CN 4Q20: ‘Strong Finish to a Challenging Year’ (Updated, Cowen)

Revenues for fourth-quarter 2020 rose 2% to C$3.656 billion vs. the same period in 2019, which CN attributed to record shipments of Canadian grain, increased shipments of U.S. grain, higher international container traffic via the Port of Vancouver, and freight rate increases.

“While the recovery remains uneven across the markets we serve, we are pleased by the momentum in volume demand that grew during the fourth quarter and continues to grow,” CN President and CEO JJ Ruest reported during the railroad’s quarterly earnings announcement on Jan. 26.

Revenues for fourth-quarter 2020 rose 2% to C$3.656 billion vs. the same period in 2019, which CN attributed to record shipments of Canadian grain, increased shipments of U.S. grain, higher international container traffic via the Port of Vancouver, and freight rate increases. It was partly offset by lower applicable fuel surcharge rates and lower volumes of petroleum crude, the railroad noted. Operating income was up 16% to C$1.411 billion and the operating ratio fell 4.6 points to 61.4% compared with fourth-quarter 2019.

Total revenue ton-miles (RTMs) were up 10% and carloads were up 7% in the fourth quarter vs. the same point in 2019.

“Our operations remained very nimble in the fourth quarter as we right-sized to meet the increased demand while we maintained industry leading fuel efficiency,” Ruest said.

Revenues for the year fell 7% to C$13.819 billion vs. 2019. This was attributed to lower volumes across most commodity groups, primarily in the second and third quarter, caused by the ongoing effects of the pandemic, and lower applicable fuel surcharge rates, according to CN. It was partly offset by freight rate increases as well as record Canadian grain shipments. Operating income dropped 15% to C$4.777 billion, and the operating ratio increased 2.9 points to 65.4% vs. 2019.

Both total RTMs and carloads were down 5% for the year compared with 2019.

Looking ahead, Ruest reported capital investments of C$3.0 billion in 2021.

Additionally, CN expects “mid-single digit volume growth in 2021 in terms of RTMs as it sees growth opportunities, despite continued weakness in sectors of the broad freight environment.”

CN’s Investor Relations page provides further details.

Cowen Insight: ‘Downgrade: Stepping Away From a Good Company’

“We are downgrading shares of CNI [CN] to a Market Perform from Outperform as the company appears constrained in reaching margin levels of some of its rail peers as we look out over the next 12-24 months,” reported Cowen and Company analysts Jason H. Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Elliot Alper. “We are lowering our EPS expectations for 2021 and 2022 while moving our PT down to $107 from $116.”

Cowen’s Key Takeaways:

• “CN reported 4Q EPS of CAD $1.43, above the consensus forecast of CAD $1.42. Q4 operating income increased 16% to CAD $1,411M, below the Street estimate of CAD $1,419M. OR came in at 61.4%, below our forecast of 59.7%.

• “On a carload basis, total carloads increased by ~7% in 4Q, led by strong growth in grain and intermodal, at 19.6% and 14.6% respectively. Looking into 2021, the company believes they are well positioned to see continued strength in grain; we note our QTD carload data is growing 49.5% in this category. Intermodal, too, has had a strong start to the quarter, and with new international business anticipated to begin soon, we model ~23% growth in 1Q21. Management cited coal as a ‘significant tailwind for CN’ as it moves into 2021, and while we model 8% annualized growth in 2021, this is off of a negative 14% comp in 2020; we do not believe investors should get too excited about the dead cat bounce in coal expected in 2021.

• “Management stated it is shooting for a target OR in 2021 below 60%, which would be worse than our initial forecast of 57.4%. Some things are expected to weigh on the company in 2021 including increased incentive compensation, depreciation, and foreign exchange items. This could make a sub-60% OR difficult for CNI.

• “Management provided adj EPS growth outlook of high single digits versus CAD $5.31 in 2020. With what we believe to be a conservative top line assumption (10% growth in 2021 off an easy comp), and a full year OR assumption of 60.2%, we struggle to adjust our model to management’s outlook assumptions, acknowledging potential fx headwinds ranging from $0.20-0.25. We are modeling ~15% bottom line growth for 2021, above management’s guidance range, and while bringing down both our 2021 and 2022 EPS estimates. We also note that management’s guidance range of ~9% growth off of 2020 EPS implies 2021 adj. EPS of CAD $5.79, well below the consensus estimate of CAD $6.24.

• “The Board authorized a new repurchase program of up to 14MM shares between Feb 2021 and January 2022. The company noted it plans to resume buybacks next week; we model ~11MM shares repurchased in 2021. CNI also recently increased its quarterly dividend 7%, giving the company to a ~2% dividend yield using yesterday’s close.”

“We adjust our 2021 and 2022 EPS estimates to CAD $6.10 from $CAD $6.75, and CAD $6.80 from CAD $7.45, respectively,” Seidl, Elkott and Alper reported. “We lower our multiple to 20x from 21x to be more in-line with the 3-year historical average, and our price target to US$107 from US$116. We are downgrading CN to Market Perform from Outperform as we see some cost headwinds building and keeping the Canadian rail giant from posting margins that some of its peers appear poised to achieve. We recommend rail-oriented investors switch into our top railroad pick KSU. Investors that wish to retain exposure to Canadian transports but like a story with more growth should consider TFII, our top trucking pick.”