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Canadian National Railway (CNI - Analyst Report) reported third quarter 2013 adjusted earnings per share of C$1.72 (approximately $1.66), comfortably beating the Zacks Consensus Estimate of $1.58. The results also increased 13% year over year on higher freight rates and volumes.

Quarterly revenues increased 8% year over year to C$2,698 million (approximately $2,596 million) and surpassed the Zacks Consensus Estimate of $2,557 million. The year-over-year growth was attributable to higher freight carloads based on strong energy markets, market share gains, as well as gradual recovery in the North American economy.

Carloads (volumes) increased 3% year over year and revenue ton miles, which measures the relative weight and distance of rail freight transported by Canadian National, moved up 4% from the year-ago quarter.

On a year-over-year basis, revenues increased 17% for Petroleum and Chemicals, 13% for Intermodal, 11% for Metals and Minerals, 8% for Forest Products and 7% for Automotive. Coal as well as Grain and Fertilizers registered a revenue decline of 1% and 3% year over year, respectively.

Operating Statistics

In the third quarter, adjusted operating income improved 10% year over year to C$1,084 million (approximately $1,043 million), despite operating expenses increasing 6.7% year over year to C$1,614 million (approximately $1,553 million). Operating ratio (defined as operating expenses as a percentage of revenues) was 59.8%, down 80 basis points.

Liquidity

As of Sep 30, 2013, Canadian National had cash and cash equivalents of C$182 million ($177.9 million). The company had long-term debt (including current portion) of C$7,498 million ($7,328 million), representing debt-to-total capitalization ratio of 39.3%. Free cash flow for the quarter was C$341 million ($328 million).

2013 Guidance

Canadian National expects growth in 2013 to be driven by upward trends in the North American economic scenario, with carload projected to improve 2–3%. The company expects North American industrial production to grow 2%. U.S. housing starts are estimated approximately 950,000 units, and U.S. motor vehicles sale is expected at 15 million units. Canadian grain production U.S. grain production is projected to remain above the five-year average.

The company estimates capital expenditure of C$2 billion.

Recommendation

We believe Canadian Nationalis well poised to reap benefits from improving demand and pricing trends. The company’s industry-leading operating ratio, service improvements and expected growth across the board, in particular Intermodal, Crude and Automotive, bode well for its projected earnings growthover the next few months. However, several headwinds such as competitive threats and uncertainties in the market condition of some of the product lines may limit the upside potential of the stock.

Canadian National which operates with other players like Canadian Pacific Railway Limited (CP - Analyst Report), Norfolk Southern Corporation (NSC - Analyst Report) and CSX Corp. (CSX - Analyst Report) has a Zacks Rank #3 (Hold).

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