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Railway profits expected to show strength despite slowdown in June

Canada’s two main railways are expected to show continued profit strength in their quarterly earnings reports this week, despite recent signs of sagging grain and coal traffic and slightly lower container shipments.


Canada's two main railways are expected to show continued profit strength in their quarterly earnings reports this week, despite recent signs of sagging grain and coal traffic and slightly lower container shipments.

While Canadian Pacific Railway Ltd. is focused on restructuring and improving efficiency, Canadian National Railway Co. has its eye on expansion, particularly in the frack sand sector. Both companies are on an earnings upswing, though a slowdown in June volume for grain and coal carloads in Canada, and a slight easing in intermodal traffic, are seen as possibly dampening second-quarter gains.

These signs of softening are happening despite rising volume in the United States, National Bank Financial noted in a July 9 report.

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The June slowdown in Canadian carloads – the first year-over-year decline in eight months, National Bank said – offset an overall 1.6-per-cent gain in the quarter, according to data from the Association of American Railroads.

National Bank subsequently downgraded its estimates for CN's second-quarter share profit to $1.57, from a previous estimate of $1.61, and similarly for CP dropped its prediction to $1.48 for the quarter, from a previous forecast of $1.56. This is still much higher than CN's $1.44-per-share second-quarter profit and CP's 60-cent share profit in the same period last year.

CN will release its quarterly earnings on Monday, followed by CP on Wednesday.

Analysts at Raymond James also tempered estimates to $1.60 a share for CN, from a previous estimate of $1.61; and $1.53 for CP, down from $1.55, due largely to ongoing weakness in export coal demand. Consensus estimates among the whole analyst community are $1.63 for CN and $1.50 for CP.

Shipping crude oil by rail remains a strong business, as National Bank notes, with Canadian railways shipping 86,000 carloads of petroleum products in the second quarter – a nearly 18-per-cent gain over 2012, and 62 per cent higher than 2011. This compares with about 154,000 carloads of chemicals shipped.

National Bank warned that "any movement to limit the shipping of crude by rail would also have to consider limiting the movement of certain chemicals by rail."

Questions about new regulations for crude and other dangerous shipments have risen sharply since the train disaster in Lac-Mégantic, Que., which left more than 40 people dead due to a runaway train, operated by the regional Montreal, Main & Atlantic Railway, carrying 72 cars of crude.

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On Friday, the Transportation Safety Board of Canada asked Transport Canada, which sets rail regulations, "to review all railway operating procedures to ensure that trains carrying dangerous goods are not left unattended on a main track."

The impact that new regulations could have on earnings remains a question, as railways continue to expand their business in the energy sectors.

CN has said it is investing significantly in transporting frac sand, used in the extraction of natural gas and oil. This includes a $33-million (U.S.) upgrade on the rail line between Wisconsin Rapids and Blair, Wis., which the company said is part of the frac sand supply chain.

"We view this announcement positively, as it aligns with management's strategy of opening up new markets through supply chain collaboration. In addition, this deal builds on CN's competitive advantage with superior network access into the Canadian oil sands," RBC analyst Walter Spracklin said.

At CP, the emphasis is on improving efficiency, though the company's restructuring plans, unveiled late last year, struck many as being very ambitious. As well, after a spate of small CP derailments involving crude and petroleum-related products, concerns have risen about efficiency gains at the expense of safety.

Yet so far, analysts seem to like what they are hearing from the company, with National Bank noting that "recent comments by CP management suggest that the company is ahead of its plan to remove costs from its operations and that the target [operating ratio] might be reached in 2015."

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About the Author

Guy Dixon is a feature writer for The Globe and Mail. More


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