(The following story by Peter Hadekel appeared on The Montreal Gazette website on January 24.)
MONTREAL — As Canadian National Railways chief executive Hunter Harrison unveiled another stellar earnings report yesterday, he reflected on a fundamental irony.
Despite what turned into a record financial year by almost any measure, investors gave the company a cold shoulder over the last 12 months.
“This past year was the first since I’ve been associated with the company that the stock was essentially flat,” he said during an interview at CN’s head office at Central Station. “We’re about the same place we were last year at this time.”
What happened to one of the great stock-market wonders Canada has seen in the past decade? Several things.
“One was the strength of the Canadian dollar,” Harrison said. “People thought it was going to kill us. Two, was the fact that we’re the largest shipper of forest products in North America, and housing starts began to go to pot. That hurt. Then, at the end of the year, the weather in British Columbia hurt.
“And the outlook back in the first quarter was that the economy was not going to be good.”
Harrison admits that CN also ran into some ingrained market skepticism over whether the company could continue to improve its results year after year. “(Investors) were saying to some degree ‘they can’t keep getting better.’ ”
As well, he noted, some financial institutions have done admirably with CN stock and decided to take their profits and go elsewhere. There’s also the fact that among U.S. investors, CN suffers from “a Canadian discount.”
All this explains why the stock still trades at an attractive valuation against the overall market.
But it doesn’t obscure the fact that Harrison, like Paul Tellier before him, has been putting up a remarkable string of results.
Indeed, if you go back to the initial public offering of CN stock back in 1995 and factor in stock splits, investors have seen the value of their holdings rise well over 1,000 per cent.
A former crown corporation, sold to to the public for $2.2 billion, is now worth $28 billion in market capitalization.
And yesterday’s results hardly diminish that lustre. CN reported adjusted 2006 net income of $1.8 billion, or $3.40 per share – a 16-per-cent annual increase. Operating income grew 15 per cent to $3.03 billion.
“This is the best operating income we’ve ever had, the best operating ratio, the best free cash flow, the best increase we’ve ever had in the dividend,” Harrison enthused.
In short, despite the best year in its history, CN’s stock price barely moved. “Am I disappointed? Yes. But I think we’ll be rewarded.”
By now, most of the skeptics about CN should have learned not to underestimate him. He has consistently wrung operating efficiencies out of the company like blood from stone.
CN’s operating ratio, which measures expenses against revenues, is by far the best in the industry at 60.7 per cent (the lower the figure, the better).
And Harrison continues to preach culture change at the company with the zeal of an evangelist, even when dealing with hard-bitten rail unions that abhor change. “You have to spend time with ’em,” he says, with the folksy southern accent that betrays his Tennessee roots.