Lower volumes, higher pension costs, strained labour relations and uncertainty over sustained growth prospects are among the challenges facing Canada’s two major railway companies as they prepare to unveil their latest quarterly earnings reports.
Canadian National Railway Co. and Canadian Pacific Railway Ltd. both experienced weak grain shipments in the third quarter, although shipments are expected to rise in the fourth quarter, thanks to a bumper crop in
CN also has a pension deficit to deal with, while CP continues to roll out its strategy to improve efficiency, in the hope of further reducing its operational costs.
Canaccord Genuity analyst David Tyerman said in a recent note that “much of the near-term growth is already reflected in CN’s share price.
“We forecast solid but lower-than-normal [earnings-per-share] growth for CN in [the third quarter of 2013] due to low volumes and ongoing pension and depreciation headwinds, partially offset by benefits from a weaker Canadian dollar.”
Meanwhile, CN is also looking at a possible lockout or strike action beginning Oct. 28, after the breakdown of talks with the union, that could have a negative impact on operations.
Mr. Tyerman’s third-quarter share-profit estimate for CN is $1.62, in line with consensus estimates.
Raymond James analyst Steve Hansen recently downgraded CN to “market perform” from “outperform” because of strong share-price performance that has far outpaced stock indexes of late. CN shares are up more than 12 per cent over the past six weeks.
Over at CP, Mr. Tyerman sees strong third-quarter earnings-per-share growth, owing to operating ratio improvements. Operating ratio compares operating costs with sales.
His third-quarter EPS estimate is $1.70, slightly below the consensus estimate of $1.72.
David Cockfield, managing director and portfolio manager at Northland Wealth Management, says he’s expecting both companies to do “reasonably well” in the third quarter.
“It’s not going to be a super-duper quarter, but better than some have been predicting,” he said, adding that both railways are in good enough shape to raise their dividends but that investors shouldn’t hold their breath.
CN is scheduled to release its quarterly earnings on Tuesday, followed by CP on Wednesday.