CN cuts profit forecast amid weak demand, stronger loonie

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Canadian National Railway Co. cut its profit expectations for 2016 amid weak demand for freight shipments and a stronger Canadian dollar.

Montreal-based CN said revenue fell by 4 per cent in the first quarter to $2.9-billion as profit rose by 13 per cent to $792-million or $1 a share.

Analysts expected revenue of $3-billion and per-share profit of 92 cents for the three months ended March 31.

CN downgraded this year's forecast for per-share profit to $4.44, or about the same as last year, after earlier predicting profit would rise by about 5 per cent.

"We're chasing every carload. We're holding our own but the overall volume is down," Claude Mongeau, CN's chief executive officer, said on a conference call with analysts.

Like other railways in Canada and the United States, CN is facing declining freight volumes amid weak economic conditions and slowing demand for such bulk commodities as iron ore and coal. Carloads at CN and Canadian Pacific Railway Ltd. are down by 6 per cent this year, including their U.S. operations, according to the Association of American Railroads.

The number of crude oil carloads CN hauled fell by half to 14,000, and the commodity has become the least profitable of the company's bulk lines, said Jean-Jacques Ruest, CN's operating chief.

"With the collapse in energy markets, Brent crude purchased by the refineries was very cheap and affordable and there was plenty of pipeline capacity to go around," Mr. Ruest said. "Those two things are making crude by rail broadly unattractive."

Coal carloads fell by 31 per cent, metals and minerals declined by 25 per cent and grain and fertilizer slipped by 5 per cent. Automotive carloads rose by 21 per cent. Volumes of energy-related cargo – coal, oil and sand used for hydraulic fracturing – will continue to fall this year, the company said.

"We are doing what we can to protect profitability," Mr. Mongeau said, pointing to faster trains and greater productivity that contributed to the company's industry-leading operating ratio of 58.9 per cent. (An operating ratio is a closely watched measure of expenses and revenue; lower is better.)

CP last week reported a 5-per-cent drop in first-quarter revenue and a 69-per-cent increase in profit to $540-million.

Benoît Poirier, a stock analyst with Desjardins Securities Inc., said in a research note he is "cautious" about investing in CN and CP. "The stronger Canadian dollar and [weak oil] prices, combined with the ongoing uncertainty in the macro environment, are key factors that will likely pressure both stocks in the coming months," said Mr. Poirier, who downgraded CN shares to "hold" from "buy" after the price rose by 20 per cent from a 52-week low.

CN is Canada's largest railway, with 23,000 employees and 32,000 kilometres of track that reaches three coasts, in Canada and the United States. CN's share price has risen by 4 per cent in the past 12 months, compared with a 22-per-cent decline at CP. The Toronto Stock Exchange has fallen by 10 per cent in the same period.

Walter Spracklin, an analyst at Royal Bank of Canada, said CN's exposure to consumer goods and lower focus on bulk commodities make it a "preferred name" he rates as "outperform." CN's container operations in Vancouver and Prince Rupert, B.C., let the company capitalize on rising cargo shipments to and from Asia.

"With about 5 per cent of containers loaded on the West Coast destined for the U.S., CNR's faster single-line access into the U.S., efficient loop around Chicago and access in southern states and ports represent key advantages in capturing greater market share," Mr. Spracklin said in a note to clients, adding that container terminal expansions in Milton, Ont., Detroit, Joliet, Ill., and Memphis will let the company manager greater volumes.