Monday, July 20, 2009

CN 2Q: "I think we've seen the bottom"

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Canadian National Monday reported second-quarter profit fell 16%, reflecting the falloff in freight rail traffic, with net income at C$387 million (US$350 million), or 82 Canadian cents per diluted  share, compared with C$459 million, or 95 Canadian cents per diluted share, in the comparable 2008 quarter. Operating income fell 18% to C$583 million.

CN revenue declined 15% to C$1.8 billion (US$1.6 billion). Operating expenses fell 14% due to cost-containment measures and a “significant reduction” in fuel prices compared with the comparable quarter, CN said. CN's operating ratio increased by one percentage point to 67.3%.


The strengthening of the U.S. dollar affected the conversion of the company's U.S.-dollar-denominated revenue and expenses, increasing second-quarter 2009 net income by C$15 million, or C$0.03 per diluted share, the railroad said.

But E. Hunter Harrison, president and chief executive officer, said, "I think we've seen the bottom. "

"The second quarter of 2009 saw a continuation of significant weakness in most of our commodity groups as a result of the current recession in North America and difficult global economic conditions, with all groups but coal registering double-digit declines in carloadings," Harrison said. "The biggest declines were in metals and minerals shipments, principally on account of a sharp reduction in short-haul iron ore movements in northern Minnesota, and in automotive and forest products traffic. Intermodal, grain and fertilizers, and petroleum and chemicals saw lesser declines. Coal was a bright spot, however, as a result of higher U.S. shipments resulting from our acquisition" of the Elgin, Joliet & Eastern Railway. 

"CN's solid pricing has limited its top and bottom line slide," Dahlman Rose Director  Equity Research and Railway Age Contributing Editor Jason H. Seidl noted. "While volumes based on carloads declined 22%, top line results came in just 15% below the prior year as average revenue per carload  increased by 9% due in part to the continuing 4-5% increases in pure price gains, positive changes in traffic mix and FX (foreign exchange). While volume declines were significant, the operating ratio was 67.3%, vs. an operating ratio of 66.3% in 2Q08.  On the balance sheet, the company maintains a strong cash position with $238 million increase in free cash flow year-to-date over 2008.  While we believe that CN’s optimism regarding solid pricing and a potential bottoming of the market may be well founded, we believe that volumes will continue to decline in the near term and that any turnaround in the market is likely to be slow and gradual. [Yet,] we reiterate our Buy rating as CN continues to be a way for investors to own a 'best in class' company that continues to generate strong free cash flow in a difficult operating environment. CN's prospects for the long-term are favorable despite the ongoing freight recession. The company noted that it sees some signs of improvement in the environment and that business volumes may have reached a bottom.  Specifically, the company cites optimism regarding possible improvements in the merchandise business, auto production, steel production, chemicals, petroleum and forest products.  We note that these last four industries are expected to enjoy positive growth rates over the next 6-12 months according to our recently published proprietary rail shipper survey."

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