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Canadian National Railway (CNI - Analyst Report) reported a mixed second quarter 2013. The company’s efficient operating base, improved services and cost-control measures were partially offset by higher costs associated with purchased services, materials and fuel.

Adjusted earnings per share of C$1.66 (approximately $1.62) comfortably beat the Zacks Consensus Estimate of $1.58. The results also increased 11% from adjusted earnings of C$1.50 ($1.47) in the year-ago quarter on higher freight rates and volumes.

Quarterly revenues increased 5% year over year to C$2,666 million (approximately $2,605 million) but failed to meet the Zacks Consensus Estimate of $2,628 million. The year over year growth was attributable to improved performance across most of Canadian National’s commodity segments along with market share gains.

Carloads (volumes) increased 2% year over year and revenue ton miles, which measure the relative weight and distance of rail freight transported by Canadian National, moved up 5% from the year-ago quarter.

On a year-over-year basis, revenues increased 18% for Petroleum and Chemicals, 3% for Intermodal, 4% for Metals and Minerals, 4% for Forest Products and 5% for Grain and Fertilizers. While Automotive business witnessed a drop of 3%, Coal revenues remained flat.

Operating Statistics

In the second quarter, adjusted operating income improved 6% year over year to C$1,042 million (approximately $1,018 million), despite operating expenses moving up 4% year over year to C$1,624 million (approximately $1,587 million). Operating ratio (defined as operating expenses as a percentage of revenue) was 60.9%, down 40 basis points.

Liquidity

As of Jun 30, 2013, Canadian National had cash and cash equivalents of C$87 million ($85 million). The company had long-term debt (including current portion) of C$7,463 million ($7,292 million), representing debt-to-capitalization ratio of 39.6%. Free cash flow for the quarter was C$437 million ($427 million).

Guidance

Canadian National expects growth in 2013 to be driven by upward trends in the North American economic scenario, with carload projected to improve 3–4%.

The company expects earnings per share to register high single-digit year-over-year growth in 2013, while free cash flows are expected in the range of C$800 million to C$900 million. The company targets capital expenditure of C$2 billion, of which nearly C$1.1 billion will be directed toward maintenance of track infrastructure and railway network.

Other Railroad Stocks

Rail transportation services firm Union Pacific Corp. (UNP - Analyst Report) reported second quarter 2013 adjusted earnings of $2.37 per share, surpassing the Zacks Consensus Estimate of $2.35 and year-ago earnings of $2.10. Better-than-expected earnings were aided by higher pricing and an improvement in operating ratio.

Another transportation firm GATX Corp. (GMT - Analyst Report) reported adjusted second-quarter 2013 earnings of 68 cents per share, missing the Zacks Consensus Estimate of 85 cents. The results reflected 15% deterioration from 80 cents reported in the year-ago quarter.

Of the other companies in the sector that are yet to report, Canadian Pacific Railway Limited (CP - Analyst Report) will release its financial results on Jul 24, before the opening bell.

Our Analysis

Canadian National carries a Zacks Rank #3 (Hold). We expect Canadian National to benefit from favorable demand/supply dynamics. The company’s industry-leading operating ratio, service improvements and expected growth across the board, particularly in Intermodal, Crude and Forest products, bode well for its projected earnings growth over the next few months.