CN Rail bumps up profit forecasts after $4.5B in revenues with `busy' Q4 ahead
Rise in freight rates and fuel prices gives boost despite merger termination fee
Canadian National Railway Co. is raising its annual profit forecasts after reporting record revenues in the third quarter.
Revenues at CN, Canada's largest railway, jumped by $922 million in the quarter to $4.5 billion — an increase of 26 per cent compared to last year, which the company said was mainly due to the fact that it increased its freight rates and charged more for fuel, due to higher fuel prices. CN also benefited from a “positive translation impact of a weaker Canadian dollar,” the railway said in a financial update on Oct. 25.
The gains drove record operating income of $1.9 billion, up 44 per cent year over year in the third quarter, which ended on Sept. 30. Earnings per share dropped 10 per cent to $2.13, only because the year-over-year comparison was distorted by an $886-million merger termination fee that CN received in the third quarter of 2021 after its bid to take over Kansas City Southern fell apart. But ignoring the impact of that termination fee, EPS of $2.13 represented a 40-per-cent increase on an adjusted basis, above forecasts of $2.01.
In a note to investors, RBC Capital Markets analyst Walter Spracklin called the performance a “solid beat.”
The results prompted CN to update its official outlook for 2022, raising forecasts on adjusted EPS growth to “approximately 25 per cent,” up from a previous forecast of 15 to 20 per cent.
CN chief executive Tracy Robinson said the railway is expecting “a busy fourth quarter” due to the grain harvest across the Prairies, which Statistics Canada is forecasting to be around 75 million tonnes.
The railway said it moved over 806,000 tonnes of grain from Western Canada last week, beating its previous record by more than 50,000 metric tonnes. CN chief financial officer Ghislain Houle said that would make for a “top five alltime” grain crop in Canada.
“This record also comes on the heels of CN'S second-best September ever for grain movement from Western Canada, with over 2.64 million metric tonnes moved,” CN said in a statement earlier this week.
But grain exporters are complaining that CN and its main rival, Canadian Pacific Railway Ltd., still aren't keeping up with orders for grain cars. This year is one of the most anticipated Canadian grain harvests in memory, after the war in Ukraine destabilized one of the world's most important bread baskets and sparked volatility in commodity markets. Canadian grain exporters and farmers, still reeling after an extreme drought cut yields by nearly 40 per cent last year, have been eager to get the new grain to port to capitalize on demand.
The railways, however, haven't been able to keep up, according to weekly order fulfilment reports from the Ag Transport Coalition. CN and CP only provided 70 per cent of all grain cars ordered by elevators in the week of Sept. 18, marking a “significant decline” from 83 per cent the previous week, according to the coalition of grain industry lobby groups. That fulfilment rate consistently improved, through September, hitting 86 per cent by the first week of October — though the coalition said that is still “below the 90 per cent threshold.”
In its financial update, CN said it moved three per cent more car loads of grain and fertilizer in the third quarter compared to last year. Revenues from grain and fertilizer shipments rose $621 million, an increase of 22 per cent over last year. The railway made almost a full dollar extra on every tonne of grain and fertilizer it shipped per mile. In the last quarter, it earned $5.20 per tonne for each mile shipped, compared to $4.33 last year.
“We saw a rapid uptick in Canadian grain starting in September when the new harvest started coming off the field,” chief marketing officer Doug Macdonald told investors on a conference call on Tuesday. “We were quick to deploy resources and our customers are very impressed with how the whole team, both commercial and operations, came together to efficiently meet the surge in traffic.”
This record also comes on the heels of CN'S second-best September ever for (Western Canada) grain movement.