CN Rail's profit misses estimates due to higher costs

(Reuters) - Canadian National Railway Co CNR.TO on Tuesday reported a lower-than-expected adjusted profit for the fourth quarter, hurt by the heavy expenses its has incurred to grow its business, and sending shares of Canada's biggest freight railroad lower.

FILE PHOTO: Managers drive rail cars at the CN MacMillan Yard in Toronto February 10, 2007. REUTERS/J.P. Moczulski/File Photo

Last year CN saw some of the biggest volume growth it has seen in the last decade. The company bid away market share from rival Canadian Pacific CP.TO, and by the end of 2017, CN was scrambling to add capacity to meet demand.

CN said operating expenses rose 9 percent in the latest quarter, mainly due to higher costs from increased volumes as well as a harsh winter and higher fuel prices.

Capacity constraints have also affected CN’s ability to meet the strong demand to transport crude-by-rail to U.S. Gulf coast refiners, which powered CP’s results last quarter.

CN has already said it plans to extend a major hiring spree into this year, and on Tuesday chalked out a record annual capital budget of C$3.2 billion ($2.6 billion), with C$800 million to expand its capacity.

“We anticipate that management will catch capacity up to demand as we move through 2018” said Dan Sherman, an analyst with Edward Jones.

CN, which has a 20,000-mile rail network spanning Canada and Mid-America, also indicated it would rethink its policy of insisting on long-term commitments for crude-by-rail contracts, a policy put in effect after a rout in crude prices in 2015.

CN will re-enter the market with new pricing and volume contracts as new capacity comes online by the summer, Jean Jacques Ruest, the company’s marketing head, told analysts on a post-earnings conference call.

The company’s net income surged to C$2.61 billion in the fourth quarter, from C$1.02 billion a year earlier, due to an income tax gain of C$1.76 billion.

Excluding items, CN earned C$1.20 per share, missing analysts’ estimate of C$1.22, according to Thomson Reuters I/B/E/S.

CN reported an operating ratio — operating costs as a percentage of revenue — of 57.4 percent for the quarter, higher than 56.2 percent last year. The lower the ratio, the more efficient the railroad.

Montreal-based CN’s total revenue rose 2 percent to C$3.29 billion, edging past analysts’ estimates of C$3.27 billion.

The company expects adjusted earnings per share to rise to between C$5.25 and C$5.40 this year, from C$4.99 in 2017.

CN’s U.S.-listed shares were down 2.3 percent at $78.50 in after-hours trading.

Reporting by John Benny in Bengaluru; Editing by Savio D’Souza