CN Rail expects increased growth for 2012, benefits from CP Rail strike

MONTREAL – CN Rail (TSX:CNR) said Wednesday it now expects higher earnings for 2012 after boosting its second-quarter net profit to $631 million and increasing revenues by 13 per cent.

“If you look at it from a financial standpoint, our agenda is working,” chief executive Claude Mongeau told analysts during a conference call.

“We do have momentum,” Mongeau said.

CN revised its financial outlook upward, saying it will deliver up to 15 per cent growth in adjusted diluted earnings per share for the year despite an additional pension expense of approximately $100 million.

That compares with CN’s April outlook calling for 10 per cent growth in 2012 adjusted diluted EPS.

The Montreal railway also said it will generate free cash flow of approximately $1 billion, compared with April’s outlook calling for free cash flow of $950 million.

Canada’s largest railway had $1.44 earnings per diluted share, compared to year-earlier net income of $538 million, or $1.18 per diluted share.

Revenues increased 13 per cent to $2.54 billion for the quarter over the same period in 2011, including $40 million in incremental revenue from the short strike at rival Canadian Pacific Railway in May, CN said.

The operating ratio — a key performance metric in the railroad industry that calculates the percentage of revenues spent to operate the railroad — was 61.3 per cent, unchanged from the year-earlier.

“I think our second-quarter results showed a lot of strength,” Mongeau said.

But Mongeau did acknowledge that there could be an economic slowdown in the United States in the second half of this year and said he’s also keeping an eye on China’s economy.

Excluding grain and fertilizers, CN says it registered solid traffic increases in every commodity group in the second quarter and noted the increases were due to economic growth, market share gains and the strike at CP Railway.

Mongeau said the strike gave CN an opportunity to service some of CP Railway’s customers on short notice, adding he hopes in the future to “deepen” relationships with some of them, such as potash exporter Canpotex.

Adjusted earnings per share — which excluded a net income tax expense of six cents per diluted share — came in at $1.50, beating analyst estimates.

Analysts’ estimates compiled by Thomson Reuters put revenue at $2.51 billion for the second quarter, and earnings per share were estimated at $1.48.

In comparison, Canadian Pacific Railway Ltd. (TSX:CP) said a series of expenses, ranging from a nine-day strike in May to management transition costs, contributed to weaker second-quarter earnings.

CP Rail reported net income fell to $103 million, or 60 cents per share, in the three months ended June 30. That compares to a profit of $128 million, or 75 cents per share, a year earlier.

CN’s former chief executive Hunter Harrison is now president and CEO of competitor CP Rail.

When asked about Harrison leading CP Rail, Mongeau said he will focus on his own railway.

“We have one franchise to manage, we will have our hands full doing that,” he told analysts.

Harrison, 67, is credited with turning CN into North America’s most successful railway company — a track record lauded by Canadian Pacific’s largest shareholder in its push for change at the top.

CN argued during a highly public battle between CP’s former leaders and activist shareholder William Ackman that Harrison continued to have contractual obligations to his former employer.

In late June, CN issued a statement congratulating Harrison on his appointment but warning that it won’t be dropping a legal battle it launched earlier this year.

CN has said it was concerned that it will be difficult, if not impossible, for Harrison to perform his new duties for CP without drawing upon his broad knowledge of CN’s confidential information, which he is not permitted to do.

National Bank Financial Research analyst Cameron Doerksen noted that CN Rail’s adjusted EPS of $1.50 was ahead of estimates.

Doerksen also noted “some positive impact” from the CP Railway strike for CN Rail.

“This business is largely temporary, although it did allow CN to showcase its service with its competitor’s customers,” Doerksen said in a research note.

He said the outlook for CN Rail remains positive and has a share price target of $87.

“Given that the new guidance is close to in-line with our existing forecast, we do not expect to make any major changes to our estimates.”

Shares in CN Rail closed down 48 cents to $86.83 on the Toronto Stock Exchange.