Canadian National Q4 Earnings & Revenues Beat, Up Y/Y

Canadian National Railway Company (CNI) reported fourth-quarter 2014 adjusted earnings per share of 93 Canadian cents (approximately 90 cents), beating the Zacks Consensus Estimate of 84 cents. Moreover, GAAP earnings per share of C$1.03 increased 36.8% year over year.

Quarterly revenues increased 16.8% year over year to C$3,207 million (approximately $2,846.9 million) and also outpaced the Zacks Consensus Estimate of $2,649 million. The year-over-year growth can be attributed to higher freight pricing and strong volumes, slightly offset by unfavorable foreign exchange rate fluctuations.

On a year-over-year basis, revenues increased 18% at Grain and Fertilizers, 34% at Metals and Minerals, 10% at Intermodal, 21% at Petroleum and Chemicals, 18% at Automotive, 11% at Forest Products and 8% at Coal.

Carloads (volumes) increased 10.5% year over year and revenue ton miles (RTMs), which measures the relative weight and distance of rail freight transported by Canadian National, moved up 9.3% from the year-ago quarter.

Operating Statistics

In the fourth quarter, adjusted operating income improved 30.3% year over year to C$1,260 million (approximately $1118.5 million), despite operating expenses increasing 9.5% year over year to C$1,947million (approximately $1,728.4 million). Operating ratio (defined as operating expenses as a percentage of revenues) was 60.7% against 64.8% in the year-ago quarter.

Liquidity

As of Dec 31, 2014, Canadian National had cash and cash equivalents of C$52million (approximately $46.2 million). The company had long-term debt of C$7,865 million (approximately $6,981.8 million), representing a debt-to-total capitalization ratio of 36.9% against 34.5% in the year-ago quarter. Free cash flow was C$188 million (approximately $166.9.4 million) in the fourth quarter.

Dividend and Share Repurchase

Canadian National paid C$202 million ($179.3 million) in dividend to shareholders in the fourth quarter. The company also repurchased shares worth C$410 million in the quarter.

Our Analysis

We believe strong demand across most of its business segments coupled with improved consumer confidence in the U.S. and domestic retail markets bode well for Canadian National. The company is also poised to reap benefits from improving demand and pricing trends. Canadian National’s industry-leading operating ratio, improved service and expected growth across the board, particularly in Intermodal and grain, should drive its projected earnings growth over the next few months.

However, low shipment of export coal in addition to competitive pressure from peers like Canadian Pacific Railway Limited (CP), Union Pacific Corporation (UNP) and Kansas City Southern (KSU), and spiraling expenses raise concern.

Canadian National currently has a Zacks Rank #4 (Sell).