Expectations from Canadian National Railway (NYSE:CNI) ran high after rival Canadian Pacific Railway (NYSE:CP) delivered strong quarterly numbers some days ago. But when Canadian National reported its third-quarter earnings on Oct. 24, headlines screamed about how the railroads giant had missed Wall Street estimates.
However, there's more to Canadian National's numbers than meets the eye. CN, as the company's commonly known, reported strong growth in revenue and reiterated its full-year outlook; it even revealed bigger growth plans, suggesting that the stock isn't running out of steam just yet.
Here's all you need to know about CN's numbers, outlook, and plans.
CN results: The raw numbers
Below is a snapshot of the key numbers from CN's third-quarter earnings report. Note that all numbers in the tables below are in CN's reporting currency, Canadian dollars:
|Metric||Q3 2017||Q3 2016||Year-Over-Year Change|
|Revenue||$3.2 billion||$3 billion||6.7%|
|Net income||$958 million||$972 million||(1.4%)|
|Earnings per share||$1.27||$1.25||1.6%|
|Free cash flow||$662 million||$574 million||15.3%|
Note the change in CN's operating ratio here. A higher ratio is negative, as the operating ratio measures a railroad's operating expenses versus its revenue. CN's operating ratio of 54.7% was marginally higher year over year, but it still topped Canadian Pacific's third-quarter operating ratio of 56.7% and remains the lowest in the industry.
What happened with CN this quarter?
The above table points at a mixed third quarter for CN, but the railroad continues to deliver in key areas:
- CN's carloadings, or the total amount of freight carried, jumped 11% year over year.
- Except for grain and fertilizers, and forest products -- both hit because of currency fluctuations -- CN reported strong sales overall. Sales from every market were higher on a constant currency basis, with metals and minerals, coal, and intermodal reporting double-digit growth in revenues.
- CN's operating expenses rose 10%, partly because of higher fuel prices. It wasn't the only one to suffer -- Canadian Pacific also endured higher fuel costs in its last quarter.
- Higher operating expenses hurt CN's operating ratio.
- For the nine months ended Sept. 30, CN's free cash flow surged nearly 33% to CA$2.3 billion.
Encouraged by a strong quarter, CN reiterated its full-year adjusted earnings outlook of CA$4.95 to CA$5.10 per share, representing a near-10% growth at the midpoint from 2016 levels.
What management had to say
The decline in CN's third-quarter net income shouldn't come as a surprise, as president and CEO Luc Jobin had warned investors about a challenging second half during the company's second-quarter earnings release. Jobin, however, sounded more optimistic this time, thanks to strong end markets: "CN delivered strong third-quarter financial results as we continued to see increased demand across key business segments such as frac sand, intermodal, coal, and Canadian grain," he said.
A bigger takeaway, though, is CN bumping up its capital expenditure thanks to an encouraging business environment. In Jobin's words:
To meet the needs of an expanding North American economy and new growth opportunities, we are increasing investments in our infrastructure and equipment by [CA]$100 million, for a total capital program of [CA]$2.7 billion in 2017. During the third quarter, and continuing through the rest of the year, we've been hiring across our network, particularly in Western Canada, as we remain focused on delivering superior service to our customers.
Going by CN's third-quarter performance, the company looks set to deliver one of its strongest years in history in terms of profits and free cash flows. With management also expanding workforce and reinvesting greater amounts of money into the business, CN's growth story is here to stay.