(The following story by Scott Deveau appeared on the Financial Post website on January 22.)
OTTAWA — Due to the current volatility in the North American market, it was with “some trepidation” that Canadian National Railway Co. forecast that increased volumes from its new terminal at the port of Prince Rupert, B.C., would drive its earnings growth in the coming year. To do so, it would have to offset the negative impact of a strong loonie, a weak U.S. economy, and high fuel costs.
Management said during a conference call Tuesday that it does not expect the North American economy to slip into a full-blown recession, as many experts have predicted, but rather have a “soft landing” in the latter half of the year.
“I’m looking for a real bounceback in 2008, despite some of the things that we read everyday,” said Hunter Harrison, CN chief executive, on the call.
The rails are exposed to any major downturn in the North American economy, as witnessed by the negative impact a slump in U.S. housing starts had on lumber shipments last year.
Despite the current volatility, CN estimates its revenue will increase between 6% and 8% next year, from nearly $7.9-billion in 2007, and that top line growth would be the major driver of its projected mid-to-high single digit earnings growth in 2008.
Last year, CN turned in net income of roughly $1.7-billion, or $3.40 a share, excluding certain one-time gains.
Canada’s largest railway also reported a net income of $444-million Tuesday, or 90¢ a share, excluding a one-time tax gain and the sale of some of its real estate assets. The net income was virtually in line with last year, but including the one-time gains, earnings jumped to $1.68 a share.
Sales declined at the railway during the quarter by 3% to roughly $1.9-billion, due mostly to the unfavourable foreign exchange on its U.S. revenue.
The railway’s operating ratio — an important measure of its profitability, defined as operating expenses as a percentage of revenue — was virtually flat at 62.1%.
Mr. Harrison also took some time to discuss the progress of the railway’s $300-million purchase of Chicago-based Elgin, Joliet and Eastern Railway Company, which is currently undergoing an extensive environmental review by the U.S. Surface Transportation Board.
The STB has said similar reviews have taken between 18 months and several years to complete in the past.
“I think that’s a little ridiculous in my view,” Mr. Harrison said, pointing out that those previous deal were much more complex than CN’s. “I don’t think the environmental review will be that long.”
He added that he hoped that the process could be completed within a year, and said that there are “virtually no problems” with the deal as he sees it.