Tony Hatch: The Canadian Railroads have had a difficult start to the year. Do you think they have what it takes to make it through? (Tony Hatch)

“If it weren’t for bad luck, they’d have no luck at all” – So, I have to give credit to Bill Stephens for labeling the past few months “CN’s terrible, horrible, no good, very bad start to the year” – I had wondered in my Q4 wrap-ups if they were “Born Under a Bad Sign” And to be fair, the bad luck stretch really began at the end of last year – to wit:

• The GM strike
• US-initiated trade wars
• The CN strike
• Winter (including washouts impacting BC)
• Slow running mandates following two CP CBR derailments 2/6016
• Blockades!
• Coronavirus!

Now, it must be said that those events impacted CP, too – even the CN strike, by added unusual movements, etc. And in fact, it was, to be fair, CP’s actions that led to the 10 days of network slowdowns. Finally, the blockades affected them in some form directly, and more so indirectly *(directed running, etc). It was clear that tensions between the two carriers were rising, even with all of their historic close personal relationships. But last week, as a reminder, both railways showed us that they were “on it”, and were built to last. The fact that the National Post (last reference) put out its list of “Canada’s Most Admired Corporate Cultures for 2019” while I was in-country and neither railway was on it was astounding – either I should stop reading the NP, or Canada has some really, really good corporate cultures.

What the Canadian rail leaders (certainly admired by their investors) both said, and this is important:

1. These two railroads are among “the better companies in the world to go through this (C-19 crisis)” – as Ghislain Houle, CN’s CFO, stated. I would add this is essentially true for the industry, but these are the pace-setters.
   1. 1. They are well known strong cash flow generators and are in excellent financial condition (here seems a good time to point out that not all Canadian business observers miss their mark – CP’s Nadeem Velani was naked Canada’s CFO of the Year. As all three rails (I am including KCS here) have stressed, they have ample liquidity.
      2. This is a long term business (“a marathon, not a sprint” – CN CEO JJ Ruest) in terms of Capex, layoffs, etc – and have long-lasting assets, most importantly their irreplaceable networks.
      3. They have proven downside management cost reduction expertise (“PSR is in our blood” – CP CEO Creel).
      4. Railroading, operationally, is well-suited for the social distancing requirements, etc.
2. The railroads are still moving.
   1. 1. Both have instituted C19 plans (CN on 3/9).
      2. Both are running well and fluidly; the final completion of (this round of) Vancouver’s Deltaport expansion and the big Capex spend by (especially) CN – as well as the reduced volume stress – have all played a role. CP actually still is running units about 9% up YTD/QTD (CN’s -7% represents a summing of all of their recent very bad/horrible luck, and is therefore beyond “normal analysis”). KCS by the way, is also up QTD – maybe that’s why these three that decided to be so forthcoming?
      3. Both see upside numbers in Ag; they both see pent-up demand in fertilizers; CP says March was its strongest ever in Domestic Intermodal.
      4. Both have take-or-pay protection in CBR (which is, of course, being hit by a double-whammy)
      5. CN has the advantage of receiving good market intelligence form its Shanghai freight forwarding operations….
3. Both managements remain confident; though guidance is always the first casualty of a crisis, they are both planning long term to take advantage of their growth opportunities and continuing to pursue expansion plans (CP in autos, CN in eastern port business, etc).
   1. 1. They resisted analyst efforts to get them to describe a “decremental” (ugh! To the penalty box!) impacts on their business.
      2. CP’s Creel announced he was buying up his shares, even as they will be less aggressive in buying in shares.
      3. Both railroads remain committed to creating long term shareholder (and stakeholder) value. For CP, BTW, the best evidence can be accumulated through their absolutely excellent Investor Fact Book, with its detailed descriptions (and fold-out maps) of their “Room to Grow” initiatives, and detailed look at their lines of business (10 pages on Ag!).
      4. And as such both railroads remain committed to solid (above industry per-capita levels) Capex, subject to some tweaking.
      5. This too shall pass!