Investors hunting for market beating returns will be paying close attention to Canadian National (NYSE: CNI ) on Thursday when its fourth-quarter results are released.
U.S. equity investors were handsomely rewarded in 2013. However, investors in North America's leading railroads did even better. CSX (NYSE: CSX ) rose 43%, Norfolk Southern (NYSE: NSC ) climbed 47%, and Canadian Pacific (NYSE: CP ) delivered a 43% return to shareholders. Unfortunately, and uncharacteristically, Canadian National did not treat its investors nearly as well. Its share price underperformed the market, appreciating just 24% in 2013.
Canadian National has achieved railroad supremacy by relentlessly focusing on its operations. As a result, there are fewer opportunities to boost earnings-per-share growth through efficiency initiatives. Canadian National's operating ratio, the percentage of revenue consumed by operations, has declined from the high 90s in 1993, to 89% in 1995 and now rests just under 60% for the third-quarter of 2013. Improving operational efficiency, and maintaining a best-in-class operating ratio, is deeply rooted in Canadian National's culture so don't expect them to relent on ringing out system inefficiencies. However, investors looking to earn market beating returns will need more from Canadian National.
Which indicators will signal that Canadian National is on the right track? When the company releases its fourth-quarter results, here is what to look for:
Grain making a comeback
Through the first three quarters of 2013, Canadian National's grain and fertilizer segment recorded flat revenue growth. With a record grain crop in Canada, and the U.S. yield above its five-year average, the challenge for Canadian National is a positive one -- find enough capacity to meet surging demand. According to Canadian National's Grain Order Book Report the current demand for covered hopper cars exceeds supply by 20,000. Investors should be looking for how well CN is managing the situation, and whether they can fully capitalize on record North American grain crops.
Canadian National reported an 8% increase in third-quarter revenues. Through the first three quarters revenue rose 6%, in line with financial analysts' expectation for a 7% growth in revenues year over year. Much of the credit goes to the transportation of petroleum and chemicals which grew 15% through the first three quarters of 2013.
Investors will soon find out if Canadian National maintained this revenue momentum into the fourth quarter, and hopefully gain some insight into whether petroleum and chemicals will be a growth driver into 2014. The transportation of oil-by-rail took a significant step forward in December when Canexus opened a new crude-carrying rail terminal near Edmonton, Alberta, designed for 100,000 barrels per day. Also, Kinder Morgan Energy Partners and Imperial Oil announced plans in January to build a $170-million facility in Edmonton capable of loading one to three unit trains per day totaling 100,000 barrels per day. The facility will be designed to eventually increase capacity to 250,000 barrels per day.
New transportation infrastructure for moving oil by rail, combined with ongoing challenges surrounding new pipeline approvals should bode well for Canadian National's revenue growth.
Safety and customer service differentiation
With the best operation among Tier I railroads, Canadian National is in an enviable position to make safety and customer service points of competitive differentiation. During the third quarter, Federal Railroad Administration train accidents per million train miles was 1.31 for Canadian National, significantly better than Canadian Pacific's comparable figure of 1.78.
While Canadian National is investing in improved customer service, Canadian Pacific is eliminating staff, reducing their workforce by 18% compared to a year ago. With approximately 50% of Canadian Pacific's track directly competing with Canadian National, a safe and client-centric railway will gain market share. Investors should look for any hint that customers are turning to Canadian National as a result of safety and client satisfaction concerns at Canadian Pacific.
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