I should really be sobbing into my Labatt's right about now. As is the case with my oft-written-about short-line railroad Genesee & Wyoming (NYSE:GWR), CanadianNational Railway (NYSE:CNI) is a railroad operator that I really happen to like, but have never managed to actually buy.
Second-quarter results continue to drive a rail through my hypothetical profits. Revenue climbed 10% (measured in Canadian dollars) as the company managed both to ship more tons of freight and charge more for each ton that it shipped.
Operating improvements continue to be a positive theme here. The operating ratio improved again (by 4.3%) and the company posted 24% higher operating income. By the time it hit the bottom lines, that profit growth became 28% net income growth and 30% EPS growth.
Looking at the type of freight shipped, there weren't too many surprises. Metals, forest products, and coal continued to grow, while auto shipments were weak again. Grain was also weak in this quarter, but I would attribute that more to a normal quarter-by-quarter fluctuation than any sort of serious trouble down the line.
With stronger operating performance, Canadian National has also reaped more cash flow from the business. Free cash flow has grown by about one-third compared with the first half of last year, and the company is putting some of that to work. Announcing a large share buyback, Canadian National could repurchase up to 6% of the shares now outstanding.
It's probably fair to point out that this run in the rails has been going on for a little while now and may be getting a bit long in the tooth. Demand (and pricing) for rail transport has been quite strong, but I don't think that can continue indefinitely without some decent economic growth in North America. Nevertheless, Canadian National management increased its earnings guidance for the year to 20% to 25% growth (up from 10% to 15%), so it doesn't look like the end is nigh.
I make no bones about the fact that jumping into a cyclical story after the stocks have already been running is dangerous -- it's much easier to get your fingers burned than to find solid bargains. And yet, I'm still favorably inclined toward Canadian National. It's not the bargain that it once was, but as long as robust demand for natural resources continues, it should have the leverage to raise rates and improve its bottom line.
Climb aboard for more railroad takes:
- Big Opportunities in Small Rails
- Another Hookup for Genesee & Wyoming
- CP's Nice Ride on the Rails
- Nice Quarter, Eh?
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
