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Why Is CN (CNI) Up 1.1% Since Last Earnings Report?

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It has been about a month since the last earnings report for Canadian National (CNI - Free Report) . Shares have added about 1.1% in that time frame, underperforming 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 its most recent earnings report in order to get a better handle on the important drivers.

Earnings Beat at Canadian National in Q3

Canadian National's third-quarter earnings of $1.26 per share (C$1.66) beat the Zacks Consensus Estimate of $1.22. The bottom line also improved year over year.

Although quarterly revenues of $2,901.1 million (C$3,830 million) increased year over year, the same missed the Zacks Consensus Estimate of $2,938 million. Higher freight rates and Intermodal revenues drove the top line.  Also, freight revenues climbed 4% year over year and contributed 94.5% to the top line.

Operating Results

On a year-over-year basis, freight revenues rose in Petroleum and Chemicals (18%), Intermodal (13%) and Automotive (9%). Meanwhile, the same declined in Metals and Minerals (7%), Forest Products (11%), Coal (1%) as well as Grain and Fertilizers (3%). While overall carloads were flat year over year, revenue ton miles (RTMs) dipped 1%. However, freight revenue per carload ascended 4% in the quarter under review. Freight revenue per RTM also increased 6%.

The Petroleum and Chemicals as well as Automotive sub-group performed impressively with respect to carloads with the metric increasing 10% each. At the Metals and Minerals plus Intermodal segments, the same inched up 1% each. While Coal volumes were unchanged year over year, Forest Products and Grain and Fertilizers volumes declined 14% and 7%, respectively.

Adjusted operating income augmented 8.1% year over year to C$1613 million. Adjusted operating ratio (defined as operating expenses as a percentage of revenues) improved to 57.9% from 59.5% in the year-ago quarter. Notably, lower value of this key metric bodes well for the company.

However, operating expenses inched up 1% year over year to C$2,217 million, primarily due to higher purchased services and material expense plus higher depreciation and amortization costs.

Liquidity

The company exited the third quarter with cash and cash equivalents of C$258 million compared with C$266 million at the end of 2018. Free cash flow came in at C$700 compared with C$585 million in the year-ago period. Long-term debt amounted to C$11,587 million as of Sep 30, 2019 compared with C$11,385 million in December 2018.

Dividend Update

The company’s board has declared a quarterly cash dividend of C$0.5375 per share payable Dec 30, 2019 to shareholders of record as of Dec 9.

Bleak 2019 Outlook

Due to fall in North American rail demand as a result of weak economy, the company now anticipates 2019 adjusted earnings per share to grow in high single-digit range compared with C$5.50 reported in 2018. Previously, the same was expected to rise in the low double-digit band. RTMs are expected to witness slightly negative volume growth in the current year compared with the earlier prediction of a mid-single-digit volume expansion.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -9.08% due to these changes.

VGM Scores

At this time, CN has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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


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