CN says it’s on track to meet profit targets

Canadian National Railway Co. said Tuesday it is on track to meet its year-end profit targets while net profit decreased by one per cent to $958 million in the third quarter and the company’s operations face increased demand.

CN chief executive Luc Jobin said that as a result of volume growth, the company is increasing its investment in rail infrastructure by $100 million, bringing its capital program total to $2.7 billion, and hiring around 600 more people. “During the third quarter, and continuing through the rest of the year, we’ve been hiring across our network, particularly in Western Canada, as we remain focused on delivering superior service to our customers,” Jobin said in a statement.

The company’s diluted earnings per share increased by two per cent to $1.27 in the three months ended Sept. 30. CN’s quarterly revenue increased by seven per cent to $3.2 billion as the company saw revenue rise across several segments, including metals and minerals (up 31 per cent), coal (23 per cent) and its intermodal business (12 per cent).

The company reaffirmed its 2017 adjusted diluted earnings per share target of between $4.59 and $5.10. CN’s operating ratio, a measure of railway efficiency that calculates operating costs as a percentage of revenue, increased 1.4 points to 54.7 per cent.

The company said operating expenses increased mainly due to higher costs from increased volumes and higher fuel prices, which were partially offset by a tailwind created by the impact of a stronger Canadian dollar.

“This year, what you’ve seen is we’ve taken on board quite a chunk of business in one swoop and we’re going to be busy digesting that a little bit,” Jobin said on a call with analysts. “But frankly, we are going to be on our feet and prepared to absorb even more growth through 2018. There’s a little short term adjustment that’s required ... if you look long term, our return on invested capital is quite attractive.”

Earlier this month, RBC Capital Markets analyst Walter Spracklin said in a note to clients that CN could experience “growing pains” that could drive up higher operating costs and impact the volume growth on the bottom line.

“CN’s combination of sector leading volume growth and softer performance metrics for (the third quarter) suggests, in our view, growing pains to absorb growth,” Spracklin wrote. “This has dampened our expectations for the quarter; however, CN remains one of our preferred names and we believe the network congestion could prove temporary.”

Dan Sherman, an analyst with Edward Jones Investment, said while the market may be slightly disappointed on Wednesday that the company missed consensus results, the company is “doing exactly what they said they would do.”

“They are holding their operating expense ration at a pretty stable rate, right around 55 per cent, and growing shipment volumes in a major way,” Sherman said.

Last week, CN’s rival Canadian Pacific Railway Ltd. increased its 2017 guidance after another profitable quarter that saw revenues grow three per cent from the same time last year to $1.6 billion. The company reported a third quarter record operating margin — an industry measure of railroad efficiency — of 56.7 per cent.