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Mixed 3Q for Canadian National

Zacks Equity Research

Canadian National Railway (CNI) reported adjusted earnings per share of C$1.52 (approximately $1.53) in the third quarter of 2012, in line with the Zacks Consensus Estimate. Adjusted earnings increased 10% from the adjusted earnings of C$1.38 ($1.41) in the year-ago quarter, aided by strong freight volume and pricing.

Revenues increased 8% year over year to C$2,497 million (approximately $2,508 million) but missed the Zacks Consensus Estimate of $2,521 million.  

The company gained significantly from growth across most of its commodity segments, mostly from Petroleum and Chemicals, Coal as well as Grain and Fertilizers.

Carloads (volumes) increased 3% year over year and revenue ton miles, which measure the relative weight and distance of rail freight transported by Canadian National, grew 2% from the year-ago quarter.

On a year-over-year basis, revenues increased 15% for Petroleum and Chemicals, 13% for Coal, 10% for Grain and Fertilizers, 9% for Automotive, 7% for Metals and Minerals, 6% for Intermodal and 3% for Forest Products.

Operating income increased 5% year over year to C$985 million (approximately $989 million). Operating expenses climbed 10% year over year to C$1,512 million (approximately $1,519 million) due to steeper fuel costs, increased purchased services and material expenses, higher labor and fringe benefits expense and increased fuel costs related to shipments. Operating ratio (defined as operating expenses as a percentage of revenue) was 60.6%, deteriorating 130 basis points.


Canadian National exited the third quarter with cash and cash equivalents of C$175 million ($176 million), which was much lower than C$192 ($196 million) in the same quarter of 2011. Free cash flow declined to C$1,036 million ($1,040 million) from C$1,328 million ($1,359 million) in the comparable year-ago quarter. The decline was primarily due to higher pension plan contributions that amounted to C$450 million.

Long-term debt decreased to C$5,770 million at the end of third quarter from C$6,441 million at year-end 2011 and C$5,878 million in the year-ago quarter. Debt-to-total capitalization ratio was 36.3% in the third quarter versus 35.5% in the year-ago quarter.


Canadian National’s board of directors announced a quarterly dividend of 37.5 Canadian cents per share to shareholders of record on December 10, payable on December 31.

Share Repurchase

Canadian National repurchased 16.7 million shares worth $1.4 billion in the third quarter under its current share repurchase program.  The company announced a new 18 million share repurchase program worth C$1.4 billion.


The company maintains its 2012 adjusted earnings per share growth estimate of approximately 15% from C$4.84 in fiscal 2011. Pension expense estimates remain unchanged at C$100.

Free cash flows are expected to be C$1 billion. The company expects voluntary pension contribution consideration of C$250 million in the fourth quarter.

The company maintains its investment plan of C$1.8 billion for 2012, of which C$1 billion will be dedicated to track infrastructure development, railway safety along with network fluidity.

The company expects carloads to remain in the mid single-digit range in 2012 and pricing will continue to trade above inflationary levels.

Canadian National expects 2012 and 2013 U.S. grain crop to be lower than the five-year average, and Canadian grain crop in 2012 and 2013 will be slightly higher than the five-year average. In addition, the company expects North American industrial production to increase by about 3% in 2012.

The company also expects U.S. housing starts to be approximately 750,000 units, and U.S. automotive sales to be approximately 14.5 million units this year. Crude oil prices (West Texas Intermediate) for 2012 are expected to be approximately US$95 per barrel.

Our Analysis

We believe Canadian National is poised to benefit from the improving demand and pricing trends. The company’s service improvements and expected growth across all segments bode well for the projected double-digit earnings growth in 2012. However, several headwinds such as competitive threats from its peers like Canadian Pacific Railway Limited  (CP) , exchange rate fluctuations, and volatilities in market conditions limit the upside potential of the stock.

Accordingly, we have maintained our long-term Neutral rating on Canadian National. The stock holds a Zacks #3 Rank (Hold).

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