(The following report by Brent Jang appeared on the Globe and Mail website on October 26.)
TORONTO — Canada’s two largest railways are expected to report stronger third-quarter profits this week as the North American rail industry thrives on booming China trade and fends off high diesel costs and fierce trucking competition.
Canadian National Railway Co. and Canadian Pacific Railway Ltd. are benefiting from growing demand for rail services from exporters and importers.
Voracious demand from China for bulk commodities from Canada is fuelling export shipments, while Canadian retailers are increasingly importing consumer products from Asia, notably China, said Randy Cousins, an analyst with BMO Nesbitt Burns Inc.
“Procurement has gone global. As we globalize, logistics become much more important. So, it’s Barbie dolls and consumer electronics going in one direction, and coal and iron ore going in the other,” Mr. Cousins said.
CPR releases its results today, followed by CN tomorrow. Montreal-based CN is forecast to post a $328-million third-quarter profit or $1.13 a share, excluding non-recurring items, says a poll of analysts by Thomson First Call. Analysts estimate that Calgary-based CPR could earn $102-million or 64 cents a share.
Excluding non-recurring items, share profit in last year’s third quarter was 91 cents at CN and a restated 60 cents at CPR.
The third-quarter results at CN, whose shares underwent a three-for-two stock split in February, will include this past summer’s $1-billion acquisition of BC Rail Ltd.’s freight operations from the B.C. government.
Including one-time items, CN posted a $294-million profit in last year’s third quarter or $1.02 a share, while CPR had a restated $91-million profit or 57 cents.
The forecast lift in third-quarter profit at CN and CPR — the No. 1 and No. 2 railways in Canada, respectively — comes as North America’s rail industry faces huge demand to handle imports and exports at West Coast ports.
The rail outlook for 2005 also appears robust, despite some notable challenges posed by high oil prices and persistent trucking competition.
Both CN and CPR have fuel price hedging programs in place, offsetting some of the effects of larger bills for diesel, which is used to run locomotives.
And while the trucking sector continues to battle the railways for business, there’s a shortage of drivers, so the railways are attracting some extra deliveries, especially hauls longer than 650 kilometres.
On the export side, Canaccord Capital Corp. analyst Robert Fay said there have been increased shipments for everything from forest products and chemicals to metals and minerals.
It hasn’t been an entirely smooth ride for the railways, however. A wet fall, combined with frost in some areas, has delayed grain exports. And the surge in Asian trade is putting a strain on rail operations.
CN and CPR are trying to avoid bottlenecks, which drive up the costs of moving goods.
Last week, CN and CPR said they will be sharing some tracks and working co-operatively in key parts of their West Coast properties in an effort to reduce congestion at the Port of Vancouver, which is bustling as Asian trade soars.
Over the past three months or so, the share prices of North America’s six largest railways have been on the ascent.
Union Pacific Corp., Burlington Northern Santa Fe Corp., CN, Norfolk Southern Corp., CSX Corp. and CPR have all received a lift from the strength of the North American economy and sizzling Asian trade.
Amid the heavy rail traffic, there are signs that it’s time to re-examine the conventional wisdom that success in the Old Economy rail sector hinges solely on keeping down costs.
“The historic perception of this industry is that it’s a no-growth industry. But there’s a legitimate case to be made that the industry may be passing through an inflection point as the procurement of goods goes global, which means the logistics take on a hugely important role in the total equation,” Mr. Cousins said.
Fred Green, CPR’s executive vice-president of operations and marketing, said the notion of railways operating in a mature industry deserves to be reassessed, given the surge in business. “There’s been a dramatic change in the last 12 months,” Mr. Green said. “There’s been a rapid escalation in the impact of the Chinese economy, and there’s no question that China has been the driver.”
CPR was spun off three years ago from Calgary-based conglomerate Canadian Pacific Ltd. CN, privatized by the federal government in 1995, has been noted for its acquisitive nature in recent years.
But Mr. Cousins said the jury is still out on whether North American rail mergers could soon be in the cards.
“There’s nothing to stop rail mergers. It’s just that the hurdles are arguably so high. It’s like asking me to slam dunk a basketball. It’s only going to happen with a springboard and a tailwind,” said the 5-foot-9 analyst.
CN shares fell 56 cents yesterday to close at $63.86. CPR shares slipped 36 cents to close at $33.89.