(The Canadian Press circulated the following on July 17.)
MONTREAL — Rapidly rising fuel prices and the sluggish North American economy are expected to batter truck and train companies´ second-quarter results, says RBC Capital analyst Walter Spracklin.
Declining freight volumes, the impact of foreign exchange rates and significant flooding in parts of the U.S. Midwest have d a pessimistic sentiment ahead of the sector´s quarterly financial reporting, which begins on Monday.
In a report to investors, Spracklin said he expects Canadian railway companies will underperform their U.S. peers.
He expects earnings per share for Montreal-based Canadian National Railway (TSX:CNR) will fall 10.5 per cent to 85 cents, while Calgary-based Canadian Pacific Railway (TSX:CP) should 6.5 per cent to $1.05 compared to a year ago.
Burlington North Santa Fe (NYSE:BNI), by contrast, is expected to increase its EPS by eight per cent to US$1.30, from $1.20 last year.
Analysts expect CNR to report 87 cents EPS on Monday, while they estimate CP will come in at $1 on Tuesday, according to Thomson Financial.
Fuel surcharges and higher pricing are expected to contribute to a 3.8 per cent growth of revenues for Canadian National and 3.6 per cent for CP.
The primary concern for CN is the forest products sector, which has ped dramatically due to the U.S. housing crisis. The sector accounts for 22 per cent of the railway´s revenues.
Lower than expected volumes of grain _ which accounted for 21 per cent of 2007 revenues _ was responsible for a 1.7 per cent volume decline at Canadian Pacific.
Spracklin said there´s a risk that the railway´s numbers will come in below his estimate.
“We believe that the significant rise in fuel costs are being worsened by the lag in fuel cost recovery from surcharges,” he wrote, adding that weak carload volumes were reported in several key segments, including grain, chemicals, autos and metals & products.
The gloomy outlook also extends to trucking firms, which continue to be punished by an extremely difficult operating environment.
“Given the pronounced negative impact fuel costs have on the trucks´ bottom line and the impact of the strong Canadian dollar on cross-border shipments, we do not expect to see any positive catalyst that could spark any relief for the trucks,” Spracklin wrote.
A tapering off of acquisitions and negative organic growth will mean slower revenue increases for most Canadian truckers.
But acquisitions are expected to boost TransForce (TSX:TFI) revenues by 10.7 per cent in the quarter.
Analysts expect that the Quebec-based company, which recently converted from an income trust, will report July 29 that earnings per share will fall 26 per cent to 23 cents.
Management has indicated that the company is on track to achieve its 2008 guidance despite the challenging market conditions.
“With specialized services representing 27 per cent of 2007 revenues, TransForce is better positioned than the other pure trucking companies to weather the storm,” Spracklin said.
He said CNR continues to be a good rail buy for investors because of its relatively low share price.
Among the trucking firms, he favours TransForce, ATS Andlauer Income Fund (TSX:ATS.UN) and among the niche players Cargojet Income Fund (TSX:CJT.UN) and Livingston International Income Fund (TSX:LIV.UN).
On the Toronto Stock Exchange, CN shares gained $1.61, or 3.29 per cent, to $50.58 Thursday. CP was up 86 cents to $66.38 and TransForce gained 20 cents to $7.50