(The following story by Nicolas Van Praet appeared on the Financial Post website on April 27, 2010.)
MONTREAL — Canadian National Railway Co. has boosted its earnings and free cash flow forecasts for the rest of the year, convinced that North America’s factories will crank up output and ship more product in the months ahead.
Canada’s largest railroad said Monday it is aiming for “solid double-digit” earnings per share growth for 2010 compared with the $3.24 per share it earned in 2009. It is expecting free cash flow of $1-billion, up from a previous $700-million prediction made in January. Industrial production in North America will climb 5%, as against the 3% to 4% previously forecast, the company said.
CN and rival Canadian Pacific Railway Ltd. have seen carload volumes increase in the first quarter this year as the continent’s automobile assembly and parts plants roared back to life, metal makers shipped more goods, and commodity producers rushed to meet the demand of Asia’s growing economies. One of the mildest and driest winters on record in Canada allowed both companies to move carloads more smoothly during what is normally a cold and disruptive time.
“It’s clear that the economy is on a recovery mode – perhaps a little bit faster than we anticipated up until now,” CN chief executive Claude Mongeau told analysts on a conference call. “We have good growth across all of our businesses.”
The bullish revision came after the railway reported a 21% increase in first quarter profit, improving also on several key metrics.
Net income was $511-million or $1.08 a share on revenue of $1.97-billion, CN said. The results included a $131-million after-tax gain from the sale of a rail line to Toronto transit agency Metrolinx. Without the gain on that sale, CN tallied adjusted first-quarter earnings per share of 80¢ compared with 64¢ on the same basis a year ago.
CN’s train carloads rose 16% during the quarter over the same period last year. Revenue ton miles, which measures the relative weight and distance of all freight it moves, increased 14%.
“Our latest review of a basket of leading economic indicators suggests that freight trends will continue to demonstrate healthy growth,” Raymond James Ltd, analyst Steven Hansen wrote in an April 15 report. “We believe it is fair to say that the recovery has safely advanced from a fragile nascent state to one of reasonable health and vigour.”
Montreal-based CN generates about half of its revenue in U.S. dollars, meaning it earns less when the Canadian dollar rises against the U.S. currency. With the Canadian dollar roughly 16¢ higher year-over-year, a stronger loonie reduced the railway’s net income by $41-million or 9¢ per share during the first quarter.
Shares of both CN and CP have surged this spring amid renewed investor interest. CN stock has gained 15% since Jan. 1 while CP has gained 8.5%.
“Looking forward, as volumes continue to improve, CN could clearly show strong earnings growth as costs remain in check,” National Bank Financial analyst David Newman said in a research note April 19. He said the railway will be helped by a plan to roll out 300 distributed power locomotives, which allow for more efficient trains, as well as a planned $1-billion spending on track infrastructure.
During the latest quarter, CN struck a new labour deal with its Canadian traffic controllers and obtained an arbitration ruling locking in a new three-year collective agreement with its 1,700 locomotive engineers. Negotiations for new labour pacts concerning conductors and yard employees are expected to begin shortly. They expire in July.