Delivering strong numbers quarter after quarter appears to have become a new normal for Canadian National Railway (NYSE:CNI). On July 25, the railroads giant reported a 17% year-over-year surge in its revenue for the second quarter, driven by higher carloadings for commodities across most sectors. Canadian National, or CN as it is better known, also reiterated its full-year adjusted earnings guidance, which points at another solid year ahead for the company.
Here's all you need to know about CN's numbers, outlook, and management's views.
CN results: The raw numbers
A quick look at CN's key operational metrics for the second quarter reveals steady growth on its top and bottom lines. Note that all numbers in the tables below are in CN's reporting currency, Canadian dollars.
|Metric||Q2 2017||Q2 2016||Year-Over-Year Change|
|Revenue||$3.33 billion||$2.84 billion||17.3%|
|Net income||$1.03 billion||$858 million||20.2%|
|Earnings per share||$1.36||$1.1||23.6%|
While the other metrics are self-explanatory, it's worth noting that the operating ratio measures a railroad's operating expenses versus its revenue, so a lower ratio indicates greater efficiency. CN's operating ratio may have increased marginally in the second quarter, but it remains the most efficient Class 1 railroad. For perspective, rival Canadian Pacific Railway (NYSE:CP) -- also the second most efficient railroad -- ended its second quarter with an operating ratio of 58.7%.
What happened with Canadian National this quarter?
As one of the most diversified Class 1 railroads, CN transports goods across several industries. Thanks to improving commodity markets, CN's volumes surged across the board during the second quarter, pushing its revenue and operating income to record quarterly highs. For better understanding, here's a snapshot of CN's industrywide performance:
|Industry||Revenue (Q2 2017)||Revenue (Q2 2016)||Year-Over-Year Change|
|Petroleum and chemicals||$549 million||$492 million||12%|
|Metals and minerals||$389 million||$292 million||33%|
|Coal||$126 million||$95 million||33%|
|Grain and fertilizers||$530 million||$432 million||23%|
|Forest products||$464 million||$439 million||6%|
|Automotive||$238 million||$199 million||20%|
|Intermodal||$815 million||$697 million||17%|
Improving freight rates and higher fuel surcharge further boosted CN's top line during the second quarter. Overall, CN's carloadings and revenue ton-miles jumped 14% and 18%, respectively, year over year. Again, this surpasses Canadian Pacific's 8% growth in carloadings last quarter partly because of CN's lower exposure to coal versus Canadian Pacific.
What management had to say
While lauding CN's strong quarterly performance, President and CEO Luc Jobin warned investors that the second half could be challenging. Jobin, however, remains confident that the railroad will meet its adjusted EPS guidance of CA$4.95-CA$5.1 this year.
The North American economic outlook continues to be positive, and we remain committed to delivering on our 2017 financial outlook. However, volume comparisons in the second half of the year will be more challenging, and the strengthening of the Canadian dollar will constitute a headwind.
During CN's earnings call, CFO Ghislain Houle confirmed management's commitment to growth and shareholder returns. In Houle's words:
On the capital front, we remain committed to reinvesting in our business, to support safety, service and growth. In this regard, we continue to target a capital envelope of CA$2.6 billion for the year and about 20% of revenues going forward. Furthermore, we continue to reward our shareholders with consistent dividend returns and we are on track with our current share buyback program of approximately CA$2 billion, having repurchased just over 14 million shares for CA$1.3 billion since last October.
CN's full-year adjusted EPS forecast translates into 9.5% growth at the midpoint of last year's level. The company is also on a solid financial footing, having generated free cash flow worth CA$811 million during the second quarter. At around CA$1.6 billion, CN's FCF came in nearly 40% higher year over year for the six months ended June 30, 2017.
All said, CN is off to a strong start this year and management is convinced that improving commodity markets should keep the momentum going.