Sector Snap: Analyst cuts 2 rails to 'Sell'

NEW YORK (AP) — An analyst recommended investors get rid of a pair of railroad stocks Monday and urged caution on another, saying the sector's reputation for outperforming even in tough economic times might be tempered with tighter regulations and the possibility of a long, drawn out recovery.

Citi Investment Research analyst Matthew Troy cut shares of Burlington Northern Santa Fe Corp. and Canadian Pacific Railway Ltd. to "Sell" from "Hold," citing both stock's recent run-ups. Shares of Fort Worth, Texas-based Burlington have jumped by nearly a third since lows in March, and Canadian Pacific is currently trading better than the S&P 500 and the rest of the rail group, he noted.

And although Troy calls Burlington "one of the best run railroads," he said its earnings growth potential is less than its peers because of its remaining fuel contracts, high exposure to weakening export grain markets and slowing demand for U.S. coal.

Troy thinks Canadian Pacific will be hurt by weakness in its key fertilizer and coal businesses. This will drag down sales in a year when the rail is trying to improve its efficiency, fund its pension plan and improve its capital position, he said.

The analyst also downgraded the Canadian National Railway Co. to "Hold," saying the stock has gotten too expensive to justify its previous rating of "Buy." Canadian National shares have leaped 39 percent since early March.

"We want best-of-breed Canadian National in the portfolio, we're just recommending patience with new money here," Troy wrote in a note to clients.

In general, Troy said that he's cautious on the sector's potential for growth as the possibility of an "L'' shaped, or slow and extended, economic recovery grows. Also, growing concerns that additional regulatory restrictions will be placed on the group might slow earnings upticks, as the rails might not be able to raise prices as fast or as high as they have in the past.

In morning trading, shares of Canadian National fell 78 cents to $39.99. Canadian Pacific lost 44 cents to $34.76. Burlington Northern fell $1.72, or 2.6 percent, to $65.42.