(The following story by Brent Jang appeared on the Globe and Mail website on January 30.)
TORONTO — Even as the North American economy lurches into low gear, the railway sector is looking downright recession-proof and poised for yet another year with strong profit.
Last week, Canadian National Railway Co. announced a record $2.16-billion profit for 2007 – and forecast an even better performance this year. Yesterday, Canadian Pacific Railway Ltd. said it expected to improve on last year’s record profit of $946-million.
North America’s Big Six railways have been able to rely on a boom in bulk international commodities – such as grain, potash and coal – taking much of the sting away from weakness in delivery in the United States of some industrial and consumer products.
And while complaints persist, railways have steadily improved their service levels over the past decade, now running scheduled operations with delivery time targets rather than waiting for enough goods to show up before the train moves, said RBC Dominion Securities Inc. analyst Walter Spracklin.
With their clout, the railways have been flexing their “pricing power,” charging premium freight rates that are still more attractive to many customers than trucking rates, he said.
Many customers view railways as their best bet for hauling freight longer distances because of road congestion that slows truckers and the more efficient use of diesel by locomotives.
“What’s exciting for everybody in the industry is that there’s just nothing on the horizon that would indicate the ability for other [transportation] modes to be as competitive as the railway industry is going to be over the next decade,” CPR chief executive officer Fred Green said yesterday in releasing the railway’s yearly results.
Canada’s two largest railways, along with the four biggest U.S. freight carriers, are steaming ahead – contrasting sharply to the dark clouds looming in other sectors, from banking to retailing to telecommunications.
Norfolk Southern Corp., Union Pacific Corp. and CSX Corp. recently reported a combined $4.6-billion (U.S.) in profit for 2007, while Burlington Northern Santa Fe Corp. of Fort Worth, Tex., said yesterday that it posted a $1.83-billion profit last year.
Mr. Green expects CPR to prosper in 2008 despite the U.S. economic slowdown, forecasting another banner year with a boost from Asian trade.
The Calgary-based freight carrier’s profit climbed 19 per cent in 2007, when it moved more commodities such as grain, sulphur and fertilizer.
The railway also thrives on transporting imports of consumer goods arriving on huge container ships from Asia, notably from Chinese ports.
“What’s really important, I think, when you look at our franchise is that we’re not dependent on the U.S. economy the way some parties are,” Mr. Green said. “So much of our activity is serving the high-growth Asian economies with our export products.”
CPR is sticking with its expectations that diluted earnings per share (EPS) will grow by between 8.8 and 12.2 per cent this year based on a soft landing in the U.S. economy.
In a fourth quarter marked by adverse weather, the railway’s profit still surged 135 per cent to $342-million (Canadian), bolstered by lower future income tax rates.
Severe weather temporarily disrupted some trains, but “we have our stride back,” said CPR chief operating officer Kathryn McQuade.
Yesterday, investors cheered CPR as the company’s shares rose 3.6 per cent. CPR shares had already benefited from the spillover effect of Montreal-based CN’s record profit in 2007. CN, however, said last night that extreme cold forced it to reduce freight service in most of Western Canada, delaying transit times.
CPR reiterated its 2008 outlook of $4.70 to $4.85 for diluted EPS, compared with $4.32 last year. The railway’s current quarterly dividend is 22.5 cents a share, and Mr. Green left the door open for an increase.
“The issue of dividends is a board matter,” he said. “But directionally, what we’ve said over the course of time is that as our earnings grow, we would address the dividend side of things. So, bear with us.”
CPR’s 2007 operating ratio – a key indicator of productivity that measures operating costs as a percentage of revenue – was 75.3 per cent, compared with 75.4 per cent in 2006. A lower number is better, and the improvement of 10 basis points narrowed the gap between CPR and rival CN, which posted an industry-leading operating ratio of 63.6 per cent last year.