Canadian National Railway (NYSE:CNI), struggling with network congestion that has led to two straight earnings misses, said it intends to "energize" its leadership team following current CEO Luc Jobin's abrupt resignation after less than two years on the job.

Jobin was replaced on an interim basis by Jean-Jacques Ruest, who is currently chief marketing officer, but board chairman Robert Pace in a statement said that the Montreal-based company would seek out a new permanent leader "who will energize the team, realize CN's corporate vision, and take the company forward with the speed and determination CN is known for."

Canadian National train

A Canadian National train navigates the mountains of British Columbia. Image source: Canadian National.


The sudden resignation follows a difficult six-month period for Canadian National, which found itself without adequate capacity to meet demand during a harsh winter season and an uptick in demand from the energy sector. Farmers in Canada have complained about multiweek waits to ship grain to elevators, and oil services firm Halliburton last month said Canadian National's failure to deliver fracking sand would cut its first-quarter earnings by $0.10 cents per share.

The Ag Transport Coalition, a group representing Canadian farm associations, said that in the most recent week it has records for, Canadian National only filled 17% of its grain car orders from western Canada. Farmers typically do not get paid until their grain reaches the elevators, meaning a shipping delay can lead to serious financial issues for the growers.

Canadian National has missed earnings estimates in each of the last two quarters, and in late January, it also issued below-consensus guidance for 2018 earnings of 5.25 Canadian dollars to CA$5.40 per share, compared to CA$5.51 expectations. The railroad also unveiled a CA$3.2 billion ($2.48 billion) capital spending program for 2018, including CA$700 million ($543 million) to increase capacity by buying new locomotives, improving terminals, and expanding its track infrastructure.

Shares of Canadian National are down 8.44% over the past six months, a period when most North American rivals were up between 24.95% and 12.74%.

CNI Chart

Six month rail stock performance data by YCharts.

The railroad in its statement acknowledged the challenges it has faced in recent months, with chairman Pace saying, "CN must accelerate execution of the innovation strategy." CN also reaffirmed its lowered guidance in the statement, signaling to investors that despite not giving many details about Jobin's resignation, conditions at the company have not significantly deteriorated in recent weeks.

Hold CN, and be watching others

For investors who have held on through the drop, it seems too late to sell now. Canadian National's planned investment in added capacity should help the company to restore service levels, even if it does eat into efficiency, and the railroad's strong route network across Canada and down the spine of the U.S. is a competitive advantage that should help it to outperform over time.

The bigger question is what investors in other railroads can learn from Canadian National's recent troubles. CN is the product of a transformation orchestrated by railroad legend Hunter Harrison, who came to the company in 1998 as part of CN's acquisition of Illinois Central Railroad. Harrison served as CEO of CN from 2003 until 2009, and during his time in charge, gained a reputation as a cost-cutter who improved operational efficiency.

The railroad as recently as year-end 2016 boasted an operating ratio -- a measure of efficiency -- of 55.9%, among the best in the business.

Harrison's fingerprints are all over the modern rail industry. After retiring from Canadian National, he spent nearly five years in charge of Canadian Pacific Railway (NYSE:CP), and from March 2017 until his death last December was CEO of CSX (NASDAQ:CSX), implementing or at least attempting similar streamlining changes at both of those companies. Canadian Pacific in 2017 recorded a better operating ratio than Canadian National for the first time in nearly 20 years, while CSX management believes they can bring down their ratio from 67.9% in 2017 to 60% by 2020. 

Canadian National got in trouble because, it appears, it cut too deep and did not have the added capacity or flexibility to deal with unexpected weather or demand. Its recent issues are a cautionary tale for holders of other railroads. It's great to see these companies bring down costs, but if they cut too deep and hinder their ability to provide good service, there is a risk of a derailment down the line.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.