ 160 CAD from Raymond James, while the lowest is $ 136 CAD.
Over the weekend, BMO Capital Markets relaunched its coverage of Canadian National Railways, raising its previous price target from C $ 150 to C $ 155, but lowering them from above market performance. . They say the current activist campaign is underway, which “exploits negative investor sentiment after several years of stock price underperformance.”
This is a potential positive catalyst, as it forces management to show its hands on “very significant and encouraging measures to improve operational efficiency”. BMO sees the new strategic plan as a positive step forward, but they believe it is not enough to “unlock the full potential of CNR”.
BMO Capital Markets outlines the key takeaways from the strategic plan:
- Target $ 700 million in additional operating revenue for 2022 with lower costs contributing $ 550 million and higher prices contributing $ 150 million.
- Aim for an exploitation rate of 57% by 2022
- Resumption of the share buyback contract.
- Carry out a review of the capital structure and financial leverage
- Reduce capital spending to 17% of total revenue by 2022
- Increase earnings per share by roughly 20% by 2022
- Increase ROIC to 15% by 2022
Commenting on the strategy and future of Canadian National Railways, BMO comments, “We believe that full profitability and the potential for creating value for CN shareholders depends not only on improving operating costs, but also the assurance that the business strategy targets the right type of freight. In addition, CN Rail’s target of 57% operating ratio is lower than BMO’s 2021 estimate of 61.7% for the company.
BMO believes that Canadian National remains one of the lowest unit cost operations in the industry in most cost categories, even though its market share to CP has declined due to the acquisition of PSR in 2016. BMO conducted a full scan on Canadian National. Performance of unit costs and unit revenues of the railway over the past 5 years. They believe the trend can be reversed and, through their analysis, they believe that a 50% medium to low exploitation ratio can achieve a high ROI for teens.
BMO has produced a scenario matrix with different scenarios based on what they see from other investors and the company, where the 2025 price target drops from $ 165 to $ 222. They say that in the first scenario, or “status quo”, this scenario is where the operating ratio stays in the low 60% range, causing the stock to contract multiple times and CN’s railroad continues to underperform. perform.
In the “CNR strategic plan” scenario, they forecast an operating ratio heading and maintaining the 57% announced, while the company fulfills its other promises. The other two scenarios are grouped together in BMO’s explanation, for which they write: “The other two scenarios see the operating ratio drift towards the lower range of 50% according to our analysis with the ROI extending to ‘to the highest adolescents. “
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