Why Is CN (CNI) Down 2.4% Since Last Earnings Report?
It has been about a month since the last earnings report for Canadian National (CNI). Shares have lost about 2.4% 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 the most recent earnings report in order to get a better handle on the important catalysts.
Earnings Beat at Canadian National in Q3
Canadian National’s third-quarter 2021 earnings (excluding 67 cents from non-recurring items) of $1.21 per share (C$1.52) surpassed the Zacks Consensus Estimate of $1.12. The bottom line increased year over year. Results were aided by higher freight rates and fuel surcharges.
Quarterly revenues of $2,852.1 million (C$3,591 million) topped the Zacks Consensus Estimate of $2,771.2 million. The top line also improved year over year, driven by a double-digit revenue increase at some of the business units.
Freight revenues (C$3,427 million), which contributed 95.4% to the top line, increased 5% year over year as economic activities gather pace. Freight revenues at the Grain and fertilizers segment declined 16% while the same at the automotive unit decreased 23% year over year. Freight revenues at the petroleum and chemicals, metals and minerals, forest products, coal and intermodal units increased 21%, 20%, 1%, 43% and 7%, respectively.
Both overall carloads (volumes) and revenue ton miles (RTMs) decreased 1% year over year. Segmentwise, carloads in the Petroleum and chemicals, metals and minerals and coal improved 9%, 13%, and 60%, respectively. Carloads at the forest products, grain and fertilizer, intermodal and automotive segment declined 2%, 19%, 6% and 31% year over year, respectively. Freight revenues per carload and freight revenues per RTM improved 6% each in the reported quarter.
Operating expenses (on a reported basis) for the third quarter shot up 10% to C$2,250 million due to higher fuel costs among other factors. Average fuel price rose 46.6% in the reported quarter. Adjusted operating income increased 10% year over year to C$1,079 million. Adjusted operating ratio (defined as operating expenses as a percentage of revenues) improved to 59% from the year-ago quarter’s 59.9%. Lower value of the metric is desirable.
Liquidity
The company generated free cash flow of C$754 million during the September quarter compared with the year-ago quarter’s C$506 million. Cash and cash equivalents amounted to C$2,194 million as of Sep 30, 2021 compared with C$569 million at December 2020 end.
2021 Outlook
Canadian National anticipates current-year earnings per share to increase 10% from adjusted earnings of C$5.31 reported in 2020. Volumes, measured in revenue ton miles (RTMs), are expected to increase in low-single digits during the current year. The company still estimates free cash flow of C$3-C$3.3 billion for 2021 while the same was reported as C$3.2 billion in 2020.
CEO to Retire
In a separate development, the company announced that Jean-Jacques Ruest will retire at the end of January 2022 (or later when his successor is appointed) as its president and chief executive officer and as a member of the railroad operator’s board. Ruest has been associated with Canadian National for more than 25 years now. He was elevated to the CEO’s post in 2018.
We remind investors that TCI Fund Management Ltd, which is a major shareholder at Canadian National with more than 5% interest, was not happy with the company’s performance and its decision to pursue the Kansas City Southern buyout deal, which eventually fell through last month following a regulatory setback. Another Canadian railroad operator Canadian Pacific Railway Limited Is now slated to acquire Kansas City Southern.
Unhappy with Canadian National’s performance, TCI Fund Management, which is run by billionaire Chris Hohn, was looking to replace Ruest and four other board members for some time. Reacting to Ruest’s impending retirement, TCI reportedly issued the following statement “Dismissing the same CEO that the board put in place just three short years ago is a good start, but it does not address the fundamental problem of a lack of leadership, failed strategic oversight, and the vacuum of operational expertise at the board level”.
TCI wishes to see Jim Vena fill Ruest’s shoes. Incidentally, the former was recently at the helm of Union Pacific. However, only time will tell if this comes true.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month.
VGM Scores
Currently, CN has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Following the exact same course, 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 D. 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 has been net zero. 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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