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Why Is CN (CNI) Down 1.3% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Canadian National (CNI). Shares have lost about 1.3% in that time frame, outperforming the S&P 500.

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

Earnings Beat at Canadian National in Q2

Canadian National's adjusted earnings (excluding 12 cents from non-recurring items) of $1.29 per share (C$1.73) beat the Zacks Consensus Estimate of $1.26. Moreover, the bottom line improved double digits on a year-over-year basis.

Although quarterly revenues of $2959.8 million (C$3959 million) increased year over year, the same missed the Zacks Consensus Estimate of $2995.5 million. The TransX buyout and higher freight rates among other factors drove the top line. Also, freight revenues climbed 10% year over year and contributed 95% to the top line.

Operating Results

On a year-over-year basis, freight revenues rose in Petroleum and Chemicals (26%), Intermodal (15%), Automotive (5%), Grain and Fertilizers (8%) and Coal (1%). Meanwhile, the same declined in Metals and Minerals (2%) and Forest Products (1%). Overall, carloads (volumes) and revenue ton miles (RTMs) inched up 2% each. Moreover, freight revenue per carload ascended 8% in the quarter under review. Freight revenue per RTM also increased 8%.

The Petroleum and Chemicals sub-group performed impressively with respect to carloads, with the metric increasing 12% year over year. At the Metals and Minerals segment, the same inched up 2% while Coal volumes expanded 5%. At Grain and Fertilizers, Intermodal and Automotive segments volumes rose 3%, 1% and 4%, respectively. Meanwhile, volumes contracted 8% at the Forest products segment.

Adjusted operating income augmented 10.7% year over year to C$1,682 million. Adjusted operating ratio (defined as operating expenses as a percentage of revenues) improved to 57.5% from 58.2% in the year-ago quarter. Notably, lower value of this key metric bodes well for the company.

However, operating expenses rose 8% year over year to C$2,277 million. This downside was mainly due to expenses related to the acquisition of TransX, currency headwind and other factors.

Liquidity

The company exited the second quarter with cash and cash equivalents of C$128 million compared with C$266 million at the end of 2018. Free cash flow came in at C$513 million compared with C$974 million in the year-ago period. Long-term debt amounted to C$11,512 million as of Jun 30, 2019 compared with C$11,385 million in December 2018.

Dividend Update

The company’s board has declared a quarterly cash dividend of C$0.5375 per share, payable Sep 30, 2019 to shareholders of record as of Sep 9.

2019 Outlook Intact

For 2019, the company still anticipates adjusted earnings per share to grow in the range of low double-digits compared with C$5.50 in the prior-year period. Also, RTMs are expected to witness mid-single-digit volume expansion in the year.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

Currently, CN has a nice Growth Score of B, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% 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

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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