29 January 2007
CPR Expected to Report Profit, as Global Trade Fuels Industry
The Big Six railways in North America are thriving on global
trade and laying a long track of profit, steaming along even as the continent's economy slows.
Canadian Pacific Railway Ltd. will be the last of the continent's leading carriers to report its financial results.
Calgary-based CPR, which releases its year-end results before markets open tomorrow, is slated to make it a
six-pack of rising annual profit.
In the first nine months of 2006, CPR posted a $650-million profit, up 60 percent from the same period in 2005. Analysts
predict that CPR's fourth-quarter share profit could rise 9 percent.
The railway industry's fortunes no longer rise and fall with the North American economy. Analysts say that with global trade patterns
fundamentally shifting, the Big Six railways will be partly shielded from a downturn within North America because Asian trade will
keep the trains busy, through imports of consumer goods and exports of commodities.
The Big Six's share prices have surged over the past three years amid tightening rail capacity. While there are bound to be some bumps
ahead, the party's not over yet for investors, analysts say.
"Despite potentially slowed earnings momentum, results should remain sound through any economic slowdown, demonstrating the
extent to which the North American freight railroad sector has decoupled from the underlying North American economy," Scotia
Capital Inc. analyst James David said in a research note.
So far, the earnings reports for 2006 have been impressive: Profit at Montreal-based Canadian National Railway Co.
rose 34 percent to $2.09-billion last year; Fort Worth, Tex.-based Burlington Northern Santa Fe Corp.
climbed 24 percent to $1.89-billion (U.S.); Jacksonville, Fla.-based CSX Corp. increased 15 percent to
$1.31-billion; Norfolk Southern Corp. of Norfolk, Va., enjoyed a 16 percent advance to $1.48-billion; and
Union Pacific Corp. of Omaha, Neb., registered a 56 percent jump to $1.61-billion.
Observers say the continent's railways are getting better at meeting scheduled deliveries, and have lured business away from truckers,
especially over the past three years.
Capacity is tight on the train tracks, meaning that freight rates aren't expected to plummet any time soon. If anything, with fuel
surcharges declining with the drop in oil prices, that may give railways room to raise general freight rates.
"We believe it will be easier for the industry to increase base prices if the price of fuel is falling," BMO Nesbitt Burns
Inc. analyst Randy Cousins said in a research report.
However, transportation consultant Greg Gormick cautioned in an interview that the topic of jacking up freight rates remains a
sensitive one with railway customers. Rail carriers would be wise to temper plans for higher rates, lest they incur the wrath of
shippers, he said.
For now, industry experts say the railways are cash cows amid bustling demand for rail services. Fuel prices are still too high to
trigger a major shift back to truckers, they say. Many shippers prefer to send their heavy or bulky goods by rail for
long-haul trips, but tend to give short-haul jobs to truckers.
"Railways have become much more cost effective and productive than they were in the past," said Cliff Mackay, president of
the Railway Association of Canada.
Mr. Mackay joined the railway group last May, after serving for eight years as president of the Air Transport Association of Canada.
He said railways have improved their performance by keeping locomotives running and reducing so-called "dwell
times" - time spent getting trains ready in rail yards.
"In the airline business, the key thing is to turn around the plane and keep it in the sky. In the railway industry, when the
train is moving, it's making you money. When it's sitting, it's not," he said in an interview from Ottawa. "We're getting a
lot more value out of our assets."
The Asian trade bonanza has fuelled growth in North America's railway sector. Consumer products, notably from China, are pouring in
while commodities such as grain, coal and fertilizer are exported abroad. "Basically, it's global trade. The consumer goods
arrive in containers, and they go to the Canadian Tires, Wal-Marts and Home Depots," Mr. Mackay
said.
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