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Canadian National Railway (CNI - Analyst Report) reported first-quarter 2014 adjusted earnings per share of 66 Canadian cents (approximately 60 cents), beating the Zacks Consensus Estimate of 58 cents. The results also increased 8% year over year on higher freight rates and volumes.

Quarterly revenues increased 9% year over year to C$2,693 million (approximately $2,443 million) and surpassed the Zacks Consensus Estimate of $2,511 million. The year-over-year growth was attributable to favourable currency fluctuations, higher freight pricing, volumes and fuel surcharge.

On a year-over-year basis, revenues increased 23% for Petroleum and Chemicals, 12% for Intermodal, 7% each for Coal as well as Metals and Minerals, and 6% for Grain and Fertilizers. Forest Products revenue remained flat year over year and revenues from Automotive dropped 4%.

Carloads (volumes) increased 1% year over year and revenue ton miles (RTMs), which measures the relative weight and distance of rail freight transported by Canadian National, moved up 5% from the year-ago quarter.

Operating Statistics

In the first quarter, adjusted operating income improved 5% year over year to C$820 million (approximately $744 million), despite operating expenses increasing 11% year over year to C$1,873 million (approximately $1,699 million). Operating ratio (defined as operating expenses as a percentage of revenues) was 69.6%, up 120 basis points.

Liquidity

As of Mar 31, 2014, Canadian National had cash and cash equivalents of C$198 million (approximately $179 million). The company had long-term debt of C$7,287 million (approximately $6,612 million), representing a debt-to-total capitalization ratio of 38.5%, down from 40.0% in the year-ago quarter. Free cash flow was C$494 million (approximately $448 million) in the first quarter.

Outlook

Canadian National reaffirmed its outlook for 2014.

The company expects double-digit earnings growth for the full year and free cash flow in the range of C$1.6–C$1.7 billion.

Canadian National expects carload growth in the mid single-digit range. However, capital expenditure is projected at around C$2.25 billion, higher than previously estimated $2.21 billion.

For 2014, Canadian National projects a 3% year-over-year increase in industrial production in North America. It also expects U.S. housing starts at around 1.1 million units and U.S. motor vehicles sales of approximately 16 million units.

The company expects U.S. 2013/2014 grain crop to remain above the five-year average and also projects Canadian 2013/2014 grain crop to witness similar growth. In addition, 2014/2015 grain crops in both the countries are anticipated in line with the five-year average.

Further, Canadian National expects CAD/USD exchange rate of approximately $0.90–$0.95 and the price of crude oil (West Texas Intermediate) in the $95–$105 per barrel range.

Dividend

Canadian National’s board of directors approved quarterly dividend payment to 25 Canadian cents, to be paid on Jun 30, 2014, to shareholders of record at the close of business on Jun 9.

Our Analysis

We believe Canadian National is 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, particularly in Intermodal and Crude, bode well for its projected earnings growth over the next few months.

However, several headwinds such as competitive threats from Canadian Pacific Railway Ltd. (CP - Analyst Report), Union Pacific Corp. (UNP - Analyst Report) and Kansas City Southern (KSU - Analyst Report), uncertainties in the market condition of some of the product lines and downturn in the economy may limit the upside potential of the stock.

Canadian National currently has a Zacks Rank #3 (Hold).

Read the Full Research Report on CNI
Read the Full Research Report on KSU
Read the Full Research Report on UNP
Read the Full Research Report on CP


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