A CN locomotive makes it’s way through the CN Taschereau yard in Montreal, Saturday, Nov., 28, 2009. THE CANADIAN PRESS/Graham Hughes
MONTREAL - The worst may be behind them, but Canadian railways should only see a gradual improvement in shipping volumes in the second half of the year despite nascent signs of an economic recovery, industry analysts say.
Canadian National Railway (TSX:CNR) and Canadian Pacific Railway (TSX:CP) saw soft volumes in the fourth quarter, especially compared with weak results a year ago.
"Although evidence supports a continued economic turnaround, we believe the recovery will be gradual," says David Newman of National Bank Financial.
Overall industry carloadings were down 7.6 per cent in the period, a significant improvement from a 22 per cent drop in previous months.
Canadian railways outperformed their U.S. peers. Carloads decreased by 3.9 per cent in Canada and by 8.5 per cent south of the border.
CN was the best performer, with volumes falling about 2.5 per cent in the quarter, lead by metals, forestry products and autos.
However, ton miles or the movement of a ton of freight over one mile, fell by 0.6 per cent.
CP volumes were down 6.2 per cent in the quarter, better than the 7.6 per cent group average.
Offsetting weaker volumes, CN continues to realize higher prices, with half of its contracts in 2010 renewed at four to five per cent price increases, Newman wrote in a report.
However Newman lowered his forecasts for the railway as he projects a deterioration in its operating ratio. He expects the country’s largest railway will earned 86 cents per share in the quarter, down from $1.12 last year.
Fuel costs and a weaker U.S. dollar could negatively impact the results.
CN remains a core holding for the long-term, however, because of its industry-leading operating ratio, strong balance sheet, healthy cash flows and growth prospects, Newman added.
"CN should be amongst the first to recover, especially given many of its end markets have been depressed far longer."
Walter Spracklin of RBC Capital Markets said the improving trends in the fourth quarter paves the way for a better 2010.
"Without a doubt, 2009 was a challenging year that saw significant declines in freight volumes across all segments," he wrote in a report.
Cost-cutting should position railways to profit once volumes return, Spracklin said.
While this "operating leverage" will be common among most North American carriers, he favours CP in this environment.
Spracklin expects that investors will focus more on earnings growth during an economic recovery than on historical results. Consequently, the focus will be on a normalized year in 2011 than on earnings during the 2010 recovery year.
On the Toronto Stock Exchange, CN’s shares closed at $55, down 34 cents, while CP shares decreased 91 cents to $54.24.
