Canadian National Railway (CNI) reported adjusted earnings per share of C$1.38 ($1.41) in the third quarter of 2011, surpassing the Zacks Consensus Estimate of $1.34.
Adjusted earnings increased 16.0% from C$1.19 in the year-ago quarter aided by strong freight volume and pricing.
Adjusted earnings include an after-tax gain of C$38 million or 8 Canadian cents per share related to assets sale proceeds from IC RailMarine Terminal Company.
Revenues increased 8.7% year over year to C$2.3 billion ($2.4 billion) and were in line Zacks Consensus Estimate driven by higher volumes across all of commodity segments except for Coal volumes that declined 9% year over year.
On a year-over-year basis, revenues climbed 21% for Metals and Minerals followed by increases of 12% in Intermodal, 9% in Automotive, 7% in Forest Products, 6% in Petroleum and Chemicals as well as in Grain and Fertilizers, and a modest 1% growth in Coal.
Carloads (volumes) increased 4% year over year and revenue ton miles, which measure the relative weight and distance of rail freight transported by Canadian National, grew 6% from the year-ago quarter.
Operating income increased 12.0% year over year to C$938 million ($959 million). Operating expenses climbed 6.0% year over year primarily due to steeper fuel costs, increased purchased services and materials expense, higher labor and fringe benefits expense. Operating ratio (defined as operating expenses as a percentage of revenue) improved by 140 basis points to 59.3% from 60.7% in the year-ago quarter.
Liquidity
Canadian National exited the third quarter with cash and cash equivalents of C$192 million, which was much lower than C$548 million in the year-ago quarter. Long-term debt decreased to C$5.9 billion from C$6.1 billion in the year-ago quarter.
Dividend
Canadian National’s board of directors announced a quarterly dividend of 32.5 Canadian cents per share to shareholders of record on December 9, payable on December 30.
Share Repurchase
Canadian National’s board of directors announced a new share repurchase program of 17 million, commencing on October 28, 2011 and expected to be over by October 27, 2012.
Our Analysis
We believe Canadian National is poised to benefit improved performance in each of the business segments that will likely fuel revenue and earnings growth. In addition, the company’s agreement with Raven Energy, LLC, for coal transportation is also expected to aid its Coal business. Further, the company remains focused on increasing network fluidity, train efficiency, productivity initiatives, and its “first mile-last mile” initiative, which should all bode well for volume growth at low costs.
However, several headwinds from rising fuel prices, higher depreciation expenses and negative currency translation, along with competitive threats particularly from Canadian Pacific Railway Limited (CP) as well as a unionized labor force will limit the upside potential of the stock. Further, the rail industry may create potential headwinds by way of increasing regulations, which may weigh on efficiency gains and earnings growth of the company.
Accordingly, we are currently maintaining our long-term Neutral rating on the largest Canadian railway, with the Zacks #3 (Hold) Rank.
CDN NATL RY CO (CNI): Free Stock Analysis Report
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