A deepening slump in railways' energy shipments has analysts and even the companies themselves revising forecasts for profits, share prices and freight volumes.
The industry-wide re-think comes as the number of carloads hauled by North American railways has declined by about 2 per cent this year, led by steep plunges in carloads of coal, oil and grain.
But Credit Suisse analyst Allison Landry said consensus expectations for profits and share prices still are "too high" for the six big publicly traded railways.
Ms. Landry on Friday slashed her estimates for the rail sector, including Canadian Pacific Railway Ltd. and Canadian National Railway Co., citing lower-than-expected quarterly freight volumes and recent comments from management. "Our updated second quarter [earnings per share] estimates are on average 7 per cent lower than the consensus," Ms. Landry said in a research note.
U.S. carloads of coal have fallen by 13 per cent since the beginning of the year as power plants have begun buying cheaper natural gas and steel plants have cut production, according to the American Association of Railroads.
The latest blow to the coal market came on Thursday when Teck said it was idling six B.C. mines.
Carloads of petroleum and related products are down by more than 6 per cent since the first week of January after a plunge in oil prices to about $60 (U.S.) from $100 in the summer. Both Canadian rail companies, CP and CN, have already cut their forecasts for expected crude and energy-related shipments this year.
Grain shipments, meanwhile, are down by 9 per cent in the United States and flat in Canada, year-to-date, as low prices prompt farmers and traders to store supply rather than sell, and a carry-over from the 2013 bumper Canadian crop tapers off.
CN was prepared for the slowdown in coal shipments but not the "significant decline" shipments of oil, frac sand and energy-related commodities in the second quarter, said Luc Jobin, the company's chief financial officer.
"A big portion of the challenge has to do with the [price] spread, but there is also a competition, there is a little bit more pipeline capacity coming on in certain places," Mr. Jobin said.
"It's going to be a challenging ride for the balance of the year … because the visibility from our [energy] customers is not great," Mr. Jobin said on Friday in a presentation to investors in New York.
Mr. Jobin said the company is sticking with its forecast for "double-digit" per-share earnings growth for the full year – aided by strong housing-related and intermodal shipments, even as overall revenue per ton-mile is down 7 or 8 per cent in the second quarter.
An index of four U.S. railways is down by 14 per cent this year, compared with a 3-per-cent rise in the benchmark S&P 500 index. CN and CP are both down by 8 per cent on the Toronto Stock Exchange.
Credit Suisse's Ms. Landry said the slide in rail stocks is nearing an end, but shares might not rise until the second quarter is over and freight volumes stabilize while service levels improve.
At current share prices, Ms. Landry said CP, CN and Union Pacific Corp. are oversold. CSX Corp. and Norfolk Southern, meanwhile, are priced "optimistically, or 5.5 per cent above consensus profits."
With contributions from David Leeder.