Volumes and Trade Policies in Focus at Canadian Railroads -- Earnings Preview

By David George-Cosh 

Canadian railroad earnings begin this week, with first-quarter results from Canadian Pacific Railway Ltd. due after markets close on Wednesday. Bigger peer Canadian National Railway Co. follows, with results on April 24. Here are a few things to watch:

REVENUE FORECASTS: Analysts sees the rail sector's recovery progressing in the latest period. Calgary, Alberta-based CP's revenue is expected to come in around 1.59 billion Canadian dollars ($1.19 billion), unchanged from a year earlier, according to Thomson Reuters estimates. Montreal-based CN is expected to post revenue of C$3.21 billion, up from C$2.96 billion a year earlier.

EARNINGS FORECASTS: Analysts expect CP to earn C$2.48 a share in the quarter, down from C$2.50 a share a year earlier, according to Thomson Reuters. CN is expected to earn C$1.13 a share, up from C$1.00 a year earlier.

WHAT TO WATCH:

GROWING VOLUMES: A recent uptick in U.S. industrial production and manufacturing sales support an increase in rail demand, likely ending a slide in volumes that has plagued the industry over the past several quarters. CN is expected to post strong volume growth over the first quarter following recent automotive and intermodal customer wins at the expense of CP, according to Desjardins Capital Markets. CP's shipping volumes are expected to be flat in the quarter, added Desjardins. Additionally, both railroads are likely to reaffirm guidance that volumes for the rest of the fiscal year will continue to improve thanks to stronger intermodal, grain and frac sand shipments.

GRAIN UPDATE: Investors will likely cast a close eye on CN and CP's grain business during the quarter. Canada's grain harvest, traditionally one of the railroad's biggest revenue drivers, has seen yields soften due to poor weather conditions over the past several weeks. Desjardins expects both CN and CP to post grain volume increases during the next quarter, with grain revenue to grow significantly over the rest of the year. CN has also highlighted its grain business in unconventional ways after launching a podcast series last month that showcases how the railroad moves its product from farm to port.

TRADE POLICIES: The biggest risk to both Canadian railroads remains south of the border. Any policy decisions related to a U.S. border tax or realignment of trade patterns could affect volume growth, particularly in international shipments, said RBC Capital Markets. While overall sentiment remains strong, any impact from reopening Nafta or policies that would lead to a stronger U.S. dollar could affect the U.S. manufacturing sector and spark a decline in the global economic outlook. Investors also will be eager to hear any clarity from railroads on forestry-related shipments ahead of the U.S. Department of Commerce preliminary determination for countervailing softwood lumber duties. While forestry shipments represent about 5% of total revenue for both CN and CP, U.S. home-building expansion has been a boon to both railroads in recent years. Any tariff may put pressure on the Canadian dollar, which could be positive for exports in general.

Write to David George-Cosh at [e-mail]

(END) Dow Jones Newswires

April 18, 2017 14:01 ET (18:01 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.