(The following story by Brent Jang and Karim Bardeesy appeared on the Globe and Mail website on July 21, 2009.)
TORONTO — The sharp downturn in freight shipments has bottomed at Canada’s biggest railway, yet another sign that the economy is on the mend.
Canadian National Railway Co., CNR-T seen as a barometer of economic health, said Monday that there have been improvements since May in moving products such as coal, grain, chemicals and consumer goods.
These modest gains point to momentum building in the second half of the year, chief executive officer Hunter Harrison said after the railway posted a decline in second-quarter profit.
“I think we’ve seen the bottom,” Mr. Harrison said on a conference call with analysts. “I’m talking more in the context of CN’s business, not the overall economy in Canada or the U.S., but business that affects us.”
CN’s outlook is another bright spot in an economy that has been hobbled for months.
“We’re seeing incremental, positive indications in certain segments for CN’s customers,” RBC Dominion Securities Inc. analyst Walter Spracklin said in an interview. “We could be out of the woods toward the end of this year in terms of the broader economy.”
Investors and analysts are scouring quarterly reports, which kick into high gear this week, for signs of a healing economy and earnings growth. Today, for example, markets are watching for reports from Caterpillar, Apple, chip maker AMD, Starbucks and Yahoo.
Mr. Harrison’s comments came after CN reported that both its profit and revenue for the quarter slipped 15 per cent.
CN’s shipments were sluggish in the year’s first half, as measured by revenue ton miles, with forest products down 22 per cent from the first half of last year. Auto sector business dropped 30 per cent, while metals and minerals declined 31 per cent.
But Mr. Harrison said he’s excited by the recent uptick in CN’s month-over-month freight statistics.
“We are well positioned as the economy improves,” he said. “I am pretty optimistic that the second half will be a better performance.”
CN executive vice-president Claude Mongeau, who replaces Mr. Harrison as CEO on Jan. 1, 2010, is also anticipating an economic rebound, but cautioned that “this is no time to let our guards down.”
In the first half, CN had a 70.8-per-cent operating ratio – a key indicator of productivity that measures operating costs as a percentage of revenue – compared with 69.4 per cent a year earlier. A lower operating ratio is better.
CN posted a second-quarter profit of $387-million, down 15 per cent from the same period last year. Its quarterly share profit fell to 82 cents from 95 cents while revenue dropped 15 per cent to $1.78-billion.
CN released its results as markets, weary from cost-cutting announcements, look for indications of how companies will grow. The market is on the hunt for earnings quality, looking for whether a company is on a more sustainable footing through revenue increases or still cutting costs.
Investors will be digging into Caterpillar’s results this week for signs that business conditions are improving. Its shares jumped 8 per cent yesterday when a Bank of America analyst upgraded the stock, saying he is seeing signs of lower inventories and an improved purchasing outlook.
Bank of America’s latest profit number, on the other hand, was pumped by asset sales.
Over a third of the S&P 500 companies share their quarterly results this week, after last week’s rally saw the index appreciate by 7 per cent.
One company at the centre of any projection about economic prospects is global shipping player UPS, which reports Thursday. Analyst Daniel Ortwerth of Edward Jones said these are tough times for any premium transportation services company.
But he is focused on shipping volumes and capital expenditures, not quarterly earnings or cost cutting, for a true read on the company.