Long, difficult winter bound to affect CN’s earnings

The Canadian winter: How quickly it exits with the spring rain.

But transportation analysts haven't forgotten, and they expect Canadian National Railway Co.'s profits to have been dampened and operating costs worsened in the company's first-quarter earnings to be released on Monday after financial markets close.

Yet most analysts see this as a return to the norm after an unusually mild winter last year. As a result, CN's operating ratio (which is the percentage of revenue over costs and is a key indicator of a railway's efficiency) worsened to 68.1 per cent as costs rose in the quarter from 66.2 per cent a year ago, estimates Scotia Capital analyst Turan Quettawala.

"Winter-related expenses should cascade through various line items – most notably labour, fuel and rent expenses," he said in a recent report, although the higher-than-expected, 4-per-cent rise in shipping volume is seen helping to offset winter costs.

"CN's operating metrics are already showing an improvement, and we believe that this trend will continue as the weather issues ease. There is no doubt that the winter has been particularly difficult in 2013, especially when compared to last year. However, we believe the key will be how fast CN can recover from these difficulties," Mr. Quettawala said.

He foresees CN's first-quarter 2013 earnings at $1.19 a share, roughly in line with $1.18 in the same quarter last year. He also feels CN shares could outperform other Canadian railways stocks in the near term, rating it "sector outperform," compared to "sector perform" for shares of Canadian Pacific Railways Ltd., which many industry watchers feel have gotten too high as that railway continues its company-wide restructuring.

Although railway earnings are often a miniature portrait of the health of the overall economy, many non-economic trends can add surprises. And the first quarter was no exception.

TD Securities' Cherilyn Radbourne noted a number of uncommon factors: Utilities generally have a high stockpile of coal; the grain shipments are still affected by last summer's drought in the United States; while crude oil shipments by rail have surged as the energy sector fluctuates. These factors, plus growth in container shipping, have helped carload volumes increase. But take these factors away, and volumes are largely flat. So company watchers should expect a set of factors keeping CN earnings steady. And also noting the worse winter, Ms. Radbourne has revised down her CN estimate to $1.24 per share for the quarter.