CN's profit surges 21 per cent to $853 million in Q3 on record revenues

MONTREAL – Canadian National Railway said its net income surged 21 per cent to $853 million in the third quarter as revenues reached a record $3.12 billion on robust shipments of Canadian grain.

Excluding one-time items, the earnings for the period ended Sept. 30 amounted to $1.04 per share, a penny shy of expectations, and compared with net income of $705 million or 86 cents last year, which included a $19-million income tax expense.

Revenues grew 16 per cent from $2.7 billion as carloadings increased 11 per cent to 1.47 million and revenue-ton miles were up 13 per cent.

“Clearly we are growing much faster than the economy, which is our game plan,” CEO Claude Mongeau said Tuesday during a conference call.

CN’s operating ratio, a measure of efficiency, improved one percentage point to an all-time low of 58.8 per cent. Operating income increased 19 per cent to $1.29 billion.

The Montreal-based railway also said its board of directors has authorized the repurchase over the next year of up to 28 million common shares, representing 3.4 per cent of shares outstanding. CN repurchased 22.3 million common shares last year, returning $1.4 billion to shareholders.

CN (TSX:CNR) had been expected to earn $1.05 per share in adjusted profits in the third quarter, according to analysts polled by Thomson Reuters. Revenues were forecast to grow 16.6 per cent to $3.146 billion.

The railway saw its volume reach a record high in the quarter on record grain shipments of 5,000 hoppers per week and strong growth in energy markets.

“Contrary to some media reports, we are moving a lot of grain and we have the facts to support it,” chief marketing officer J.J. Ruest told analysts.

The federal government said last month that it would fine the railway for failing to comply with an order that it move a minimum amount of grain each week. But CN said weekly demand fell to about 4,500 cars per week on average for several weeks while waiting for the new harvest.

Mongeau said the network is back in sync and that CN maintained its market share at slightly above 50 per cent.

CN moved a record amount of grain last year, about 15 per cent more than the prior record and 20 per cent more than average. It estimates that 58 million tonnes will be available from the new crop that will keep the railway busy through spring or early summer.

Asked about potential railway mergers following Canadian Pacific’s (TSX:CP) interest in CSX, Mongeau said the changes would “likely start with the four railroads in the U.S. going down to two.”

CN maintained its full-year outlook to deliver solid double-digit EPS growth over $3.06 in adjusted diluted EPS last year and to generate free cash flow in the range of $1.8 billion to $2 billion, excluding major asset sales.

Analyst foresee strong growth prospects for CN in crude oil and frac sand, along with international intermodal from Prince Rupert, B.C.

Fadi Chamoun of BMO Capital Markets anticipates the railway will generate 14 per cent compounded annual earnings per share growth over the next five years.

He expects CN’s crude volumes will increase to 200,000 carloads a year by 2015 from about 130,000 currently, and could reach 300,000 over the next two years. Shipments of frac sand used to extract underground oil and gas in the process known as fracking are forecast to grow by 25 per cent annually over the next several years.

The improving results should lead to an acceleration in dividend increases, the analyst wrote in a report.

On the Toronto Stock Exchange, CN shares closed Tuesday at $75.68, up $1.69 or 2.28 per cent.

CN, with about 24,000 employees, transports some $250 billion worth of good annually across its rail network spanning Canada and mid-America.

Follow @RossMarowits on Twitter