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Canadian Nat'l Rail (CNI) is in reverse today after lowering its EPS growth outlook for the year after finally restoring operations following several months of labor uncertainty and a resulting total shutdown of its Canadian rail network. CNI and its Canada-based counterpart, Canadian Pacific Kansas City (CP), were dealing with a labor dispute that could have led to significant disruptions across North America. Late last month, both railroad companies' Canadian networks were shut down after implementing a worker lockout. The shutdown was short-lived after the Canadian government swooped in almost immediately, ordering binding arbitration to end the dispute.

Today, CNI announced that its operations fully recovered, albeit not without damage to its near term outlook. CNI reduced its FY24 EPS growth outlook to low single digits from its previous target of mid to high single digits, which was already down from its initial outlook of approximately 10%. It is also well below CP's recently updated FY24 adjusted EPS growth forecast of a double-digit percentage.

• When concerns of a work stoppage started to brew in late May, companies began shifting volume away from CNI. During its Q2 earnings call in late July, CNI remarked that volume destined for the U.S. through its rail network shifted to U.S. ports, causing lighter volumes at its Rupert port. Meanwhile, even though CNI enjoyed heavy grain flows in its Vancouver corridor, it moved record volumes inefficiently, illuminated by velocity issues, which have since returned to normal.
• At the same time, the ongoing economic recovery is advancing slower than CNI initially anticipated. Due to current commodity prices, the company adjusted its outlook for lumber, now expecting a 2025 recovery instead of a gradual rebound this year. Additionally, overall industrial production remains mildly positive but tepid, partly due to persistent inflation and elevated interest rates.
• The headwinds in the global economy are eroding CNI's 2024-2026 guidance, projecting a compounded annual adjusted EPS growth rate in the high single digits, down from the company's +10-15% guidance reaffirmed less than two months ago. The reduction underscores just how much slower the pace of an economic recovery is compared to how it was trending in late July.

CNI is still confident that an economic rebound will eventually unfold, even if it takes slightly longer than it thought. It helps that the labor issue has been cleared up, removing a nasty overhang. However, while one cloud has cleared, economic conditions present several additional headwinds. Last week, LTL trucking companies Old Dominion (ODFL) and XPO, Inc. (XPO) issued gloomy Q3 updates, underpinning softness across the U.S. Canadian-based TFI International (TFII) noted in late July that the challenges associated with the U.S. and Canada market will lead to a problematic back half of 2024. These economic variables keep uncertainty relatively high, creating further obstacles for CNI to clear.