Canadian railways outperform U.S. rivals in Q4 but petroleum helps 2012 numbers

MONTREAL – Canada’s two large railways outperformed their U.S. rivals in the fourth quarter although rail companies on both sides of the border were helped last year by a surge in traffic for petroleum products.

Walter Spracklin of RBC Capital Markets said Canadian railway freight volumes were up 2.6 per cent overall in the final quarter of 2012 on strong intermodal, agricultural products and chemicals carloads.

American railways, meanwhile, suffered a 1.8 per cent volume decrease, largely as a result of a decline in coal and grain shipments.

While the volume trends were in line with guidance provided by the railways in the third quarter, Spracklin is raising his earnings forecast for Montreal-based Canadian National Railway (TSX:CNR) by four per cent to $1.45 per share on superior volume trends and to $5.65 per share for the year.

The consensus forecast of analysts is $1.40 per share for the quarter and $5.59 for the year.

CN, the larger of Canada’s two major railways, had the highest volume growth of all Class 1 railways in the quarter, rising 3.4 per cent, or 8.4 per cent on an RTM (revenue per ton) basis.

Canadian Pacific Railway (TSX:CP) saw volumes increase 1.1 per cent.

CN larger size weighted the overall percentage volume increase of Canada’s railways to 2.6 per cent.

Among other things, CN’s improvement was fuelled by new intermodal contracts, robust traffic at Canadian West Coast ports and a 15.3 per cent growth in agricultural products due to a strong Canadian crop, as well as a less robust quarter for comparison last year.

“We believe CN will target high single-digit earnings growth in 2013, in line with our current forecast,” Spracklin added in a report, noting that guidance will be announced with fourth-quarter and year-end results on Jan. 22.

The railway has forecast that 2012 adjusted diluted earnings by share would grow by up to 15 per cent over the $4.84 earned in 2011.

Spracklin also boosted his target price for CN by $1 to $93 per share on the expectation that it will retain volume in fiscal 2014 that he had expected to be recouped by Canadian Pacific.

He lowered his EPS forecast for CP last month by three per cent to $1.26 per share and says volume trends in the fourth quarter failed to meet the company’s forecasts.

“We expect these disappointing freight patterns to result in downward estimate revisions.”

Volume growth at CP Rail included 6.7 per cent growth in chemicals carloads along with modest volume growth in four of seven other segments. However, it sustained “notable” declines in forest products, metals and minerals.

The speed of its trains increased by 2.2 per cent in the quarter, the lowest increase in the year.

Spracklin is maintaining his target price for CP shares at $91.

“We continue to believe that the new management team’s operating plan will result in materially higher efficiency, productivity and ultimately earnings at CP. However, we believe CP’s share price has gotten significantly ahead of this improvement and consider much of the optimism to be fully priced in.”

The Association of American Railroads said 2012 was a mixed year for U.S. rail traffic with carloads falling 3.1 per cent to 14.7 million, but with intermodal volume reaching its second-highest level since a record year in 2006.

Twelve of 20 product categories showed increases, led by a 46.3 per cent jump in petroleum products. Vehicles and parts were up 16.5 per cent; stones, sand and gravel were 7.9 per cent higher and lumber products were up 13 per cent. Coal was down 10.8 per cent, grain off 9.5 per cent and metallic ores down 5.7 per cent.

Excluding coal and grain, U.S. rail carloads in 2012 were up 4.9 per cent over 2011, the third year-over-year annual increase.

“Coal and grain typically account for around half of U.S. rail carloads, so when they’re down, chances are good that overall rail carloads are down too, as we saw in 2012,” said association senior vice-president John Gray.

Total volume for Canadian railways increased two per cent to four million carloads last year, while trailers and containers were up 6.6 per cent from 2011 to nearly 2.7 million.

Petroleum products were up 30.1 per cent, while autos were up 9.1 per cent, sand up 4.4 per cent, lumber up 7.2 per cent and coal up 4.8 per cent. Non-grain farm products were down 5.1 per cent, non-metallic minerals off 9.7 per cent, pulp and paper down 5.8 per cent and chemicals off 5.7 per cent.

On the Toronto Stock Exchange, CN’s shares closed up eight cents at $90.65, while CP’s shares were off 53 cents at $105.55.