Canadian rails hurt by cold weather but outlook bright for 2014, says analysts

MONTREAL – The outlook for Canada’s two largest railways remains bright for 2014 even though the year got off to a rocky start due to winter weather woes and a fiery derailment.

Total volumes shipped in the first week of the year decreased 4.4 per cent as bone-chilling cold swept much of the continent.

Canadian National Railway’s (TSX:CNR) carloads declined 4.4 per cent for the week ended Jan. 4 as an 8.8 per cent decrease in bulk shipments was partially offset by 2.9 per cent growth in intermodal, according to the Association of American Railroads.

Total carloads shipped by Calgary-based Canadian Pacific Railway (TSX:CP) slipped 4.5 per cent as bulk shipments decreased 4.8 per cent and intermodal volumes were down 4.2 per cent.

CN and CP both said the entire North American rail industry was effected by extreme weather in the first two weeks of the year.

“CN was no exception, with extremely cold weather affecting operations across Canada, as well as its northern U.S. network,” spokesman Mark Hallman wrote in an email.

CP spokesman Ed Greenberg said the extreme weather caused temporary slowdowns.

“Now, as conditions improve, we are returning to strong performance levels,” he said.

CN’s year also got off to a difficult start when one of its freight trains derailed Jan. 7 near Plaster Rock, N.B., and caught fire.

About 150 people were evacuated when the 122-car train derailed, with 19 cars and one locomotive leaving the tracks. Five of the derailed tanker cars were carrying Western crude oil to an Irving Oil refinery in Saint John, N.B., while four tankers carried liquefied petroleum gas.

The suspected cause is a cracked wheel, but Hallman said there’s no indication that weather was a contributing factor.

Analysts say weather will put pressure on Canadian rail results when CN and CP report later this month.

Analyst Walter Spracklin of RBC Capital Markets wrote in a report that he expects both railways will underperform U.S. carriers, citing the extreme cold temperatures, shortened train lengths and increased labour costs among other things.

Analyst Turan Quettawala of Scotiabank said the cold weather should “cascade” through CN’s income statement compared with last year when weather was not a major negative factor.

He expects the railway’s operating ratio, a measure of productivity where lower numbers are better, will increase to 64.9 per cent from 63.6 per cent in the fourth quarter of 2012.

The two analysts reduced their fourth-quarter estimates for Montreal-based CN.

The country’s largest railway was expected to have earned 79 cents in adjusted profits in the quarter on $2.76 billion of revenues, according to analysts polled by Thomson Reuters. That compared with 71 cents on $2.5 billion in revenue in the prior year. For the full year, adjusted profits are expected to have increased seven per cent to $2.6 billion or $3.09 per share, on $10.6 billion of revenues.

At CP, adjusted profits are forecast to have surged 51 per cent to $1.94 per share on $1.6 billion of revenues in the quarter. That compared with $1.28 per share on $1.5 billion of revenue in the 2012 quarter. Full-year adjusted profits are forecast to have risen 50 per cent to $1.1 billion or $6.47 per share on $6.15 billion of revenue.

CP is expected to issue its 2014 revenue and earnings guidance with its results. CN should reiterate its forecasts provided during an investor day in December and announce a dividend increase of at least 15 per cent, said Quettawala.

And analysts say weather challenges in the quarter shouldn’t dampen investor enthusiasm because of positive trends for agriculture with a record Canadian grain crop, the continued growth of crude-by-rail and intermodal demand.

“We expect CN to deliver another record volume year in 2014 based on recent contract wins and positive trends across the company’s book of business. CP has strong volume prospects due to the company’s high exposure to strong grain and petroleum products markets,” Spracklin wrote in a report

On the Toronto Stock Exchange, CN’s shares closed down 54 cents to $58.29 in Tuesday trading. CP’s shares gained 27 cents to $163.71.

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