Railways expected to pick up speed
July 21, 2008
Source: The Globe and Mail
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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
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
"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."