OTTAWA — An earnings warning that prompted a sharp drop in Canadian National Railway Co.’s shares yesterday should not obscure the fact profits will still grow this year, says Paul Tellier, president and chief executive.
The National Post reports that CN’s stock fell as much as $5.39 before recovering slightly to close down $4.08 at $61.20 following a warning after markets closed on Wednesday.
CN said 2002 earnings growth will be at the low end of its 5%-to-10% target due to a drop in grain shipments brought on by drought in Western Canada.
“This company will be producing in excess of $1-billion of earnings, which is a pretty good margin on a business of $6-billion,” Mr. Tellier said in an interview. “This is shaving our earnings per share growth, this is not moving into the red.”
Although the crop crisis was well known before Wednesday — and reflected in the drop of CN’s shares from $80 in early July — Mr. Tellier said the company acted as quickly as it could to quantify the impact.
The decision to warn came after it was realized there was no hope of offsetting the grain losses with cost cutting because expenses, such as healthcare in the United States, are rising, he said.
“We are not running this business by looking at the stock price every evening. We are trying to trend down costs as much as we can … but [the grain crop problem] is of such a proportion that there is no way, even if the rest of our business is doing extremely well,” he said.
CN plans to provide a clearer outlook for the rest of the year and 2003 when it reports third-quarter results Oct. 22, although that is inherently difficult because grain depends on the weather, he said.
Several analysts downgraded CN. John Barnes of Deutsche Bank Securities and Jill Evans of J.P. Morgan Securities both lowered CN to “market perform” from “buy,” citing diminishing earnings prospects that could linger for several quarters.
CN was not the only company to issue a warning on Wednesday as CSX Corp. said it will miss consensus earnings estimates because of weaker coal shipments. The malaise spread throughout the sector, knocking down Standard & Poor’s rail index 6.8%.
Canadian Pacific Railway Co. was also affected, its shares falling $2.30 to $29.70. Bob Fay, an analyst at Canaccord Capital, lowering his price target to $30 from $34.
Len Coccolichio, a spokesman for CPR, said the company does not intend to provide further earnings guidance until its third-quarter presentation on Oct. 22.
While two-thirds of CPR’s grain originates from parts of the United States and Canadian prairies less affected by drought, he noted that CPR has always said grain is a “wildcard” and is part of the reason the company is saying it expects growth in the lower end of the 3%-to-5% range.
Although it was a down day for the rail market, Dominion Bond Rating Service Ltd. issued a relatively upbeat report on the sector that lauded the two major Canadian carriers as industry leaders.
In particular, it noted the sector has enjoyed significant cost cutting and productivity gains, there is good cash flow and low-cost growth opportunities through alliances.