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Why Is Canadian National (CNI) Down 2% Since Last Earnings Report?

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A month has gone by since the last earnings report for Canadian National (CNI - Free Report) . Shares have lost about 2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is CN due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Second-Quarter Earnings

Canadian National’s adjusted earnings of $1.17 per share (C$1.77) surpassed the Zacks Consensus Estimate of $1.05. Moreover, the bottom line improved significantly from the prior-year quarter’s figure.

Quarterly revenues also increased year over year to $2,814 million (C$3,631 million) and beat the Zacks Consensus Estimate of $2,684.4 million. Rail freight revenues improved 10% year over year and accounted for 94.1% of the top line.

Operating Results

On a year-over-year basis, freight revenues rose in Petroleum and Chemicals (12%), Metals and Minerals (15%), Forest Products (6%), Coal (39%), Grain and Fertilizers (12%) as well as Intermodal (6%), while the same declined only at Automotive (1%). Overall, carloads (volumes) and revenue ton miles (RTMs) expanded 6% and 7%, respectively. Moreover, rail freight revenue per carload improved 4% in the quarter under review.

The Coal sub-group performed impressively with respect to car loads. In fact, the metric expanded 21%. In Petroleum and Chemicals, Metals and Minerals, Forest Products, Grain and Fertilizers as well as Intermodal, the same expanded 4%, 8%, 1%, 9% and 5%, respectively. However, the carloads contracted 3% in the Automotive segment.

Operating income increased 7% year over year to C$1,519 million. Operating ratio (defined as operating expenses, as a percentage of revenues) was 58.2% compared with 57.5% in the year-ago quarter. Higher fuel, labor and material costs induced this key metric’s deterioration.

Liquidity

The company exited the first half of the year with free cash flow of C$1,296 million compared with C$1,659 million in the year-ago period. As of Jun 30, 2018, adjusted debt was C$12,824 million compared with C$11,483 million a year ago.

Dividend

The company’s board of directors approved a dividend of 45.5 cents (C$0.4550) for the third quarter, payable on Sep 28, 2018 to shareholders of record as of Sep 7.

Bullish  Outlook

The company now expects adjusted earnings per share of C$5.30-C$5.45 for 2018. The previous outlook was in the range of C$5.10-C$5.25. The company raised view on the back of impressive second-quarter performance and increasing demand.

Capital Program Value Raised

The company has raised its C$3.4 billion capital program to C$3.5 billion. It plans to invest an additional amount toward buying of new rail cars.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month.

VGM Scores

At this time, Canadian National has an average Growth Score of C, however its momentum is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for momentum investors than those looking for value and growth.

Outlook

Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. Notably, Canadian National has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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