Despite a lower operating ratio and higher revenue and net profits in the third quarter, Canadian National Railway (NYSE: CNI) said it plans to lower its guidance for 2019 amid sluggish rail volumes and a softer North American economic outlook.
The railroad now expects its adjusted diluted earnings per share (EPS) in 2019 to grow in the high single-digit range, compared with its July outlook of low double-digit growth, "in light of the deterioration in North American rail demand [and] as the economy continues to weaken," the company said when it released its earnings on October 22. Its adjusted diluted EPS in 2018 was C$5.50. (A Canadian dollar is worth US$0.76.)
Third-quarter net profit was C$1.2 billion, compared with C$1.1 billion in the third quarter of 2018. Diluted EPS was C$1.66 in the third quarter, compared with diluted EPS of C$1.54 and adjusted diluted EPS of C$1.50 in the third quarter of 2018. Adjusted diluted EPS takes into account some measures that are not part of generally accepted accounting principles, or GAAP.
Operating ratio in the third quarter fell to 57.9%, compared with 59.5% in the same period in 2018. A lower operating ratio can imply a company's increased profitability.
CN pointed to several factors that contributed to its tempered outlook for 2019. The railroad projects North American industrial production to increase between 0.5%-1% in 2019, compared with its July assumption of approximately 1%. Meanwhile, while the 2019-2020 grain crop in Canada is expected to be line line with its three-year average, CN anticipates the U.S. grain crop to be below the three-year average for the same time period.
The railroad also expects revenue per ton mile growth to be "slightly negative" in 2019 when compared with 2018. This is a change from its expectations in July that revenue per ton mile would increase in the mid-single digits.
Third-quarter revenue rose 4% to C$3.8 billion on higher freight rates and increased intermodal revenue, while operating expenses rose 1% to C$2.2 billion on increased purchased services and material expenses.
Source: Canadian National
"Canadian National delivered strong results, despite a softening economy," said J.J. Ruest, the railroad's president and chief executive officer. "Our team of experienced railroaders swiftly aligned resources with the weaker demand to achieve solid efficiency gains. We remain committed to our long-term agenda of growing faster than the economy at low incremental cost, and to taking scheduled railroading to the next level by deploying advanced operating technology."
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