CN Rail shares take a hit as efficiency dips

Tue Jan 24, 2012 5:11pm EST
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By Nicole Mordant

(Reuters) - Shares of Canadian National Railway Co (CNR.TO: Quote) "took it on the chin" on Tuesday as quarterly results revealed a surprise weakening in productivity, suggesting performance gains may be getting tougher for North America's most efficient railroad.

The stock skidded nearly 5 percent as Canada's biggest railway also cautioned that a pension cost headwind could cap its earnings per share growth at 10 percent in 2012. In 2011, EPS increased by 15 percent.

Raymond James analyst Steve Hansen said that CN stock is trading at a premium to the broader North American rail sector and is "priced for a bit of perfection" thanks to the railway's top-rated operating efficiency.

"As soon as you get a marginal slip in performance they take it on the chin," Hansen said.

CN said its operating ratio - an important measure of a railroad's productivity - rose 1.3 points to 64.7 percent in the fourth quarter. The lower the ratio, which measures operating costs as a percentage of revenue, the more efficient the railway.

CN has the lowest ratio of North America's "big six" railroads, and it has been rare in recent times for increases in its operating expenses to outstrip revenue growth.

"These guys are so efficient. It is getting more difficult to drive the operating ratio lower," said Edward Jones analyst Brian Yarbrough.

For all of 2011, CN's operating ratio was 63.5 percent, a tiny improvement on its 63.6 percent in 2010. It is still far superior to that of its biggest domestic competitor, Canadian Pacific Railway (CP.TO: Quote), which last reported a ratio of 75.8 percent.   Continued...