CN shares jump as railroad shows price strength amid rising inflation | So Good News

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Canadian National Railway Co.’s shares rose to their highest since May after the company demonstrated its pricing power by reporting record revenue and earnings per share in the second quarter.

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The country’s largest railroad said profits rose 30 percent in the quarter ended June 30, as higher fuel surcharges and freight rates allowed the company to offset rising inflation. CN said after markets closed on July 26 that it had net income of $1.3 billion in the quarter, on revenue of $4.3 billion.

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Shares were trading at around $156 at midday in Toronto, up four per cent from the previous close.

“It is clear that the company is tracking ahead of targets,” Kevin Chiang, an analyst at CIBC World Markets, the investment banking arm of the Canadian Imperial Bank of Commerce, said in a note to clients, citing CN’s ability to “price above inflation” as one of the reasons they believe CEO Tracy Robinson will exceed their 2022 outlook.

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CN said the revenue growth also came from higher volumes of Canadian coal moving to West Coast ports for export. The railway transported around 30 per cent more carloads of coal in the second quarter, compared to last year. And revenues from coal rose 58 percent in the quarter, to $249 million. CN said the increase in coal exports was partly due to the fact that two Canadian coal mines reopened late last year as prices for the commodity rose.

Higher volumes of U.S. grain also contributed to CN’s overall earnings growth, as Canadian grain volumes have suffered in recent quarters due to last summer’s extreme drought across the prairies, which depleted local supplies. CN said revenue growth was offset by this decline in grain.

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CN said it expects the upcoming prairie grain harvest to be above the three-year average, or at least “in line” with that average when you exclude the impact of last year’s significantly lower volumes.

In the east, the railroad is trying to entice ships to use the port of Halifax – where CN offers the only rail service – instead of west coast ports.

CN chief marketing officer Doug MacDonald said the Halifax port is only at half capacity in terms of shipping containers, even though it offers the “fastest transit times from the East Coast to Montreal, Toronto, Detroit and Chicago.”

The company’s plan is to convince more shippers to route cargo from Southeast Asia through the Suez Canal, rather than crossing the Pacific Ocean to one of its West Coast ports. “From a cost and time perspective, it’s just as easy to get through the Suez Canal to the East Coast,” MacDonald said on a call with financial analysts.

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Earnings per share at the railroad rose to a record $1.93 in the quarter, on an adjusted and diluted basis, up 30 percent from a year earlier. The result exceeded analysts’ expectations of $1.76 per share, according to the Wall Street Journal.

“Our team has the network up and running, demonstrating improvements in service levels to our customers,” Robinson said in a press release.

Admittedly, the quarter was not without challenges. Some of the railway’s customers have reported delays at ports due to backlogs across Canadian rail lines.

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So far this summer, global shipping company Maersk A/S has warned its customers three times about “significant congestion” in the Canadian rail system. At the port of Prince Rupert, BC, for example, containers have waited as long as 25 days, or more, to be picked up by a train from CN, or its rival Canadian Pacific Railway Ltd.

In its latest update, on July 15, Maersk said CN is still restricting the flow of eastbound rail freight from Price Rupert to ensure “they don’t lock up” facilities in Toronto. Jonathan Abecassis, a CN spokesperson, told the Financial Post’s Robert Shelton that the backlog in Toronto was due to a lack of warehouse and trucking capacity in the city.

CN has also faced labor problems recently, after negotiations broke down with the International Brotherhood of Electrical Workers (IBEW), which represents CN’s signal and communications workers. These workers walked off the job on June 18 in a strike that lasted 16 days. They returned to work on July 6, after both sides agreed to binding arbitration.

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CIBC’s Chiang cited CN’s determination to “get ahead of demand” as one of the reasons he thinks the stock could rise to around $167. While the major U.S. railroads have struggled with “service issues,” Chiang observed that CN has hired about 850 railroad workers since the end of 2021 and plans to add 47 locomotives and 500 grain cars to help them cope with what’s about to shape up. to be a bumper crop this autumn.

CN reiterated that they expect growth in earnings per share of between 15 per cent and 20 per cent this year. Chiang called it “conservative” and predicted 21 percent growth based on the latest numbers.

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