Canadian National Stock Slips More Than 2% On Labor Row

Canadian National Railway Company (NYSE:CNI) is embroiled in a labor strife that involves more than 3000 conductors, trainpersons and yard workers, represented by Canada's Teamsters labor union. The employees agitating over safety issues, working conditions and benefits, have been staging walkouts since Nov 19 while the federal government is negotiating talks between the two parties for a mutual agreement. With this ongoing turbulence, shares of the company have dipped more than 2% since Nov 19.

Labor Conflict Amid Soft Freight Volumes

The labor dispute happens at a time when the company is already under significant pressure due to low freight volumes amid slowdown in the global economy. While trade-related uncertainty is affecting international intermodal volumes, weakness in the manufacturing sector is impacting domestic intermodal volumes.

In fact, declining North American rail demand forced the company to lower its 2019 earnings outlook. It now anticipates adjusted earnings per share to grow in high single-digit range compared with a rise in the low double-digit band expected previously. Moreover, revenue ton miles (RTMs) are expected to witness slightly negative volume growth in the current year compared with the earlier prediction of a mid-single-digit volume expansion.

Labor Dispute Weighs on the Canadian Economy

Transportation of freight, such as crops, potash, coal and manufactured goods to ports and the United States, is being affected significantly in Canada as the country depends heavily on Canadian National, its largest railroad operator, for these activities.

If the strike gets prolonged, the Canadian mining industry, accounting for more than half of annual rail freight revenues, is also likely to take a severe hit as it relies on Canadian National for the transportation of supplies. Per Pierre Gratton, president and CEO, Mining Association of Canada, "this strike will result in a severe reduction or elimination of railway capacity and will trigger the closure of mines with concurrent layoffs of thousands of employees beginning in a matter of days."

How Long Can the Strike Last?

According to Credit Suisse (SIX:CSGN) analysts, the work stoppage may have a short-term effect on Canadian National’s volumes but not a long-term impact on its earnings. Canadian ministers are striving to resolve issues between the company and Teamsters to avert the economic disruption at the earliest. Meanwhile, market watchers believe that the industrial action is not likely to persist for too long as rail strikes can have devastating consequences on the economy. Per TD Securities analyst Sean Steuart, “Rail strikes are normally short-lived, with either a fast negotiated resolution or back-to-work legislation enacted to prevent a significant impact on the economy”.

Zacks Rank & Key Picks

Canadian National carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader Transportation sector are Kansas City Southern (NYSE:KSU) , Allegiant Travel Company (NASDAQ:ALGT) and Controladora Vuela Compania de Aviacion, S.A.B. de C.V. (NYSE:VLRS) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Shares of Kansas City Southern, Allegiant Travel and Controladora Vuela have soared more than 59%, 68% and 100%, respectively, so far this year.

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