CN Rail Profit Beating Estimates Shifts Earnings Spotlight on CP

North American railroads are three-for-three in beating analysts’ profit estimates even as cargo volumes shrink. Now Canadian Pacific Railway Ltd. is in the spotlight.

Canadian Pacific reports second-quarter results on Tuesday, following Monday’s earning surprise from Canadian National Railway Co., the country’s largest carrier. A hiring freeze and 600 layoffs helped Canadian National boost its financial performance and reaffirm its full-year forecast.

“The fact they maintained the guidance for 2015 is the most important takeaway,” Jeff Nelson, an analyst at Edward Jones & Co., said in a telephone interview. “They’re taking cars out, taking headcount out and improving all their key metrics.”

Earnings excluding one-time items of C$1.15 a share topped the C$1.05 average of 26 analyst estimates compiled by Bloomberg. Last week, CSX Corp. and Kansas City Southern both reported results exceeding estimates, leaving the major North American carriers 3-for-3. Canadian Pacific’s release on Tuesday will be followed by Union Pacific Corp., the region’s biggest carrier, on Thursday.

Operating expenses at Montreal-based Canadian National fell 5.1 percent to C$1.76 billion ($1.35 billion), sparking a 3.2 percentage point improvement in the operating ratio -- a widely watched measure of railroad productivity -- to 56.4 percent. Revenue was little changed at C$3.13 billion, matching analysts’ average forecast.

Costs Dropped

Fuel costs dropped 32 percent while labor, the company’s single biggest expense, fell 3.2 percent to C$542 million. The railroad will recall most of the laid-off employees in 2016 because the company’s worker attrition rate runs at about 10 percent a year, Chief Operating Officer Jim Vena said on a conference call.

Canadian National also said it’s sticking to a forecast calling for an increase of at least 10 percent in 2015 per-share profit from last year’s C$3.76 -- implying earnings of at least C$4.14. Analysts including Benoit Poirier of Desjardins Capital Markets had predicted Canadian National would probably revise its 2015 outlook.

The company rode a 17 percent increase in car shipments and a 2 percent gain in intermodal cargo to overcome declines in grain and energy-related products. Revenue also benefited from the 11 percent decline in the value of the Canadian dollar against its U.S. counterpart.

Carload growth should be “fairly flat” for the rest of the year, Chief Marketing Officer Jean-Jacques Ruest said on the conference call.

Canadian National parked about 200 of its less productive locomotives and about 10,000 railcars to improve efficiency, Vena said.

The rail company’s shares have declined 1.1 percent this year, closing at C$78.95 in Toronto Monday before results were released.

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