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Canadian National Beats as Rev Ups - Analyst Blog

Canadian National Railway ( CNI ) reported adjusted earnings per share of C$1.18 (approximately $1.18) in the first quarter of 2012 that breezed passed the Zacks Consensus Estimate of $1.03. Adjusted earnings also increased 31% from the 90 Canadian cents (approximately 89.8 cents) achieved in the year-ago quarter, aided by strong freight volume and pricing.

Adjusted earnings for the first quarter exclude the impact of an after-tax benefit of C$252 million or 57 Canadian cents per share related to assets sale proceeds.

Revenues increased 13% year over year to C$2,346 million (approximately $2,341 million) and were above the Zacks Consensus Estimate of $2,260 million, driven by higher volumes across most of the commodity segments except for 'Coal' and 'Grain and Fertilizers', which declined 11% each year over year. Additionally, other factors like a favorable seasonal impact, higher freight rates alongside fuel surcharges and a positive macroeconomic environment supported revenue growth in the quarter.

On a year-over-year basis, revenues climbed 31% for Metals and Minerals followed by increases of 18% in Coal, 17% in Intermodal, 15% in Petroleum and Chemicals, 13% in Automotive and 10% in Forest Products. However, Grain and fertilizers revenue declined 2% year over year owing to lower U.S. corn and soybean production.

Carloads (volumes) increased 5% year over year and revenue ton miles, which measure the relative weight and distance of rail freight transported by Canadian National, grew 6% from the year-ago quarter.

Operating income increased 23% year over year to C$793 million (approximately $791 million). Operating expenses climbed 7.9% year over year primarily due to steeper fuel costs, increased purchased services and materials expense, higher labor and fringe benefits expense. Operating ratio (defined as operating expenses as a percentage of revenue) improved 280 basis points to 66.2% from 69% in the year-ago quarter.

Liquidity

Canadian National exited the first quarter with cash and cash equivalents of C$182 million, which was much lower than C$593 million in the same quarter of 2011. Free cash flow declined to C$48 million from C$445 million in the comparable year-ago quarter. The decline was primarily due to higher pension plan contributions that amounted to C$450 million.

Long-term debt decreased to C$5,892 million from C$6,441 million at year-end 2011 but was higher than C$5,451 million in the year-ago quarter.

Dividend

Canadian National's board of directors announced a quarterly dividend of 37.5 Canadian cents per share to shareholders of record on June 8, payable on June 29.

Share Repurchase

Canadian Nationalrepurchased 4.7 million shares under its share repurchase program.

Guidance

Given the positive head start, Canadian National has revised its guidance for the remaining year ahead.

For fiscal 2012, the company expects adjusted earnings per share growth of approximately 10% from C$4.84 in fiscal 2011. Pension expenses will amount to an additional C$100 in fiscal 2012.

Free cash flow is expected to be approximately C$950 million, up from the previous guidance of C$875 million.

Our Analysis

We believe Canadian National is poised to benefit from the improving demand and pricing trends. The company's healthy operating ratio, service improvements and expected growth across all segments, particularly Intermdoal, Metal and Minerals and Automotive bode well for the projected mid to double-digit earnings growth at low costs in 2012. However, several headwinds such as competitive threats from peers like Canadian Pacific Railway Limited ( CP ) , exchange rate fluctuations, rising fuel prices and low utility coal shipments limit the upside potential of the stock.

Accordingly, we are currently maintaining our long-term Neutral rating on Canadian National, with the 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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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