Railways expected to pick up speed
Published: July 21, 2008
Source: The Globe and Mail
Printer friendly version

It's been a tough quarter for Canadian railways — flooding in the U.S. rendered tracks useless, a strong dollar wiped out efficiency gains, fuel prices ate into profits and demand for forestry products slumped.

Still, Canadian National Railway Co. and Canadian Pacific Railway Ltd. shares are up this year, 10 per cent and 4 per cent, respectively, as investors bet that locomotives will replace transport trucks as an environmentally friendly way to haul commodities from coast to coast.

"Rail is both a cheaper and greener way to move freight, even if it may take a little while longer," said Tom Varesh, who covers both railways for Canaccord Adams. "I think what we've seen in the last couple of months has definitely put pressure on railway stocks, and that weighs on some investors. But I'm looking for a strong second half of the year.' Analysts are looking for 87 cents a share when CN reports Monday at the market's close, down from last year's profit of 95 cents.

John Barnes, who covers railways for BB&T Capital Markets, warned that CN earns most of its revenue in U.S. dollars, but pays its costs in Canadian dollars. So, while the railway has raised prices to make up for rising fuel costs, much of the gains have evaporated.

"The weak U.S. dollar relative to the Canadian dollar has masked the pricing increases," Mr. Barnes said, adding that in past years investors could count on the weaker Canadian dollar to add "several pennies" to earnings per share each quarter.

Mr. Barnes said CN has fared better than its competitors in maintaining freight volumes as the economy worsens, but some key loads have been declining. Forest products are the most profitable to haul at $2,657 per car, but weakness in the U.S. housing market has seen shipments slip 0.4 per cent since 2003. Meanwhile, metals and mineral shipments have increased by 26 per cent — at $818 a load.

"Forest products have declined another 14.2 per cent year-over-year, year-to-date," he said. "It's a trend we expect to continue as the economy works through the excess supply of new homes in the market. Sure, other commodity prices have increased, largely filling most of the void. However, forest products command the highest revenue per carload by a significant margin."

Meanwhile, CPR releases second-quarter results Tuesday. A profit of $1 is forecast, down from $1.12 last year. Mr. Varesh is looking for 92 cents a share, with fuel and currency charges his main concerns.

"CP has faced various headwinds that negatively affected earnings," he said. "While these headwinds will likely result in another weak quarter, we believe the worst is behind the railway and we expect to see strong results in the second half of 2009."