CN 2Q19: Record Financials, Plus a Volume Increase

Written by William C. Vantuono, Editor-in-Chief
image description

Like its U.S. Class I peers, CN posted record 2Q19 financials—diluted earnings per share, operating revenues and operating income. Unlike them, CN grew volume in the quarter, as well as in the first half of the year.

Compared to the prior-year period, CN 2Q19 operating revenues increased by 9%, from C$3.63 billion to C$3.96 billion, an increase of C$328 million. The increase in revenues was mainly due to the inclusion of TransX in the intermodal commodity group, the positive translation impact of a weaker Canadian dollar, freight rate increases and higher volumes primarily from CBR (crude by rail) and Canadian and U.S. grain, which were partly offset by lower volumes of frac sand, lumber and potash.

CN’s 2Q19 operating income increased by 11%, from C$1.52 billion to C$1.68 billion. Operating expenses increased by 8%, from C$2.11 billion to C$2.28 billion, mainly driven by the inclusion of TransX, the negative translation impact of a weaker Canadian dollar, and higher costs resulting from increased traffic volume. The operating ratio improved by 70 basis points, dropping from 58.2% to 57.5%. Net income grew 0.4%, from C$1.31 billion to C$1.36 billion. Diluted EPS increased by 6%, from C$1.77 to C$1.88.

For the first six months of 2019, CN’s operating revenues increased by 2.9%, from C$6.83 billion to C$7.03 billion, an increase of C$200 million. Operating income increased by 1.1%, from C$2.55 billion to C$2.76 billion. Operating expenses increased by 10.8%, from C$4.28 billion to C$4.74 billion. The operating ratio improved by 60 basis points, dropping from 62.7% to 62.1%. Net income grew 0.5%, from C$2.05 billion to C$2.15 billion. Diluted EPS increased by 1.1%, from C$2.77 to C$2.96

CN reaffirmed its 2019 guidance, saying that it “still aims to deliver 2019 adjusted diluted EPS growth in the low double-digit range this year vs. last year’s adjusted diluted EPS of C$5.50, and continues to assume mid-single-digit volume growth in 2019 in terms of revenue ton-miles (RTMs).”

“The CN team delivered record second-quarter results, and we remain optimistic on CN’s volume prospects in the second half of the year while maintaining our vigilance on costs,” said President and CEO JJ Ruest, Railway Age’s 2019 Railroader of the Year. “Our focus on delivering profitable growth and advanced technologies to modernize our scheduled railroading model is expected to continue driving long-term value creation for our shareholders.”

“CN registered a top through bottom beat and maintained its volume and EPS guidance,” noted Coen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “Growth opportunities in refined products, recently renewed intermodal contracts and potential upside scenarios in crude by rail should excite investors and provide a hedge against the potential threat of further macro/trade volume weakness. We adjust our estimates and increase our price target to $101.

“Revenue increased 9% to C$3.96 billion, beating our and Street expectations of C$3.89 billion and C$3.92 billion, respectively. Operating income grew 11% to C$1.68 billion, compared to our and consensus forecasts of C$1.64 billion and C$1.67 billion, respectively. The operating ratio (OR) of 57.5%, was ~30 bps better than our estimate, ~10 bps worse than the consensus expectation, and ~65 bps better than last year.

“Though CN’s U.S. peers CSX and Union Pacific lowered their full-year volume outlooks, CN maintained its volume guide (much like fellow Canadian rail CP did) of mid-single-digit growth in revenue-ton-miles (RTMs), in part due to a number of new revenue opportunities coming online and a positive CBR outlook. Among CN’s new revenue opportunities are a recent domestic intermodal deal with retailer Hudson Bay Company; growth in SUVs, even if growth in autos as a whole isn’t expected to be as substantial; renewed agreements with Hapag-Lloyd and Evergreen; and other new growth areas in intermodal with TransX, now a part of CN for more than a quarter.

“In terms of CBR, CN’s volumes trended higher over the course of the quarter, from 150,000 barrels a day in April to 180,000 barrels a day in May and finally 200,000 barrels a day in June. CN management noted that they believe they are fully prepared to handle up to 300,000 barrels per day, and believes that the government of Alberta will be successful in passing their crude contracts to the private sector in the fall, which will add volume for CN. With CN’s aforementioned other revenue opportunities providing great growth levers, we continue to view CBR upside scenarios for CN as simply icing on the cake.”

Download CN’s full 2Q19 Financial Data PDF: Q2-2019-Quarterly-Review-en

Download CN’s full 2Q19 Analyst Presentation PDF: Q2-2019-Financial-Presentation-en

Categories: Class I, Freight, Intermodal, News Tags: ,