Canadian National Railway (CNI) reported adjusted earnings per share of C$1.30 ($1.27) in the fourth quarter of 2011, surpassing the Zacks Consensus Estimate by a penny. Adjusted earnings increased 20% from C$1.08 a year ago based on strong freight volume and pricing. For the full year, adjusted earnings per share grew 15.2% year over year to C$4.84.
Adjusted earnings for the fourth quarter and full year 2011 exclude the impacts of $11 million (or $0.02 diluted per share) in income tax recoveries and related fuel costs of some wholly owned subsidiaries. Additionally, adjusted earnings for the year exclude the impacts of $40 million (or $0.08) in special items related to net deferred income tax expenses as well as $254 million (or $0.55) and $38 million (or $0.08) in gains on sale of Lakeshore East assets, a part of the company’s Kingston subdivision and IC RailMarine Terminal Company.
Quarterly revenues increased 12.3% year over year to C$2.4 billion ($2.3 billion) and were ahead of the Zacks Consensus Estimate of $1.2 billion. During the fourth quarter, Metals and Minerals, Intermodal, Petroleum and Chemicals, Automotive, Forest Products, Grain and Fertilizers revenues increased 30%, 16%, 14%, 13%, 12% and 3% year over year, respectively. However, coal revenues remained flat at $149 million. The year-over-year growth across most of the segments was primarily driven by higher freight volumes coupled with higher freight rates and fuel recoveries.
Revenue for the year grew 8.8% year over year to C$9 billion ($8.7 billion). Freight rates and fuel surcharges exhibited strong growth throughout the year.
Carloads (volumes) increased 4% year over year to 1,232 units and revenue ton miles (RTM), which measure the relative weight and distance of rail freight transported by Canadian National, grew 3% from the year-ago quarter. For the full year, Carloads registered a growth of 4% and RTM grew 5%.
In the final quarter of 2011, operating income increased 8% year over year to C$839 million ($820 million) and operating ratio (defined as operating expenses as a percentage of revenue) deteriorated 130 basis points (bps) to 64.7% on 31.3% year-over-year increase in fuel expenses. Operating income for fiscal 2011 increased 26% year over year to C$612 million ($598 million) and operating ratio improved 230 bps to 70.9%.
Liquidity
Canadian National exited fiscal 2011 with cash and cash equivalents of C$101 million, which was much lower than C$490 million in the year-ago quarter due to increased capital expenditures. Cash from operating activities decreased to C$2,976 million from C$2,999 million in 2010. Free cash flows for the year was C$1,175 million compared to C$1,122 million a year ago. Long-term debt increased to C$6.4 billion from C$5.5 billion in the year-ago period.
Dividend
Canadian National’s board of directors announced a 15% increase in its quarterly dividend to 37.5 Canadian cents per share from 32.5 Canadian cents. The increased quarterly dividend will be paid on March 30 to shareholders of record as of March 9.
Guidance
For 2012, management expects adjusted earnings per share to grow approximately 10% over the year-ago level of C$4.84. Management expects carload to grow in the mid-single digit range, on pricing improvements.
For 2012, management expects North American industrial production to increase approximately 3%. The U.S housing market is expected to produce 700,000 units and the U.S. motor vehicles sales to be approximately 13.5 million units. Additionally, management expects 2012-2013 grain crops in Canada and the U.S. to be in line with the five-year averages. U.S. corn and soybean production are expected to be low in 2012.
Management expects crude oil prices for 2012 to be in the range of US$100 per barrel.
Management expects capital expenditure for 2012 to be approximately C$1.75 billion, of which over C$1 billion will be dedicated toward track infrastructure to improve railroad safety and efficiency.
Our Analysis
We believe Canadian Nationalis poised to benefit from the improved performance in each of its 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 bode well for volume growth at low costs.
However, several headwinds, such as 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 in terms of increasing regulations, which may weigh on efficiency gains and earnings growth of the company.
Accordingly, we are maintaining our long-term Neutral recommendation on the largest Canadian railway, as well as the Zacks #3 Rank (short-term Hold rating).
CDN NATL RY CO (CNI): Free Stock Analysis Report
CDN PAC RLWY (CP): Free Stock Analysis Report
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment