Railroads to benefit from “solid demand environment”: RBC analyst

TORONTO, Ont,– According to figures released in the latest RBC Compass report, from RBC Dominion Securities Inc. analyst Walter Spracklin, railroads are benefitting from a solid demand environment.

Total volume growth improved to +3.8%Y/Y in Q4/13 (a quarterly record for 2013) on renewed strength in crude-by-rail demand, a recovery in U.S. grain, a record Canadian crop, and accelerated intermodal growth, noted Spracklin. Coal

continued to temper volume gains; however, overall freight patterns met or exceeded our expectations for the quarter.

Weather conditions will however put pressure on Canadian rail results.

“Despite solid volume growth sector-wide, we believe the key differentiator in Q4/13 results will be impact from weather, particularly in Canada. We expect that extreme cold temperatures shortened train lengths, increased labour costs, lowered fuel productivity, and increased purchased services costs in Q4/13. As a result, we believe CNR and CP’s fourth quarter results will underperform the U.S carriers,” said Spracklin.

Disounting the weather impact, Spracklin noted  volume estimates are based on positive trends developing across

a number of sectors: 1) agriculture products (record Canadian crop + easier U.S. comp); 2) petroleum products (crude-by-rail strength); and 3) intermodal (highway conversion + steady macro demand).

Coal remains a key risk that could stem demand for US players.