The positive pricing environment coupled with modest volume
gains has significantly aided
Canadian National Railway Company
's (
CNI
) financial performance in the third quarter and we expect the
trend to continue.
However, we believe Canadian National's industry leading
operating ratio will remain challenged in the fourth quarter and
beyond by rising fuel prices, increased depreciation charges,
unfavorable currency translation, higher taxation and a competitive
railroad market in Northern America.
Additionally, the company's utility coal volume is expected to
be affected by higher inventories and cheaper natural gas prices.
Coal mine operations will also face weather hindrances in Canada,
affecting volume growth and compelling our cautious stance on the
company.
Despite the strong Canadian dollar, surging fuel prices and a
volatile economic outlook, the company expects double-digit
earnings growth of up to 15% for2011. We believe the company's key
business segments, particularly Coal and Intermodal will fuel the
earnings growth this year and beyond. Canadian National remains
well positioned to benefit from the growing demand of export
coal.
The company registered higher coal shipments from West Coast and
Port of Prince Rupert, which serves PRB (Powder River Basin) mines.
The ports are also emerging as the new hubs for coal exports.
Intermodal is also expected to remain a key growth driver in fiscal
2011.
The company provides Intermodal services to mainly three coasts
(Vancouver, Prince Rupert and North American West Coast) and is
looking forward to expand its network to the neighboring areas.
The company is focusing on train productivity by accelerating
the purchase of locomotives equipped with distributed power
capability that allows the company to run longer haul trains
efficiently.
In order to support these development projects, the company to
invest C$1.7 billion toward track and infrastructure improvement as
well as productivity initiatives in 2011. Approximately C$1 billion
is dedicated toward track infrastructure that includes the
replacement of rail, ties, and other track materials and bridge
improvements, as well as rail-line improvements for the Elgin,
Joliet and Eastern Railway Company property acquired in 2009.
Canadian National's strong financial performance has
strengthened its balance sheet position. As a result, the company
maintains a free cash flow expectation of C$1.2 billion for
2011,including voluntary pension contribution of approximately
$350.0 million for pension plans. Further, Canadian National seeks
to deliver increased returns to its shareholders via dividends and
share buybacks.
However, the company is prone to volatility in fuel prices due
to changes in the economy or supply disruption. Rising fuel prices
could adversely affect the company's expenses. In an effort to
forestall this risk, Canadian National has implemented a fuel
surcharge program. However, rising fuel prices have forced the
company to raise its crude oil estimate to the range of $90-$100
per barrel for 2011.
Additionally, increased depreciation charges and taxation will
hurt the cost component of the company. We believe these near-term
headwinds will lead to reduced profits, affecting the financial
position of the company.
Canadian National operates its business in both Canada and the
U.S. and is, thus, affected by currency fluctuations. The company
expects the Canadian dollar exchange rate to remain similar to the
third quarter level i.e., 98 cents to $1.00 for fiscal 2011.
Changes in the exchange rate makethe company more or less
competitive in the world market and thereby affect its revenue.
Going forward, Canadian National faces significant competition
from rail carriers and other modes of transportation. Specifically,
the company faces competition from
Canadian Pacific Railway
(
CP
), which operates other major rail systems in Canada and service
areas similar to Canadian National. It also faces intense
competition from trucking companies in eastern
Canada.
Consequently, we maintain our long-term Neutral recommendation
on Canadian National, supported by a Zacks #3 Rank (Hold).
CDN NATL RY CO (
CNI
): Free Stock Analysis Report
CDN PAC RLWY (
CP
): Free Stock Analysis Report
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