Canadian National Railway ( CNI - Analyst Report ) reported mixed fourth quarter and full year results, based on better slot utilization, improved productivity and favorable pricing, partially offset by higher fuel costs and equipment rents.

Adjusted earnings per share of C$1.41 (approximately $1.42) in the fourth quarter of 2012 were in line with the Zacks Consensus Estimate. The results increased 8% from the adjusted earnings of C$1.30 ($1.31) in the year-ago quarter, aided by operational excellence and better services.

Quarterly revenue increased 7% year over year to C$2,534 million (approximately $2,556 million) but missed the Zacks Consensus Estimate of $2,569 million. The year-over-year growth is attributed to improved performance across most of its commodity segments, especially from Petroleum and Chemicals, Coal as well as Grain and Fertilizers.

Carloads (volumes) increased 3% year over year and revenue ton miles, which measure the relative weight and distance of rail freight transported by Canadian National, moved up 8.0% from the year-ago quarter.

On a year-over-year basis, revenues increased 13% for Petroleum and Chemicals, 15% for Coal, 11% for Grain and Fertilizers, 5% for Automotive and 7% for Intermodal. There was a drop in revenue by 2% for Forest Products and 1% for Metals and Minerals.

For the full year, the company posted earnings per share of C$5.61 or $5.66 (marginally beating our projection of $5.62 but up 16% year over year), on revenue of C$9,920 million or $10,006 million (up 10% from the prior year).

Operating Statistics

In the fourth quarter, operating income increased 10% year over year to C$922 million (approximately $930 million). Operating expenses climbed 5% year over year to C$1,612 million (approximately $1,626 million). Operating ratio (defined as operating expenses as a percentage of revenue) was 63.6%, down 110 basis points.

Liquidity

Canadian National exited 2012 with cash and cash equivalents of C$155 million ($156 million). The company had long-term debt (including current portion) of C$6,900 million ($6,960 million), representing debt-to-capitalization ratio of 38.5%. Free cash flow for the year amounted to C$1,006 million ($1,015 million).

Dividend

Canadian National’s board of directors hiked the quarterly dividend by 15% to 43 Canadian cents per share (C$1.72 per share annualized). The dividend will be paid to shareholders of record on Mar 28, payable on Mar 7.

Guidance

Canadian National expects growth in 2013 to be driven by upward trends in the North American economic scenario, various prospects in domestic energy-related projects as well as opportunities in the export market.

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.

Other Railroad Stocks

Of the other stocks in the sector, Union Pacific Corporation ( UNP - Analyst Report ) will release its fourth quarter results on Jan 24, before the opening bell, while Canadian Pacific Railway Limited ( CP - Analyst Report ) will release the same on Jan 29, also before the opening bell.

Another stock worth considering within the sector is Genesee & Wyoming Inc ( GWR - Snapshot Report ) that holds a Zacks Rank #1 (Strong Buy).

Our Analysis

Canadian National holds a Zacks Rank #3, implying a short-term Hold rating. We believe Canadian National is poised to benefit from the improving demand and pricing trends. The company’s service improvements and expected growth across all segments bode well for the projected double-digit earnings growth in the coming months.