cn rail

The Greek bailout and the poor financial state of major countries rattled the market again this week. Everybody agrees that high government debt and deficit spending are serious problems that must be fixed, but opinions differ about urgency. The biggest pessimists see government debt-and-deficits as terminal conditions that are too far advanced to be reversed. Others see the debt-deficit as more akin to a serious case of high blood pressure – a risk factor, not a death sentence. My view is that a combination of budget cuts, economic growth and a dash of inflation may be enough to gradually unwind the debt-and-deficits problem over a period of years if not decades....

CGI GROUP INC., $15.04, Toronto symbol GIB.A, is Canada’s largest provider of computer-outsourcing services. These services help its customers automate certain routine functions, such as accounting and buying supplies. That lets CGI’s clients focus on their main businesses, and improve their efficiency. The company continues to renew existing contracts and win new ones. CGI added $1.1 billion of new orders in its second quarter, which ended March 31, 2010. Its backlog is now $11.4 billion, or 3.1 times its annual revenue. Even with the jump in new orders, CGI’s revenue fell 4.0% in the latest quarter, to $910.4 million from $948.3 million a year earlier. CGI gets roughly 40% of its revenue from outside of Canada, mainly the U.S., so the higher Canadian dollar hurt its revenue. Without the negative impact of exchange rates, revenue would have risen 3.5%....

SAPUTO INC., $29.70, Toronto symbol SAP, will distribute its foods in Toronto from a new facility in Vaughn, Ontario (it currently distributes from a number of different warehouses in the city). The company will complete this consolidation in stages, and expects to be finished by the end of September 2010. As well, Saputo will close its plant in Brampton, Ontario, in October 2010. This plant processes milk and cheese products. The company will merge this plant’s operations with its other Ontario facilities. In all, these moves will cost Saputo $4.6 million. However, the company expects the plan to save it $6.5 million a year. To put these figures in context, Saputo earned $104.3 million, or $0.50 a share, in the three months ended December 31, 2009....

BANK OF NOVA SCOTIA, $49.49, Toronto symbol BNS, fell 2% this week, even though it reported better-than-expected quarterly earnings. In its first quarter, which ended January 31, 2010, the bank earned $988 million. That’s up 17.3% from $842 million a year earlier. Earnings per share rose 13.8%, to $0.91 from $0.80, on more shares outstanding. That beat the consensus earnings estimate of $0.88 a share. Most of the gains came from the bank’s Canadian retail-banking operations, where earnings rose 27.9%. That’s mainly because low interest rates continue to fuel strong demand for home mortgages and personal loans. As well, improving financial markets have made it easier for companies to issue new shares and debt securities. That pushed up earnings at the bank’s capital-markets division by 27.0%....

CANADIAN NATIONAL RAILWAY CO. $54 (Toronto symbol CNR; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 471.0 million; Market cap: $25.4 billion; Price-to-sales ratio: 3.3; Dividend yield: 2.0%; SI Rating: Above Average) is spending $100 million to build a new rail hub in Calgary. To put this figure in context, CN earned $1.5 billion, or $3.24 a share, in 2009. When this facility opens in 2013, it will make CN more efficient by speeding up the flow of trains in western Canada. CN Rail is a buy....

CANADIAN NATIONAL RAILWAY CO., $53.52, Toronto symbol CNR, earned $1.5 billion in 2009. That’s down 13.8% from $1.8 billion in the prior year. Earnings per share fell 12.7%, to $3.24 from $3.71, on fewer shares outstanding. These figures exclude unusual items, including income-tax refunds and gains on sales of two small railway lines. Despite the drop, the latest earnings beat the $3.22 a share that analysts were expecting. Revenue fell 13.2%, to $7.4 billion from $8.5 billion. The recession hurt revenue at all of CN’s freight groups: The automotive group’s revenue fell 24%, followed by metals and minerals (down 23%), forest products (down 20%), consumer and industrial goods (down 15%), petroleum and chemicals (down 6%), coal (down 3%), and grain and fertilizers (down 3%)....

BCE INC., $27.51, Toronto symbol BCE, has increased its quarterly dividend by 7.4%, to $0.435 a share from $0.405. The new annual rate of $1.74 yields 6.3%. This is the company’s third dividend hike since a private consortium led by the Ontario Teachers’ Pension Plan dropped its plan to buy BCE a year ago. BCE has also earmarked $500 million for share buybacks. That’s equal to 2.4% of its $20.9-billion market cap. From December 2008 to May 2009, the company spent $986 million to buy back 5% of its shares. Share buybacks increase the value of the remaining shares....

Warren Buffett’s Berkshire Hathaway recently offered $44 billion U.S. for 77% of U.S.-based railway Burlington Northern Santa Fe. (Berkshire already owns 23%.) This lifted the shares of other big railways, including CN and CP. Despite the jump, both still trade at reasonable multiples of their earnings. As well, both are cutting costs. This will help their earnings grow as the economy recovers. CANADIAN NATIONAL RAILWAY CO. $57 (Toronto symbol CNR; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 470.1 million; Market cap: $26.8 billion; Price-to-sales ratio: 3.5; SI Rating: Above Average) operates the largest freight-rail network in Canada. It also serves 16 U.S. states. The recession continues to hurt demand for rail service. CN’s earnings fell 12.7% in the third quarter of 2009, to $446 million from $511 million a year earlier. Earnings per share fell 12.1%, to $0.94 from $1.07. These figures exclude unusual items, mainly income-tax recoveries to reflect adjustments made to prior years. As well, CN gets half of its revenue from its U.S. operations, so the U.S. dollar’s rise since last year added $0.03 a share to its latest earnings. Revenue fell 18.3%, to $1.8 billion from $2.3 billion....

POTASH CORP. OF SASKATCHEWAN, $105.95, Toronto symbol POT, rose 3% this week on speculation that Australia-based BHP Billiton plc (New York symbol BHP) may try to buy the company. BHP is the world’s largest mining company, and a recommendation of our Wall Street Stock Forecaster newsletter. BHP is developing a potash mine near Potash Corp.’s operations in Saskatchewan, so combining these would offer some cost-cutting opportunities. Moreover, potash prices are low right now, so it would make some sense for BHP to make an offer. That’s not reason enough to buy shares of Potash Corp., but it adds to their appeal. Meanwhile, Potash Corp. earned $0.82 a share in the three months ended September 30, 2009 (all amounts except share price in U.S. dollars). That’s down 79.1% from $3.93 a year earlier. Sales fell 64.1%, to $1.1 billion from $3.1 billion....

POTASH CORP. OF SASKATCHEWAN, $101.95, Toronto symbol POT, moved up 4% on speculation that Brazilian mining company Vale SA is preparing to launch a takeover offer for U.S.-based potash producer Mosaic Co. (New York symbol MOS). Potash Corp. is down from last July’s high of $227 due to falling potash prices and demand. However, Vale’s potential interest in Mosaic has spurred the stock prices of most fertilizer producers, including Agrium (see below). The Vale-Mosaic speculation also helped Potash Corp. overcome a drop earlier in the week on news that Russian potash producer Silvinit agreed to sell potash to Indian Potash Ltd. for $460 a tonne (all amounts except share price in U.S. dollars). Indian Potash imports and distributes about 70% of India’s potash needs. The $460 price is a lot less than the $700 that Canpotex will receive from its recent contracts to sell potash to buyers in Japan, South Korea and Taiwan. Canpotex is a potash marketing and exporting firm that is jointly owned by Potash Corp., Agrium and Mosaic. Still, Silvinit’s price is far above potash’s average 2003-2008 price of $270 a tonne....