Canadian National Railway (CNI -5.05%) announced fourth-quarter results last Thursday afternoon, and the market collectively shrugged its shoulders. Having lost nearly 3% initially, the company's stock closed flat by the time the markets closed for the weekend. As long-term investors, though, we are more interested in investment performance over three to five years than one to two quarters.
As Canadian National approaches its 20th year as a publicly traded company, long-term investors likely have a few questions. Can it continue on the same trajectory of revenue growth, profitability, and cash generation? Will its stock continue delivering market-beating returns? Here are three critical takeaways from Thursday's announcement that help address some of these concerns.
Source: Canadian National Railway
Record revenue and volume
Canadian National delivered record revenue of $10.6 billion in 2013, an increase of 7% from 2012. A positive sign for the economy, and Canadian National, is the growth in revenue-ton miles, which measures the weight and distance of freight transported. It increased 4% over 2012, and marks another company record.
Adjusted net income for 2013 was $2.6 billion, an improvement of 5% from 2012. Analysts' expectations were missed with Canadian National's full-year 2013 EPS of $3.06, an improvement of 9%. For context, Canadian Pacific (CP -6.60%) reported results earlier the same week and delivered EPS growth exceeding 50%. The comparison is not necessarily fair, however, given the large number of productivity and cost saving opportunities still available at Canadian Pacific.
Strength in energy and intermodal markets
Revenue growth in 2013 was driven primarily by petroleum and chemicals and intermodal, up 18% and 9%, respectively.
During the fourth quarter, revenue-ton miles for petroleum and chemicals increased an impressive 20%; this was an excellent indication that Canadian National is capitalizing on the growing oil-by-rail opportunity. Oil by rail could eventually match the 830,000 barrels per day capacity envisioned for the proposed (yet chronically delayed) Keystone XL pipeline.
Due to extreme winter weather and a shortage of covered hopper cars, Canadian National was unable to fully capitalize on the record 2013 grain crop. Revenue grew just 1% in the grain and fertilizer segment last year. The grain must still get to market, however, so both Canadian National and Canadian Pacific should enjoy strong revenue growth in grain throughout 2014.
Blame it on the weather
Extreme cold weather affecting large portions of North America was blamed for a surprising increase in CN's operating ratio to 63.4%, with most of the deterioration coming during the fourth quarter. While we sometimes ridicule companies that blame weather for poor operational performance, Canadian National has a solid argument.
When it's extremely cold for extended periods of time, railways aren't terribly efficient. They need to run shorter trains, utilize more locomotives, and spend more money on fuel and labour. This was an issue recently -- December was very cold.
Take the Canadian city of Winnipeg as an example. According to Environment Canada, it experienced an average temperature of -6°F in December, the second-coldest month in 120 years. On one particularly frosty day, Winnipeg was actually colder than Mars. A tweet from the Manitoba Museum says it all, "According to the Curiosity Rover, Mars reached a maximum air temperature of -20°F today. Winnipeg's high was -24°F." That's cold, and gave Canadian National's operations team huge challenges during December and January.
Where do we go from here?
Let's start with a 16% dividend increase that Canadian National's board approved on Thursday. the company announced its first dividend in 1996, one year after its initial public offering. The dividend has grown every year since.
Canadian National is committed to delivering double-digit-EPS growth in 2014 and generating free cash flow in the range of $1.6 billion-$1.7 billion. Intermodal and oil and gas commodities were important to Canadian National's results in 2013, and will equally be so in 2014. The record amount of Canadian and U.S. grain crops will also be strong growth drivers for the railroad.
Steady and consistent revenue growth, modest improvements in its operating ratio, strong cash flow, a growing dividend, and an effective management team make for a compelling investment thesis. Its one that will likely yield solid stock price appreciation, though likely not the market-trouncing returns Canadian National has delivered to shareholders over the last five years.
