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CN forecasts double-digit earnings growth in 2014

A CN locomotive makes it's way through the CN Taschereau yard in Montreal, Saturday, Nov., 28, 2009.


Canadian National Railway is expecting to deliver double-digit earnings growth in 2014 by boosting its carload volumes on a continued recovery in the North American economy.

The country's largest railway says its adjusted diluted earnings should be on top of the $3.05 to $3.10-per-share forecast for 2013.

That implies adjusted diluted EPS of $3.38 to $3.54, which is in line with the $3.52 per share forecast by analysts polled by Thomson Reuters.

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Free cash flow before dividends is forecast to range between $1.6-billion and $1.7-billion and capital expenditures are pegged at $2.1-billion.

Chief executive Claude Mongeau says CN's "agenda is gaining momentum."

"Our focus on efficiency and profitable growth continues to drive solid shareholder value," he said in a statement.

The Montreal-based railway said its revised 2013 forecast is consistent with its initial target of achieving high single-digit growth compared with the adjusted $2.81 per share earned in 2012.

This year's capital expenditures are expected to reach about $2-billion, including $1.1-billion to be spent on track infrastructure to maintain "a safe and fluid railway network."

It also plans to invest in productivity and growth initiatives.

CN's stronger performance in 2014 is predicated on an improving economy, with North American industrial production or output rising one percentage point to 3 per cent and U.S. housing starting to surpass one million and U.S. motor-vehicle sales rising 6.7 per cent to 16 million units. The Canadian grain crop is expected to be well above the five-year average in both years and above average in the U.S.

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Carloads are expected to increase by mid-single digits in 2014, up from 2 to 3 per cent in 2013.

CN continues to expect volume growth of real GDP plus 0.5 to 1 per cent and prices rising by inflation plus 0.5 per cent.

Analysts said the railway's 2014 guidance is positive but could be conservative.

"Based on CN's habit of underpromising and overdelivering, we remain confident in its ability to deliver strong performance, especially in light of its ongoing market share gains and disciplined approach toward the use of capital, which should continue to drive a lower operating ratio," Benoit Poirier of Desjardins Capital Markets wrote in a report Wednesday.

David Tyerman of Canaccord Genuity said CN's shares fully reflect the company's outlook, providing little opportunity for them to go much higher.

"We expect good EPS growth but the shares look relatively expensive, suggesting limited investment returns over the next couple of years," he wrote, adding that the guidance may suggest "modest downside risk."

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He also said CN could exceed its forecasts next year because of the possibility of a less harsh winter, lower pension costs, volume growth from intermodal and automotive contract wins from Canadian Pacific Railway and higher shipments of crude-by-rail.

CN transports about $250-billion in goods annually across a rail network that spans Canada and mid-America.

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