January 22, 2013 / 2:48 PM / 6 years ago

UPDATE 4-CN Rail's '13 profit forecast disappoints, shares dip

* CN sees high single-digit EPS growth in 2013

* Quarterly profit rises, matches expectations

* Quarterly dividend increased 15 pct

By Susan Taylor

TORONTO, Jan 22 (Reuters) - Canadian National Railway forecast 2013 profits on Tuesday that fell short of analyst expectations, sending shares of the country’s biggest rail carrier lower, even as it posted higher quarterly earnings and increased its dividend.

The Montreal-based railway said it expects earnings per share in 2013 will grow in the high-single digits, on a percentage basis, a marked slowdown from the past two years.

CN stock, which has powered about 19 percent higher over the past year, closed down just over 1 percent on the TSX.

“If you look at the earnings growth that they’re calling for, high single digits, that’s down from roughly 16 percent last year,” said Raymond James analyst Steve Hansen.

“Which really does suggest the cycle’s maturing a little bit here and that brings in the question, what multiple you’re willing to pay for the stock.

There have been lofty expectations for CN, which boasts top-notch operating efficiency and trades at 15 times 2012 earnings.

CN’s guidance implies 2013 earnings of C$6.11 a share, said BMO Capital Markets analyst Fadi Chamoun, a figure that trailed his earlier forecast of C$6.15 and the mean analyst estimate of C$6.22, according to Thomson Reuters I/B/E/S.

Still, analysts said CN management is typically cautious in its full-year forecasts.

“This has to be taken into context,” said Canaccord Genuity analyst David Tyerman. “The stock is up a good amount over the last year and we’re ... down just over 1 percent. So it’s hardly telling you it’s a disaster.”


CN’s fourth-quarter results largely matched expectations. Profit rose to C$610 million, or C$1.41 a share, from C$592 million, or C$1.32, a year earlier.

Revenue climbed 7 percent to C$2.5 billion, stoked by a 15 percent increase for coal, 13 percent jump for petroleum and chemicals, and 11 percent gain for grain and fertilizers. Revenue for intermodal, or containers carrying a variety of goods transported by more than one form of carrier, rose 7 percent.

The gains were party offset by a 2 percent decline in forest product revenue and 1 percent drop in metals and minerals.

CN also announced a 15 percent increase in its quarterly dividend to 43 Canadian cents.

Looking ahead for 2013, CN said an approximate C$120 million ($120.79 million) increased pension expense and C$30 million for rising depreciation costs will bite into earnings.

“The economy is sluggish,” said Chief Executive Claude Mongeau on a conference call with analysts. “We are determined to outpace economic conditions.”

CN hopes to boost its intermodal business as it opens two new U.S. terminals this summer and launches new services, Chief Marketing Officer Jean-Jacques Ruest said on the call.

Resource and energy markets, notably crude-by-rail, are also expected to help drive a 3-4 percent increase in carloads.

The company, which expanded its headcount by less than 2 percent in 2013, sees a 1 percent staffing increase in 2013 as it boosts efficiency by running longer, heavier trains.

CN estimates 2013 free cash flow generation between C$800 million and C$900 million, a decline from C$1 billion in 2012, and plans to spend C$1.9 billion on capital investments.

The company’s operating ratio, a key measure of a railway’s productivity, improved by 1.1 points to 63.6 percent in the fourth quarter. A lower ratio, which calculates operating costs as a percentage of revenue, indicates greater efficiency of a railway.

For all of 2012, the ratio was 62.9 percent, a 0.6 point improvement over 2011.

Shares of CN fell 99 Canadian cents to C$93.77 on the Toronto Stock Exchange.

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