Increase in carloads expected to drive CN profit higher

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Double-digit growth in carloads is expected to drive up profit at Canadian National Railway.

The Montreal-based railway is expected to report second-quarter per-share profit of $1 a share after markets close on Monday.

Higher revenues and a lid on rising costs should help CN hit an operating ratio of 60, for the April to June period, Salman Partners analyst Kam Mangat said in a research note. An operating ratio, which compares expenses against revenue, is a closely watched measure of a railway's efficiency.

Ms. Mangat recently raised her outlook for CN's quarterly results to 99 cents, pointing to CN's industry leading 11-per-cent increase in carloads – almost double her forecast – led by shipments of grain (up 47 per cent), coal (29 per cent) and intermodal (15 per cent).

"We attribute CNR's robust volumes to new contracts, the record Canadian crop, and the rapid recovery of network fluidity following significant weather-related disruption in the first quarter," said Walter Spracklin, an analyst with Royal Bank of Canada.

North American railways are enjoying surging freight volumes after a harsh winter that clogged networks and backlogged traffic.

Shares in CN's Calgary-based rival, Canadian Pacific Railway, last week rose by 5 per cent after it beat profit expectations for the quarter.

CN shares have risen by 20 per cent this year, outpacing the S&P/TSX composite index by 8 percentage points.

Fadi Chamoun, an equities analyst with Bank of Montreal, expects accelerating earnings growth in the coming quarters at CN, based on measurements he described as "best in class:" execution, operating margin and return on invested capital.

"The balance sheet is very strong and affords the company the ability to support growth and increase dividends," Mr. Chamoun said in a note to clients.