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Growth & Income

Canadian National Railway Company (CNI - Analyst Report) delivered better-than-expected first quarter results on strong freight volumes, driven by an improving North American economy. And management revised their earnings guidance higher for the remainder of 2012.

This prompted analysts to raise their estimates for both 2012 and 2013, sending the stock to a Zacks #2 Rank (Buy).

The company also continues to steadily raise its dividend. It currently yields a solid 1.8%.

Company Description

Canadian National Railway's network of approximately 20,000 route miles spans Canada and mid-America, connecting three coasts: the Atlantic, the Pacific and the Gulf of Mexico. Its freight revenues are derived from 7 commodity groups:

Metals & Minerals: (13%)
Coal: (8%)
Intermodal: (21%)
Petroleum & Chemicals: (18%)
Automotive: (6%)
Forest Products: (15%)
Grain & Fertilizers: (19%)

The company is headquartered in Montreal and has a market cap of $37 billion.

First Quarter Results

Canadian National Railway delivered a nice 'beat & raise' for the first quarter. Earnings per share came in at $1.18, beating the Zacks Consensus Estimate by 15 cents. It was a 31% increase over the same quarter last year.

Revenues rose 13% to $2.353 billion, ahead of the consensus of $2.280 billion. This was mainly driven by higher freight volumes as the North American economy continued to improve. A mild winter helped too.

Each segment saw an increase in revenue year-over-year with the exception of Grain & Fertilizers, which declined 2%.

The operating ratio (operating expenses/total revenue) improved 280 basis points to 66.2%. This led to a 23% increase in operating income.

Guidance Raised

Given Canadian National Railway's strong Q1 results and an "assumption of continued improvement in economic conditions", management revised its guidance for the remainder of the year.

The company now expects 2012 EPS growth of 10%, up from previous guidance of "up to" 10% growth. This prompted analysts to revise their estimates higher too, sending the stock to a Zacks #2 Rank (Buy).

The Zacks Consensus Estimate for 2012 is now $5.50, representing 15% growth over 2011 EPS. The 2013 consensus estimate also moved higher and is currently $6.12, corresponding with 11% growth.

Dividend

In addition to strong growth, Canadian National Railway pays a dividend that yields a solid 1.8%. Since the year 2000, the company has increased its dividend at a compound annual rate of 17% in its local currency.

And this includes increases throughout the Great Recession. With a payout ratio of just 29%, expect additional large dividend hikes in the future.

Valuation

The valuation picture looks reasonable with shares trading at 14.6x 12-month forward earnings, slightly above the industry median of 14x. But considering the company's above-average growth potential, this premium seems justified.

The Bottom Line

With both management and analysts raising their earnings outlook for the year, and with a solid 1.8% yield and reasonable valuation, Canadian National Railway offers a lot of upside potential.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.

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