Canadian National Lags Earnings & Rev
Canadian National Railway (CNI) reported a dull first quarter 2013, hurt by unfavorable weather conditions across Western Canada that impeded operations, slowed down network activities and restricted volume growth. Steeper fuel costs were no less responsible for the deterioration.
Adjusted earnings per share of C$1.22 (approximately $1.21) missed the Zacks Consensus Estimate of $1.23. The results however increased 3% from the adjusted earnings of C$1.18 ($1.17) in the year-ago quarter, aided by better services, higher train velocity and lower freight car dwell times.
Quarterly revenues increased 5% year over year to C$2,466 million (approximately $2,447 million) but failed to match the Zacks Consensus Estimate of $2,512 million. The year-over-year growth was attributed to improved performance across most of Canadian National’s commodity segments.
Carloads (volumes) increased 2% year over year and revenue ton miles, which measure the relative weight and distance of rail freight transported by Canadian National, moved up 3% from the year-ago quarter.
On a year-over-year basis, revenues increased 17% for Petroleum and Chemicals, 7% for Intermodal, 3% for Metals and Minerals, 2% for Forest Products, 2% for Automotive and 1% for Grain and Fertilizers. Coal business witnessed a drop of 1%.
Operating Statistics
In the first quarter, adjusted operating income declined 2% year over year to C$780 million (approximately $774 million), while operating expenses crept up 9% year over year to C$1,686 million (approximately $1,673 million). Operating ratio (defined as operating expenses as a percentage of revenue) was 68.4%, up 220 basis points.
Liquidity
As of Mar 31, 2013, Canadian National had cash and cash equivalents of C$128 million ($127 million). The company had long-term debt (including current portion) of C$7,411 million ($7,353 million), representing debt-to-capitalization ratio of 40.0%. Free cash flow utilized for the quarter was C$20 million ($20 million).
Guidance
Canadian National expects growth in 2013 to be driven by upward trends in the North American economic scenario, with carload projected to improve 3%–4%.
The company expects earnings per share to register high single-digit year-over-year growth in 2013, while free cash flows are expected in the range of C$800 million to C$900 million. The company targets capital expenditure of C$2 billion, of which nearly C$1.1 billion will be directed toward maintenance of track infrastructure and railway network.
Other Railroad Stocks
Rail transportation services firm Union Pacific Corporation (UNP) reported first quarter 2013 adjusted earnings of $2.03 per share, surpassing the Zacks Consensus Estimate of $1.96 as well as the year-ago earnings of $1.79. Higher pricing and an improvement in operating ratio aided better-than-expected earnings.
Of the other stocks in the sector, Canadian Pacific Railway Limited (CP) will release its financial results on Apr 24, before the opening bell, while GATX Corp. (GMT) is expected to report on Apr 25, also before the start of trading.
Our Analysis
Canadian National carries a Zacks Rank #3 (Hold). We expect Canadian National to benefit from its supply chain collaboration for Coal and Intermodal terminal service, which would aid volume expansion. Additionally, market share gains, solid execution, effective cost-control measures, a turnaround in automotive production and gradual improvements in housing and related segments would also remain favorable.
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