The largest rail network in Canada, Canadian National Railway Company(CNI) reported adjusted earnings per share of C$1.08 ($1.07) in the fourth quarter of 2010, slightly below the Zacks Consensus Estimate of $1.08.

Adjusted earnings climbed 20% from the year-ago earnings of 90 Canadian cents (89 cents) driven by solid revenue growth, operating efficiencies and volume expansion. Adjusted earnings for fiscal 2010 shot up 30% year over year to C$4.20 ($4.08) per share.

Total revenue for the reported quarter increased 12% year over year to C$2,117 million ($2,090 million) but below the Zacks Consensus Estimate of $2,109 million. For full year 2010, revenue increased 13% to C$8,297 million ($8,057 million), primarily driven by higher volumes across all commodity segments.

Growth across all commodity segments can be attributable to improving economic conditions in North America and internationally, a higher fuel surcharge as well as an increase in freight rate. These factors were partly offset by a negative currency translation.

On a year-over-year basis, quarterly revenues increased 22% for Coal, 17% for Intermodal, 13% for Metals and Minerals, 13% for Grain and Fertilizers, 10% for Automotive, 10% for Petroleum and Chemicals and 8% for Forest Products.

Carloads (volume) rose 10% year over year and revenue ton miles, which measure the relative weight and distance of rail freight transported by Canadian National, grew 11% from the year-ago quarter. For fiscal 2010, carloads and revenue ton miles increased 18% and 12%, respectively.

Operating expenses grew 9% year over year to C$1,343 million ($1,326 million) in the reported quarter due to higher fuel costs, increased labor and fringe benefit expenses as well as higher casualty and other expenses. Operating ratio (defined as operating expenses as a percentage of revenue) improved 190 bps year over year to 63.4% from 65.3% in the year-ago quarter.

For 2010, operating expenses increased 6% to C$5,273 million ($5,120 million) and operating ratio improved 310 bps to 63.6%.

Liquidity

The company generated free cash flow of C$1,122 million at the end of fourth quarter 2010 compared to C$790 million in the year-ago quarter.

Cash and cash equivalents increased to C$490 million in 2010 from C$352 million in 2009. Long-term debt decreased to C$5.5 billion from the year-ago level of C$6.4 billion. Debt-to-total capitalization ratio was 35.0%, down from 36.5% in 2009. The low debt-to-total capitalization ratio implies that the company has enough liquidity and is favorably positioned for long-term opportunities.

Dividend

Canadian National will pay a quarterly dividend of 32.5 Canadian cents per share on March 31, 2011, to shareholders of record on March 10.

Guidance

For 2011, Canadian National projected double-digit adjusted earnings growth as compared with C$4.20 per share in 2010.

The company expects free cash flow of approximately C$850 million for 2011.

Our Analysis

Canadian National expects continued recovery in the North American economy in 2011, albeit at a slower rate compared to 2010. It also expects the global economic conditions to improve. Based on solid growth prospects for 2011, we believe the company will benefit from expansion in overseas container traffic, metal products and iron ore in the domestic markets, pulp and paper in international markets, Canadian metallurgical coal, U.S. thermal coal, increased shipments of petroleum and chemicals, and growth in domestic intermodal segments.

However, the company is expected to encounter headwinds from increased depreciation expenses and negative currency translation. Additionally, Canadian National faces significant competition from rail carriers and other modes of transportation, particularly from companies like Canadian Pacific Railway Limited (CP), which operates in almost the same areas as Canadian National.

We are currently recommending our long-term Neutral rating on Canadian National, which corroborates with a Zacks #3 (Hold) Rank.  

 
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