Canadian Rail Operations Set to Resume: Impact to Stocks & TSX?

Canadian Railways (CNR:CA) (CP:CA)

In a decisive move aimed at resolving the ongoing labor disruption affecting major Canadian railways, the Canadian Industrial Relations Board (CIRB) has imposed binding arbitration, compelling CN (Canadian National Railway) and CPKC (Canadian Pacific Kansas City) to resume operations. This development follows heightened tensions and labor disputes involving the Teamsters Canada Rail Conference (TCRC), which had previously maintained picket lines and a firm stance on the lockout/strike.

Background and Recent Developments

The conflict between the TCRC and the rail companies escalated significantly over recent weeks, prompting intervention from the federal government. On August 22, Canada’s Minister of Labour initiated steps to end the labor disruption by directing the CIRB to address the ongoing dispute. The TCRC, however, initially rejected the government’s intervention, arguing that the Minister’s actions were premature and potentially unconstitutional.

Despite the TCRC’s resistance, the CIRB intervened decisively on August 24, mandating that CN and CPKC resume their operations and that workers return to their duties. This order includes a directive to extend the term of existing collective agreements until new terms are determined through final binding arbitration. The CIRB’s decision effectively overrides the TCRC’s previous strike notice, which was set to take effect on August 26.

TCRC’s Response and Legal Challenges

The TCRC has expressed its intention to comply with the CIRB’s decision, but it has also indicated plans to challenge the ruling in court. The union maintains that Section 107 of the Canada Labour Code does not grant the Minister of Labour absolute power to enforce binding arbitration and argues that the government’s intervention was an overreach.

Section 107 of the Canada Labour Code allows the Minister of Labour to take necessary actions to secure industrial peace and facilitate the resolution of disputes. The government’s use of this provision reflects its determination to minimize disruptions to the national supply chain and mitigate broader economic impacts.

Impact on TSX and Canadian Stocks

The resumption of Canadian rail operations following the CIRB’s ruling is likely to have several notable impacts on Canadian stocks, particularly those of the involved railway companies—Canadian National Railway (CN) and Canadian Pacific Kansas City (CPKC)—as well as related sectors and broader market sentiment.

Financial Implications for CN and CPKC

The resumption of rail operations is expected to mitigate some of the immediate financial impacts on CN and CPKC. Both companies had anticipated a short-term strike in their 2024 outlooks, and the brief interruption is unlikely to significantly alter their financial forecasts.

For CN, the potential earnings impact from the disruption is projected to be modest. Historical data from a similar labor action in 2019 suggested a minimal hit to earnings per share (EPS), with estimates indicating a reduction of approximately $0.08 to $0.10 per share, translating to a 1% to 1.5% decrease in EPS growth for 2024. CPKC had already factored in the possibility of a short strike in its guidance and is expected to maintain its forecast.

Immediate Market Reaction:

CN and CPKC: The resumption of operations will likely have a positive effect on the stock prices of CN and CPKC. Investors generally view the resolution of labor disputes as favorable since it removes uncertainty and stabilizes operational performance. As such, the end of the disruption should support these stocks and potentially drive their prices up as investors regain confidence in the companies’ ability to meet their financial forecasts. Both rail stocks are currently trading higher as a result.

Impact on Related Sectors

Transportation and Logistics:

Broader Impact: The resolution of the rail disruption will benefit sectors reliant on rail transport, such as industrials, energy, and materials. Stocks in these sectors may see a positive ripple effect as rail services return to normal, ensuring a smoother supply chain and reduced transportation costs. Companies with Rail Exposure: Firms that rely heavily on rail transport for shipping goods might see improvements in operational efficiency and reduced costs, potentially boosting their stock performance.

Commodity Prices:

Lumber and Energy: Rail disruptions had previously led to challenges in transporting commodities like lumber and energy products. With rail operations resuming, there could be a stabilization or decrease in commodity prices, which might positively impact related stocks and sectors.

Investor Sentiment and Market Confidence

Overall Market Sentiment:

Confidence Boost: The swift resolution of the labor dispute and the return to normal operations will likely boost investor confidence in the stability of the Canadian rail sector. This positive sentiment has also translated into broader market gains, as the TSX has just reached a all time high.

Regulatory and Policy Implications:

Government Intervention: The federal government’s intervention through the CIRB highlights its role in maintaining industrial peace and ensuring economic stability. This could influence future policy considerations and investor perceptions of government intervention in labor disputes, affecting broader market dynamics.