Tuning an instrument like a violin is an exact science, where the end result can be measurable perfection.
Tuning a company to prevailing business conditions is far less precise. The most laudable achievements in efficiency are by nature non-recurring, since the result is a company moving ever closer to perfect pitch.
Canadian National Railway (NYSE: CNI ) this week reported a 13% earnings decline over prior-year levels. The earnings result beat analyst expectations by over 5% even as revenues missed by about the same margin. Beneath that achievement lie an 18% reduction in operating costs and a noteworthy 460 basis point improvement in the operating ratio from 67.3% in the second quarter to just 62.7% in the third quarter.
Quarter after quarter, I have watched with amazement as the railroad industry has squeezed every ounce of profit imaginable out of deteriorating revenue streams by fine-tuning costs and operating efficiency. Despite my cautious fundamental outlook on the sector, leading operators like Burlington Northern Santa Fe (NYSE: BNI ) and CSX (NYSE: CSX ) merit some recognition for the effective adaptations they have made thus far to this challenging financial climate. Like Diana Shipping (NYSE: DSX ) in the dry bulk sector, cargo haulers of all shapes and sizes remain in a race to adapt.
With a big move into future efficiency gains, Canadian National announced this week that it will purchase 70 new high-efficiency locomotives over the next several years. Of those, half will be from General Electric's (NYSE: GE ) Evolution series, which matches the horsepower of 16-cylinder engines while running on only 12. Although I believe that hybrid locomotives -- like those being developed by GE or Norfolk Southern (NYSE: NSC ) -- will lay tracks to the most optimal efficiency gains of all, the 15-20% reduction in fuel consumption that Canadian National anticipates from these efficient diesel locomotives adds another feather to this hauler's engineer's cap.
Short of screaming "danger" from the rooftops, Canadian National CEO Hunter Harrison echoed the theme of moderating expectations for a swift recovery, stating: "I think we have bounced across the bottom and now we are starting to float to the top." Indeed, the prospect for further deterioration of the greenback vis-a-vis the Canadian dollar threatens to erode earnings in the fourth quarter. Oil's creeping price appreciation raises another red flag.
I continue to view Canadian National Railway as a top competitor from an operational standpoint, but I consider a warm bench at the train station the best position for investors just now.