(Bloomberg News circulated the following article by Rip Watson on July 20.)
WASHINGTON — Canadian National Railway Co., which leads North America’s railroads in profit margin, said second- quarter earnings rose 28 percent as rates and shipments increased. The company boosted its 2005 profit forecast, and the shares gained 6.7 percent, the most in five years.
Net income climbed to C$416 million ($339.9 million), or C$1.47 a share, from C$326 million, or C$1.13, the Montreal-based company said in a statement today. Sales rose 10 percent to C$1.84 billion from C$1.67 billion.
Canadian National said the results and “solid outlook” for the rest of the year prompted it to raise its annual earnings forecast to as much as 25 percent above 2004’s C$4.34 a share, from a range of 10 percent to 15 percent. The company, the first major North American railroad to report quarterly results, said it benefited from demand for cargo hauling.
“They wouldn’t be giving guidance like that if they weren’t confident that they could deliver,” said Gavin Graham, director of investments for the Guardian Group of Funds in Toronto, which holds 212,000 Canadian National shares. “They were already the best in terms of profit margin; now they have widened the gap. If you are getting 10 percent more revenue, that allows you to help spread out the costs.”
Canadian National shares rose C$4.90 to C$78.50 at 4:05 p.m. in Toronto trading. It was the biggest one-day gain since July 26, 2000.
The company said its profit margin was 38.8 cents per dollar of sales before taxes and interest. That margin was 30.8 cents in 2005’s first quarter, 8.9 cents higher than Burlington Northern Santa Fe Corp., the biggest U.S. railroad by shipments.
Lower Labor Costs
“It was a very impressive quarter that was led by intensive cost control,” said James Valentine, a Morgan Stanley analyst in Chicago who rates the shares “equal weight” and doesn’t own them. “Labor costs came in C$53 million less than we expected. Costs per employee were 6.2 percent lower.”
Labor costs fell C$30 million, in part because of lower stock-based compensation and the stronger Canadian dollar, which reduces the company’s expenses in the U.S., spokesman Mark Hallman said. Total costs rose 3 percent, including a 46 percent surge for fuel.
Canada’s stronger dollar relative to U.S. currency cut net income by about C$15 million, reduced revenue by C$80 million and lowered costs by C$50 million, the company said.
The company was expected to earn C$1.35 a share, the average estimate of analysts surveyed by Thomson Financial.
Buying Back Stock
Canadian National said it will buy back as many as 6 percent, or 16 million, of its 275.4 million shares outstanding on July 8. The buyback will occur over a year starting July 25.
Acquisitions of two U.S. ore-hauling railroads and BCRail Ltd., which carries mainly forest products, helped boost second- quarter results, as did a fuel surcharge, Canadian National said.
“CN’s core merchandise businesses, including forest products, metals and minerals, and petroleum and chemicals continued to register solid gains,” Chief Executive Hunter Harrison said in the statement.
Shipments rose 5.2 percent and rates measured in cents per ton of freight shipped rose 5.6 percent. Revenue for forest- products shipments rose 22 percent.
Cargo that moves by a rail-truck combination, the second- biggest category by revenue, rose 9 percent to C$313 million, helped by imports. Petroleum and chemicals sales rose 5 percent. Revenue from metals shipments, including ore, climbed 16 percent, as acquisitions contributed to the gains.
Auto revenue fell 3 percent on production cuts and grain declined 5 percent as farmers held back some crops for higher prices. Executive Vice President James Foote said grain business will rise later this year because of higher exports and a strong Canadian crop. Grain revenue could be the highest in five years, he said.
International Shipping
Canadian National expects increased business at Halifax, Nova Scotia, when China Shipping Co. begins a cargo service between Asia and North America later this year via the Suez Canal, Foote said. Planned new cargo service at Prince Rupert, British Columbia, is still 18 months away, he said. Foote didn’t estimate how much either service would boost sales.
“Everyone has been working very hard not to congest the port and the railroad” at Vancouver, where striking truckers have stopped making local deliveries, Foote said. “It has not had any impact on our business and nor do we expect that it will,” because cargo moves directly between ships and trains without any truck handling, he said.