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CN (CNI) Down 5.8% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for Canadian National (CNI). Shares have lost about 5.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is CN due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Earnings Beat at Canadian National in Q4

Canadian National's fourth-quarter earnings (excluding 3 cents from non-recurring items) of 95 cents per share (C$1.22) beat the Zacks Consensus Estimate by 4 cents. The bottom line, however, declined 15.9% year over year.

Although quarterly revenues of $2,715.5 million (C$3,584 million) surpassed the Zacks Consensus Estimate of $2,690 million, the same declined 5.8% year over year, primarily due to reduced volumes being shipped across all segments following the eight-day rail strike (Nov 19- 26). Lackluster freight demand also negatively impacted the top line. Notably, freight revenues, which contributed 95.1% to the top line, declined 5.4% in the quarter under review.

On a year-over-year basis, freight revenues declined across all segments apart from Intermodal where the same increased 4%. Freight revenues in Petroleum and Chemicals, Metals and Minerals and Forest Products segments declined 7%, 10% and 11%, respectively. Meanwhile, the same also declined in the Coal (14%), Grain and Fertilizers (6%) and Automotive (8%) units. While overall carloads declined 7% year over year, revenue ton miles (RTMs) slipped 13%. However, freight revenue per carload ascended 4% in the reported quarter. Freight revenue per RTM also increased 9%.

Segment-wise, carloads declined in the Petroleum and Chemicals, Metals and Minerals and Forest Products segments by 8%, 8% and 15%, respectively. The metric also dropped in the Coal (16%), Grain and Fertilizers (7%), Intermodal (4%) and Automotive (8%) units. However, operating expenses remained flat in the fourth quarter at C$2,356 million. Adjusted operating income declined 16% year over year to C$1,249 million. Adjusted operating ratio (defined as operating expenses as a percentage of revenues) deteriorated to 65.2% from the year-ago quarter’s 61.2%. Notably, a lower value of this key metric is desirable.

Liquidity

The company exited the year with cash and cash equivalents of C$64 million compared with the C$266 million recorded at the end of 2018. The company generated free cash flow of C$493 during the final quarter of 2019 compared with the year-ago period’s C$633 million. Long-term debt amounted to C$11,866 million as of Dec 31, 2019 compared with C$11,385 million at 2018-end.

Decent 2020 Outlook

RTMs are expected to witness single-digit volume growth in the current year despite the lackluster freight scenario. Moreover, the company aims at 2020 earnings per share (adjusted) growth in the mid-single-digit range compared with the C$5.80 reported in 2019. The company aims to generate free cash flow of C$3-3.3 billion this year compared with the prior year’s C$2 billion.

Capital expenditure in 2020 is targeted at C$3 billion. In addition, the railroad operator aims to buy back up to 16 million shares in a 12-month period, starting Feb 1, 2020.

How Have Estimates Been Moving Since Then?

Since the earnings release, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -8.66% due to these changes.

VGM Scores

Currently, CN has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, CN has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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