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Canadian National Sees Soft 2nd Half as Bulk Market Slows

Canadian National Railway Co. (CNR), the country’s largest railroad, said it may face a “challenging” second half because of “softness” in shipping bulk products such as grain.

Chief Financial Officer Luc Jobin disclosed the company’s outlook yesterday on a conference call with analysts. Even so, the railroad reaffirmed its 2013 target of “high single-digit growth” for adjusted profit from C$5.61 a share in 2012.

“They are struggling through a little bit of a slower growth environment,” Jeff Nelson, an analyst at Edward Jones & Co. in St. Louis, said in a telephone interview. “The company will get through it. Things are just a little bit weaker than they were expecting.” Nelson rates Canadian National hold and doesn’t own the stock.

The comments came after the company reported adjusted second-quarter profit of C$1.66 a share, topping the average estimate of C$1.61 in a Bloomberg survey of 28 analysts. The railroad’s operating ratio, which compares expenses to sales, improved to 60.9 percent from 61.3 percent a year earlier, Canadian National said.

Including a gain of 3 cents a share on a transaction with another railway, net income rose to C$717 million ($694 million), or C$1.69 a share, from C$631 million, or C$1.44, a year earlier, the Montreal-based company said in a statement. Sales rose 5 percent to C$2.67 billion, buoyed by an 18 percent jump in petroleum and chemicals, Canadian National said.

Bulk Products

Canadian National released its results yesterday after the close of trading in Toronto. The stock fell 3.2 percent to C$101.69 at the close for the biggest drop amomg members of the Standard & Poor’s/TSX Industrials Index, cutting its gain this year to 13 percent.

Carload growth will be “muted” in the third quarter because of weak markets for coal, grain and fertilizer before shipments pick up in the fourth quarter, Chief Marketing Officer Jean-Jacques Ruest said on the call. The three bulk products together generated sales of C$570 million in the second quarter, the company said in a quarterly filing.

“While this leaves the full year guidance somewhat uncomfortably dependent on a strong fourth quarter, we believe that continued GDP-plus like growth in merchandise and intermodal, an expected ramp-up in crude on rail, and an average grain crop production volume should drive a strong ending for 2013,” Fadi Chamoun, an analyst at BMO Capital Markets, said yesterday in a note to clients.

Excluding some costs and gains, Canadian National may earn C$1.63 a share in the third quarter and C$1.61 in the fourth, according to data compiled by Bloomberg.

While bulk products struggle, the shipment of crude oil by rail is booming and growth is sustainable, Ruest said. Crude revenue more than doubled from last year’s second quarter to almost C$100 million, and Canadian National -- which now has 10 more loading stations than last year at the same time -- will continue to add terminals in western Canada, he said.

“Petroleum has been the shining star,” Nelson at Edward Jones said. “It continues to impress investors.”

Quebec Crash

Rail safety of crude shipments has come under scrutiny after a Montreal Maine & Atlantic Railway Ltd. train derailed in Lac-Megantic, Quebec, on July 6, killing at least 47 people and incinerating buildings in the town’s center. Officials are investigating the cause of the nation’s worst rail disaster since 1910.

Even though Canadian National wasn’t involved in the accident, the railroad sent staff to the crash site to help investigators and learn about its safety implications, CEO Claude Mongeau said yesterday on the call. Canadian National has begun to review its policies because of the accident, he said.

“We feel that our train securement policies are robust, but we are nevertheless reviewing them in light of the accident,” he said. “Before we conclude our assessment, we first need to understand what actually happened here. We don’t know at this point exactly what happened.”

The Lac-Megantic crash “will definitely raise questions in the public’s mind about the safety of crude-by-rail versus pipeline projects,” Benoit Poirier, an analyst at Desjardins Capital Markets in Montreal, said today in a note to clients. “The event may negatively affect” business at Canadian National and smaller rival Canadian Pacific Railway Ltd. (CP), he said.

To contact the reporter on this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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