Rails are rolling on

CN & CP

The increase in global demand for commodities is continuing to maintain strong prices. The demand out of the Far East has been steady for the past year or so with very little signs of letting up. China recently released fourth quarter Gross Domestic Product (GDP) showing an increase of 9.5% up marginally from the 9.3% reported in the fourth quarter of 2003. To put this in perspective the fourth quarter GDP in the US was reported at 3.1%, in relative terms the Chinese economy is growing three times faster then the US economy.

The increase in demand has been very positive for the Canadian economy and Canadian natural resource companies have seen some of their best earnings in history. The situation appears to have the potential to last for a number of years adding needed economic activity to the Canadian economy.

The other beneficiary of all this increase in demand has been the transportation and shipping sector. The Port of Vancouver recently announced a $500 million expansion to the Port facilities to keep up the expected increase in shipping between Canada and the Far East. The increase in demand has put pressure on most of the transportation sector to upgrade and expand capacity.

Both Canadian Pacific Railway (CP -TSX, $41.80, 403-319-7000, www.cp.ca) and Canadian National Railway (CNR-TSX, $72.61, 514-399-0052, www.cn.ca) have seen dramatically higher traffic over the past year and this has helped to increase the revenue for both companies to historic highs. The future looks very bright fro both of the Canadian railway firms.

Canadian Pacific Railway is one of the oldest companies in Canada originally incorporated in 1881, the company was renamed Canadian Pacific Railway after a major reorganization in 1996 which saw Canadian Pacific Limited split into its major operating companies CP Ships, PanCanadian Petroleum, Fording Inc., Marathon Realty Company Limited and Canadian Pacific Hotels & Resorts.

Canadian Pacific Railway operates a 13,850 mile rail network which stretches from Montreal to Vancouver in Canada and serves the major industrial centers in the US Midwest and North East. The company transports a variety of products including, grain, coal, forest products, autos, potash and containerized cargo.

The increase in demand for base metals and coal will continue to benefit Canadian Pacific over the coming years. CP is the exclusive rail service for the transportation of coal for the Elk Valley Coal Partnership which produces 25 million tonnes of metallurgical coal annually for export. CP is also a major shipper of base metals and 78% of that is copper which has seen dramatically declining inventories globally and will likely become an even larger part of the product mix for CP in the future as production is ramped up to meet demand.

CP recently released fourth quarter and full year financial results for 2004. The company reported 2004 fourth quarter net income of $129 million or $0.81 per share as compared to the $174 million or $1.09 per share for the same quarter in 2003. The decline has been attributed to the impact of foreign exchange on US dollar denominated long term debt. For the full year 2004 the company reported net income of $413 million or $2.60 per share as compared to $401 million or $2.52 per share in 2003.

The shares are trading with a current price earning of 16 times and pay an annual dividend of $0.53 to yield 1.25%. The shares are in a sustained uptrend which started in October 2004, buy at current levels with an initial target price of $47.00 use a $39.00 stop on close only.

Canadian National Railway Company is a leading North American railway, after acquiring Illinois Central in 1999and Great Lakes Transportation in 2004 along with the partnership agreement with BC Rail in 2004. The company has 19,560 miles of track in Canada and the US operating from coast to coast and down to the Gulf of Mexico serving the ports of Vancouver, Prince Rupert, Montreal, Halifax, New Orleans and Mobile Alabama.

CN transports a variety of products including petroleum, chemicals, grain, fertilizers, coal, metals, forest products and autos. The company generates revenue from the US (56%), Canada (25%) and international traffic (19%). CN has seen a substantial increase in fourth quarter revenue from the commodity sector metal (37%), forest products (22%), coal (20%) and chemicals (9%).

The company recently released fourth quarter and full year results for 2004 in the fourth quarter net income increased to $376 million or $1.29 per share compared to $224 million or $0.78 per share a year earlier an increase of 24%. For the full year net income was $1.258 billion or $4.34 per share an increase of 24% from the $1.045 billion or $3.49 per share in 2003.

CN announced a 28% increase in the dividend per share from $0.78 to $1.00 annually the shares now yield 1.37%.

The shares continue to trade in the uptrend that started June 2004 and have recently fallen back from a high of $76.00, buy at current prices with an initial target of $82.00 use a $68.00 stop on close only.