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Noah Zivitz

Managing Editor, BNN Bloomberg


Canadian National Railway has unveiled a plan to boost profitability in the aftermath of being elbowed out of the way in the Kansas City Southern sweepstakes. It also warned that it's not about to leave that takeover battle quietly.

In a release early Friday, CN said it's aiming to boost operating income by $700 million and announced a strategic review of its non-rail businesses, as well as an "optimization of labour productivity" to achieve that target next year.

The Montreal-based railway said it's aiming to lift earnings per share approximately 20 per cent next year, and will aim to improve its operating ratio to 57 per cent. In CN's most recently reported quarter in July, the company's operating ratio was 61.6 per cent.

“Our shareholders, by and large, most of them were very supportive of our bid, they were hoping that we could close the transaction,” said CN Rail President and Chief Executive Officer Jean-Jacques Ruest in an interview Friday.

“But they were also giving us the feedback that we should work a little harder on our operating metrics, namely the operating margin and the famous operating ratio.”

In a report to clients Friday morning, Scotia Capital Analyst Konark Gupta said he estimates, based on the plan CN announced Friday, that its adjusted earnings per share could “reach or exceed” $8.00 per share by 2023. Gupta raised his price target on CN to $160.00 per share from $147.00, and maintained his Sector Outperform rating.

"I am confident that CN’s senior management, a team of world-class railroaders who are focused on redefining the rail industry, have the skills and determination to lead the company into this exciting next phase," said CN Chair Robert Pace in a release.

Additionally, Ruest said CN may end up going above and beyond what the company announced on Friday.

“There's many other things that we're considering on the long-term strategy when it comes to what we can do with our network, organically or not. ... These are the things that we would keep in our own boxes until they're market ready,” he said in the interview.

The strategy update was announced just a few days after CN formally gave up on its plan to buy Kansas City Southern (KCS). It bowed out after KCS deemed a rival offer by Canadian Pacific Railway to be superior after the U.S. Surface Transportation Board last month denied CN's application for a voting trust, which was a crucial component of its takeover agreement with KCS.

However, CN hinted on Friday that it will be keeping a close eye on how its rival's takeover attempt plays out.

"CN will continue to engage with market participants, railroads and shippers to ensure that all regulatory rules are enforced fairly, and customers do not suffer anti-competitive effects arising from a combination between Canadian Pacific and KCS," CN said in its release.

CN is also facing an activist threat, as one of its top shareholder seeks to overhaul the company’s board and ultimately replace its chief executive officer.

TCI Fund Management, which holds a 5.2 per cent stake in CN, confirmed in a regulatory filing Friday that it has formally requisitioned a meeting of CN’s shareholders to vote on its proposals no later than Dec. 1.

“We are not impressed, why hasn’t this been done before?,” said TCI Partner Ben Walker in an email to BNN Bloomberg Friday about CN’s strategy update. “Management lacks the credibility to execute the plan.”

CN confirmed Friday that Pace’s term as chair will expire next year and so he will not be standing for re-election. The railway announced that it plans to add two new directors to its board this year.

"You've got an activist kind of getting up in their grill, so to speak. So, not surprisingly, (CN) management is digging in a bit and trying to entrench themselves," said Brian Madden, senior vice-president and portfolio manager at Goodreid Investment Counsel (which has a position in CN), in an interview Friday.

"I think this speaks to the value that activist shareholders can add."

With a file from BNN Bloomberg's David George-Cosh

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