On Aug 14, 2014, we issued an updated research report on Canadian National Railway Company (CNI). The company reported strong second-quarter 2014 results that surpassed the Zacks Consensus Estimate on both lines. Strong demand across most of its businesses with improvements in the U.S. economy and domestic retail markets bode well for the company. However, lower coal shipments, particularly for export, continue to be a headwind for Canadian National. The Montreal-based company currently carries a Zacks Rank #3 (Hold).
The company foresees strong demand across most of its businesses with improvements in consumer confidence in the U.S. and domestic retail markets, underpinning mid-to-high single-digit growth in business volumes in 2014.
In terms of agricultural volumes, Canadian National forecasts robust grain export from both Canada and the U.S., as the company continues moving the record harvest achieved last year. Increased vehicle production in North America will boost the automotive division while thermal coal volume will remain strong due to the ongoing restocking and market share gains.
The company’s chemical business will benefit from shale-related activity and continuous growth in crude-by-rail business while higher revenues are expected from potash and the upcoming markets for frac sand in 2014 and 2015.
Post a difficult winter, the company has finally managed to synchronize its overall supply chain. It has also opened 2 new training centers in Winnipeg and suburban Chicago apart from enhancing its on-job training to improve employees’ skill levels. We expect the operating ratio to remain at the current level of around 60% on enhanced productivity from improving system velocity and fuel efficiency.
However, offshore coal export is expected to remain challenged going forward. Although fuel price has currently eased from the recent highs, its impulsive nature continues to be a significant challenge for the company. As a result, despite performing efficiently on the fuel expense front in the second quarter, the carrier expects tough times in the second half of the year. Further, Canadian National faces significant competition from rail carriers and other modes of transportation.
Stocks that Warrant a Look
Other stocks that warrant a look in this sector include Trinity Industries Inc. (TRN), GATX Corp. (GMT) and Canadian Pacific Railway Limited (CP). Trinity Industries sports a Zacks Rank #1 (Strong Buy), while GATX Corp. and Canadian Pacific Railway carry a Zacks Rank #2 (Buy).
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