While analysts broadly expected investors to react positively to Canadian National Railway Co. latest quarterly results, shares slumped amid concerns that a possible recession will weigh on Canada’s biggest railroad’s balance sheet.

The Montreal-based railway company reported first quarter earnings late Monday which surpassed analysts' expectations. CN Rail reported profits during the quarter ending on March 31, increased to $1.22 billion or $1.82 a share, compared to $918 million a year earlier and $1.32 a share. Revenue hit $4.31 billion in the first quarter, up 16 per cent from $3.71 billion during the same period last year. 

CN Rail Chief Executive Officer Tracy Robinson said during an investor call late Monday that the company is hiking its outlook for earnings-per-share to the “mid-single-digits” from a prior guidance of “low-single-digits” while cautioning about a potential slowdown in the North American economy.

"Our current volumes reflect that we are in a mild recession And we're uncertain about how deep or how long it will go on. What we're modeling is negative North American industrial production for the full year," Robinson said.

That view was countered by several analysts who believe that CN Rail will be able to maintain healthy margins in a tough economic environment given its diversified freight revenue base.  

“While management remains cautious on the near-term outlook, particularly given its exposure to intermodal volumes and industrial end-markets, the company maintains a fairly balanced freight mix, including a strong commodities franchise, which we expect to support margins and significant free cash flow generation and returns to shareholders despite heightened uncertainty,” said ATB Capital Markets Analyst Chris Murray in a note to clients on Tuesday.

RBC Capital Markets Analyst Walter Spracklin reduced his EPS estimates for CN Rail’s second and third quarters but stated the decline would be offset by the better-than-expected first-quarter EPS growth. As a result, Spracklin kept his 2023 and 2024 EPS growth estimates in place. 

“Overall, we see CN as offering an attractive blend of earnings resiliency (during recession) and growth opportunity (in recovery),” Spracklin said in the note.  

Along with its quarterly earnings, CN also announced a new service agreement with Union Pacific Railroad Co. and GMéxico Transportes, S.A.B. de C.V. (GMXT). The joint agreement is dubbed Falcon Premium and connects the three railroad company’s network throughout Canada, Mexico and the U.S. 

“We see this [Falcon Premium] potential as reflective of a new growth opportunity that is (and likely continues to be) evolving on near-shoring and similar trends,” Spracklin said in the note. 

However, Desjardins Analyst Benoit Poirier said that the new shipping route may have some challenges to note for investors.

“We view this as incrementally positive for CN and a potential wrench in CP’s plans as investors have had concerns about CPKC’s single-line transit time between Laredo and Chicago, based on distance and elevation changes,” Poirier said in a report to clients on Monday. “We must caution investors, however, that the truck-to-rail conversion will take time, and cars will have to interchange railroads, which is not ideal.”

CN also declared its second-quarter dividend Monday at $0.79 per common share, which will be paid out to shareholders on June 30. 

PRICE TARGETS

Following the earnings release, some analysts raised their 52-week price target on the Montreal-based railway company although many others held their ratings steady.

Poirier raised his price target on CN Rail to $180 from $178. Analysts at Evercore ISI raised the CN price target to US$129 from US$123. Wells Fargo analysts lifted the price target by US$10 to US$125. Veritas analysts increased the price target on CN Rail to $170 from $158 while Barclays also raised the price target to US$130 from US$126.

However, CIBC maintained the price target on CN Rail.

“We continue to see an improving service model and deep revenue pipeline benefitting CN, helping it offset the headwinds from a slowing economy. We maintain our Neutral rating and $175 price target,” CIBC analysts said in the note.  

RBC analysts also maintained the price target on the company at $184.