CN (CNI) Up 3.5% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Canadian National (CNI). Shares have added about 3.5% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is CN due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Earnings Beat at Canadian National in Q1

Canadian National's earnings (excluding 15 cents from non-recurring items) of 91 cents per share (C$1.42) beat the Zacks Consensus Estimate by 15 cents. The bottom line increased 3.4% year over year.

Although quarterly revenues of $2,643.3 million (C$3,545 million) surpassed the Zacks Consensus Estimate of $2,455.7 million, the same declined year over year. The downtick was primarily caused by COVID-19-induced network disruptions. Lackluster freight demand also had a negative impact on the top line. However, freight revenues, which contributed 96.6% to the top line, marginally inched up in the quarter under review.

On a year-over-year basis, freight revenues declined across all segments.  Nevertheless, the same in the Petroleum and Chemicals, and Grain and Fertilizers segment increased 8% and 6%, respectively. Freight revenues in Metals and Minerals, Forest Products and Coal segments declined 4%, 5% and 12%, respectively. Moreover, the same also declined in the Automotive segment (9%).Revenues in the Intermodal segment edged down marginally to $849 million from $850 million, reported in the year ago quarter. While overall carloads declined 6% year over year, revenue ton miles (RTMs) slipped 1%. However, freight revenue per carload increased 7% in the reported quarter. Freight revenue per RTM also moved up 2%.

Segment-wise, carloads declined in the Forest Products, Intermodal and Automotive segments by 8%, 12% and 15%, respectively. The metric also dropped in the Coal by 4%. Meanwhile, the metric increased in the Petroleum and Chemicals, Metals and Minerals and Grain and Fertilizers by 3%, 3% and 1%, respectively. Operating expenses for the first quarter fell 5% to C$2,330 million, primarily owing to lower labor cost as well as depreciation and fuel expenses. Adjusted operating income increased 13% year over year to C$1,215 million. Adjusted operating ratio (defined as operating expenses as a percentage of revenues) improved to 65.7% from the year-ago quarter’s 69.5%. Notably, a lower value of this key metric is desirable.

Pulls Back Guidance

Canadian National withdraws its full-year guidance as well as the three-year targets it outlined in June on Investors Day 2019, citing coronavirus-led uncertainty.

Liquidity

The company exited the year with cash and cash equivalents of C$488 million compared with the C$64 million recorded at the end of 2019. The company generated free cash flow of C$573 during the first quarter of 2020 compared with the year-ago quarter’s C$286 million. Long-term debt amounted to C$12,695 million as of Mar 31, 2020 compared with C$11,866 million at 2019-end.

Maintains Dividend

The company's board maintains its quarterly dividend at C$0.575, which will be paid out on Jun 30 to shareholders of record at the close of business on Jun 9.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -9.55% due to these changes.

VGM Scores

Currently, CN has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, CN has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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