Investing.com -- Amid concerns over tariff risks, UBS has revised its stock price targets for Canadian rail companies CPKC and CN. This follows the announcement of U.S. reciprocal tariffs last Wednesday, which proved less severe for Mexico and Canada than initially feared.

Goods that are non-compliant with the United States-Mexico-Canada Agreement (USMCA) will continue to face a 25% tariff, while compliant goods will not. UBS analyst Thomas Wadewits sees this situation as more favorable for  Canadian Pacific  (NYSE:CP) Kansas City Limited (TSX:CP) and Canadian National Railway Co (TSX:CNR), as investor concerns had previously centered on their cross-border exposure.

Despite this, the analyst cautioned that broader U.S. trade policy remains uncertain, with the possibility of increased tariffs on other trading partners that could result in reduced demand.

The White House has indicated that a notable portion of imports from Mexico and Canada are USMCA compliant, meaning many goods will not be subject to the new tariffs.

Although the U.S. trade policy remains fluid, Wadewits believes the path to USMCA compliance and tariff avoidance does not appear to be overly challenging. Mexico, in particular, is expected to quickly increase its USMCA compliance, potentially reducing the effective tariff rate on its exports to the U.S.

However, the analyst argues, the automotive sector faces significant risks. The U.S. has proposed a 25% tariff, matched by a retaliatory tariff of the same percentage by Canada on non-USMCA compliant U.S. vehicle imports.

This could significantly affect automotive volumes for CPKC and CN, with an estimated 50% of their automotive revenues being cross-border. Additionally, Wadewits sees broader demand reduction due to higher prices and market uncertainty could impact consumer and industrial volumes for both companies.

In response to these risks, UBS has revised its earnings per share (EPS) estimates for CPKC and CN for 2025 and 2026. The 2025 EPS estimate for CPKC has been lowered from CAD$4.85 to CAD$4.58, and for CN from CAD$7.80 to CAD$7.50. These adjustments reflect expected declines in automotive, forest products, metals, and energy/chemicals volumes.

Additionally, UBS set a new price target for CPKC at CAD$113, down from CAD$129, while CN’s price target has been adjusted to CAD$172 from CAD$187.

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