Canadian National Railway (CNI, Financial) is facing a downturn after lowering its EPS growth outlook for the year. This comes after restoring operations following months of labor uncertainty and a complete shutdown of its Canadian rail network. Both CNI and Canadian Pacific Kansas City (CP, Financial) dealt with a labor dispute that threatened significant disruptions across North America. A worker lockout led to a short-lived shutdown, which ended after the Canadian government ordered binding arbitration.
Today, CNI announced full recovery of its operations but not without an impact on its near-term outlook. The company reduced its FY24 EPS growth outlook to low single digits from the previous mid to high single digits, which was already down from an initial outlook of approximately 10%. This is also well below CP's recently updated FY24 adjusted EPS growth forecast of a double-digit percentage.
- Concerns over a work stoppage in late May led companies to shift volume away from CNI. During its Q2 earnings call in late July, CNI noted that volume destined for the U.S. shifted to U.S. ports, resulting in lighter volumes at its Rupert port. Despite heavy grain flows in its Vancouver corridor, CNI moved record volumes inefficiently due to velocity issues, which have since normalized.
- The ongoing economic recovery is slower than CNI initially expected. Due to current commodity prices, the company now anticipates a lumber recovery in 2025 instead of a gradual rebound this year. Overall industrial production remains mildly positive but tepid, partly due to persistent inflation and elevated interest rates.
- Global economic headwinds are affecting CNI's 2024-2026 guidance, projecting a compounded annual adjusted EPS growth rate in the high single digits, down from the previously reaffirmed +10-15% guidance. This reduction highlights the slower pace of economic recovery compared to late July trends.
CNI remains confident in an eventual economic rebound, even if it takes longer than expected. The resolution of the labor issue removes a significant overhang. However, economic conditions still present several headwinds. Last week, LTL trucking companies Old Dominion (ODFL, Financial) and XPO, Inc. (XPO, Financial) issued gloomy Q3 updates, highlighting softness across the U.S. TFI International (TFII, Financial) also noted in late July that challenges in the U.S. and Canada markets will lead to a difficult second half of 2024. These economic variables keep uncertainty high, creating further obstacles for CNI.
