Canadian National Railway Faces Challenges After Labor Disruption and Economic Slowdown
2min read Canadian National Railway (CNI) recently reported a revised outlook for its fiscal year 2024 after a turbulent period marked by labor disruptions and a sluggish economic environment. Shares of the company are under pressure as CNI adjusts its earnings expectations following a brief but impactful shutdown of its Canadian rail network.
CNI faced significant operational setbacks stemming from a labor dispute that temporarily halted its rail network in Canada. The shutdown, which also affected Canadian Pacific Kansas City (CP), caused immediate disruptions in rail operations across North America.
The situation was resolved relatively quickly through government intervention, which mandated binding arbitration to settle the dispute. However, the brief stoppage left a mark on CNI’s financial outlook.
Today, CNI announced that while its operations have fully recovered, the company had to lower its EPS growth expectations for the year to low single digits. This is a substantial downgrade from its earlier target of mid to high single digits, and an even further drop from its initial forecast of around 10 percent growth.
Comparatively, Canadian Pacific Kansas City, which also faced the same labor turmoil, recently updated its FY24 adjusted EPS growth forecast to a double-digit percentage, highlighting a stronger recovery trajectory.
The labor disruption compounded the issues already facing CNI. As early as May, when labor tensions began to rise, customers began shifting their freight volumes away from CNI.
During its Q2 earnings call in late July, CNI highlighted that goods destined for the U.S. through its network were redirected to U.S. ports, resulting in decreased volumes at the company's Rupert port.
Even with strong grain flows through its Vancouver corridor, CNI faced operational inefficiencies marked by reduced velocity. While these operational metrics have since normalized, the temporary loss of volume and inefficiency has weighed on near-term performance.
Complicating matters further is the sluggish pace of economic recovery, which has not met CNI’s earlier expectations.
The company has now revised its recovery timeline for certain commodities, notably lumber, which it now expects to recover in 2025 rather than seeing a gradual improvement this year. Meanwhile, overall industrial production remains tepid due to persistent inflation and high interest rates, putting additional pressure on CNI's business.
These factors have collectively led to CNI adjusting its longer-term guidance as well. The company now projects a compounded annual adjusted EPS growth rate in the high single digits for 2024-2026, down from the previously reaffirmed range of 10 to 15 percent.
This reduction underscores how the economic landscape has shifted, slowing the pace of recovery and dampening the company's prospects.
Despite these headwinds, CNI remains cautiously optimistic about an eventual economic rebound. The resolution of the labor dispute removes a significant overhang that was clouding the company’s near-term outlook.
However, broader economic conditions continue to present hurdles. Recent updates from U.S.-based transportation companies, such as Old Dominion (ODFL) and XPO, Inc. (XPO), highlighted a challenging environment for logistics and transport.
Canadian peer TFI International (TFII) also echoed these sentiments in late July, forecasting a difficult second half of 2024 due to economic challenges in both the U.S. and Canada.
Overall, while CNI's recent challenges highlight the complexities of operating in a volatile environment, the company is positioning itself for recovery. Clearing the labor dispute hurdle is a positive step, but the ongoing economic uncertainties mean that CNI will need to navigate carefully in the coming quarters to stabilize and grow.