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Canadian National Beats on Q4 Earnings & Revs

Zacks Equity Research

Canadian National Railway (CNI) reported fourth-quarter 2013 adjusted earnings per share of 76 Canadian cents (approximately 72 cents), beating the Zacks Consensus Estimate by a penny. The results also increased 7% year over year on higher freight rates and volumes.

Quarterly revenues increased 8% year over year to C$2,745 million (approximately $2,617 million) and surpassed the Zacks Consensus Estimate of $2,511 million. The year-over-year growth was attributable to higher freight carloads based on strong energy markets, market share gains, as well as gradual recovery in the North American economy.

In 2013, the company reported adjusted earnings per share of C$3.06 ($2.97), up 9% year over year on revenues which came in at C$10,575 million (approximately $10,270 million), up 7% year over year.

On a year-over-year basis, revenues increased 22% for Petroleum and Chemicals, 12% for Metals and Minerals, 11% each for Intermodal and Forest Products, 4% for Automotive and 2% for Grain and Fertilizers in the fourth quarter. Coal registered a revenue decline of 9% year over year.

Carloads (volumes) increased 3% year over year and revenue ton miles (RTMs), which measures the relative weight and distance of rail freight transported by Canadian National, moved up 5% from the year-ago quarter. For 2013, carloads increased 3% and RTMs was up 4% year over year.

Operating Statistics

In the fourth quarter, adjusted operating income improved 5% year over year to C$967 million (approximately $921 million), despite operating expenses increasing 10% year over year to C$1,778 million (approximately $1,695 million). Operating ratio (defined as operating expenses as a percentage of revenues) was 64.8%, up 120 basis points.

For 2013, operating income rose 5% year over year to C$3,873 million (approximately $3,761 million). Operating expenses increased 7% year over year to C$6,702 million (approximately $6,509 million), resulting in an operating ratio of 63.4%, 50 bps higher year over year.


As of Dec 31, 2013, Canadian National had cash and cash equivalents of C$214 million (approximately $208 million). The company had long-term debt of C$6,819 million (approximately $6,623 million), representing a debt-to-total capitalization ratio of 37.7%, down from 38.5% in 2012. Free cash flow was C$1,623 million (approximately $1,576 million) in 2013.


Canadian National expects double-digit earnings growth in 2014 from adjusted earnings of 2013 and free cash flow in the range of C$1.6 – C$1.7 billion.

Canadian National expects carload growth in the mid-single digit range. Capital expenditure for 2014 is projected around C$2.1 billion, of which over C$1.2 billion will be directed toward track infrastructure as well as enhancement of productivity and network fluidity.

For 2014, Canadian National projects a 3% year-over-year increase in industrial production in North America. It also expects U.S. housing starts to be around 1.1 million units and U.S. motor vehicles sales to be approximately 16 million units.

The company expects U.S. 2013/2014 grain crop to remain above the five-year average and also projects Canadian 2013/2014 grain crop to witness similar growth. In addition, 2014/2015 grain crops in both the countries are anticipated to be in line with five-year average.

Further, Canadian National expects CAD/USD exchange rate to be approximately C$0.95 and the price of crude oil (West Texas Intermediate) to be in the $95–$105 per barrel range.


Canadian National’s board of directors approved a 16% hike in its quarterly dividend payment to 25 Canadian cents, representing an annualized dividend payment of C$1.00 per share. The increased dividend will be paid on Mar 31, 2014, to shareholders of record at the close of business on Mar 10, 2014.

Our Analysis

We believe Canadian National is well poised to reap benefits from improving demand and pricing trends. The company’s industry-leading operating ratio, service improvements and expected growth across the board, particularly in Intermodal, Crude and Automotive, bode well for its projected earnings growth over the next few months. However, several headwinds such as competitive threats from Canadian Pacific Railway Limited (CP), Union Pacific Corp. (UNP) and Kansas City Southern (KSU), uncertainties in the market condition of some of the product lines and downturn in the economy may limit the upside potential of the stock.

Canadian National currently has a Zacks Rank #3 (Hold).

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