Canadian National Railway Company (CNI), Canada’s largest railway, reported first quarter 2011 adjusted earnings per share of 91 U.S. cents (90 Canadian cents), at par with the Zacks Consensus Estimate.

However, adjusted earnings increased 12.5% from the year-ago earnings of 80 Canadian cents. The year-over-year improvement was backed by gradual improvement in the North American economy, despite challenging weather conditions.

Adjusted earnings exclude an after-tax gain of C$254 million or 55 Canadian cents per share related to the disposal of the Toronto rail line.

Total revenue climbed 6% year over year to C$2,084 million ($2,113 million) but fell way below the Zacks Consensus Estimate $2,119 million. Higher volumes across all commodity segments drove the year-over-year improvement.

On an annualized basis, revenues increased 12% for Intermodal, 9% for Grain and Fertilizers, 7% for Petroleum and Chemicals, 7% for Coal, 4% for Forest Products and 1% for Automotive. Metals and Minerals were flat in the reported quarter. 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 the freight rate. These factors were partly offset by a negative currency translation.

Carloads (volume) rose 3% year over year and revenue ton miles, which measures the relative weight and distance of rail freight transported by Canadian National, grew 5% from the year-ago quarter.

Operating expenses increased 6% year over year to C$1,439 million ($1,459 million). Higher fuel costs, increased purchased services and materials expense, andhigher depreciation and amortization expense were partially offset by the positive impact of currency translation and lower casualty and other expenses. Operating ratio (defined as operating expenses as a percentage of revenue) improved 30 bps year over year to 69% from 69.3% in the year-ago quarter.


Cash and cash equivalents decreased to C$583 million at the end of the first quarter from C$748 million in the year-ago quarter. Long-term debt decreased to C$5.4 billion from the year-ago level of C$6.2 billion. Debt-to-total capitalization ratio was 34.1%, down from 35.4% in the year-ago quarter.

Canadian National repurchased 5 million shares at a total cost of $340 million during the reported quarter.

The company generated free cash flow of C$445 million in the reported quarter compared with C$493 million in the year-ago quarter.


Based on the first quarter performance and continued improvement in the North American economy, Canadian National now expects adjusted earnings per share to increase in the double digits to 15% year over year compared with the previous forecast of only double-digit growth for fiscal 2011.

The company also raised its free cash flow expectation to C$1.2 billion from C$850 million for 2011.


On June 30, Canadian National is scheduled to pay a quarterly dividend of C$0.325 per share to shareholders of record on June 9.

Our Analysis

We believe Canadian Nationalis poised to benefit from the eventual rebound in the overall economy as well as slower rise in North American industrial production. Improved performance in each of the business segments will likely fuel future revenue and earnings growth. In addition, the company’s focus on increased network, train efficiency, productivity initiatives, and “first mile-last mile” initiativeshould 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 highly unionized labor will limit the upside potential of the stock. Further, the railindustry 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 Canadian National with the Zacks #3 (Hold) Rank.

CDN NATL RY CO (CNI): Free Stock Analysis Report
CDN PAC RLWY (CP): Free Stock Analysis Report
Zacks Investment Research