Canadian National (CNI) Earnings Beat, Revenues Miss in Q2

Canadian National Railway Company’s (CNI) second-quarter 2016 earnings (on an adjusted basis) of C$1.11 per share (86 cents) beat the Zacks Consensus Estimate by 3 cents. Earnings declined 3% from the year-ago figure due to lower revenues. However, the earnings beat was a result of effective cost management by the company.

The company’s top-line performance was disappointing as quarterly revenues of C$2,842 million (approximately $2,209 million) fell short of the Zacks Consensus Estimate of $2,262 million and deteriorated 9% on a year-over-year basis. Most importantly, rail freight revenues, which accounted for 93.1% of the top line in the quarter, contracted 9.6%. Canadian National’s top line suffered mainly because of reduced shipments of energy-related commodities, declining North American demand for coal, reduced supply of grain resulting in lower delivery to North America and low fuel surcharges.

Operating Results

On a year-over-year basis, freight revenues decreased 36% at the coal segment, 16% at Petroleum and Chemicals, 17% at Metals and Minerals, 12% at Grain and Fertilizers, 4% at Intermodal, and 15% at Automotive. On the other hand, freight revenues increased 4% for Forest Products. Carloads (volumes) dropped 11.7% and revenue ton miles (RTMs) fell 11% year over year.

In the quarter under review, operating income declined 5% year over year to C$1293 million. Operating ratio (defined as operating expenses as a percentage of revenues) was 54.5% versus 56.4% in the year-ago quarter.

CDN NATL RY CO Price, Consensus and EPS Surprise

CDN NATL RY CO Price, Consensus and EPS Surprise | CDN NATL RY CO Quote

Liquidity & Dividends

Canadian National exited the second quarter of 2016 with free cash flow of C$585 million compared with $530 million in the prior-year quarter. Adjusted debt at the end of the second quarter of 2016 was C$10,883 million versus C$9,955 million a year ago.

The company also declared a quarterly dividend of C$0.375 which will be paid on Sep 30, 2016, to shareholders on record as of Sep 9.

Guidance

Reiterating its earlier issued guidance, Canadian National expects earnings per share to remain flat on a year-over-year basis in 2016. The company reported earnings of C$4.44 per share in 2015. The Montreal-based company expects markets such as automotive, lumber and panes, refined petroleum products and grains to remain strong for the remaining part of 2016. However, volumes are expected to be sluggish in intermodal and oil and gas.

Zacks Rank & Key Picks

Canadian National currently carries a Zacks Rank #3 (Hold). Investors interested in the transportation space may also consider Cathay Pacific Airways Limited (CPCAY) and Air Lease Corp (AL) with a Zack Rank #1 (Strong Buy) and ANA Holdings Inc. (ALNPY) with a Zacks Rank #2 (Buy).

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