CN: “Strong” 3Q19 Results

CN reported “strong results” for its financial and operating results for the third quarter ended Sept. 30, 2019, such as a 4% increase in revenues and diluted earnings per share (EPS) increase of 8%.

“CN delivered strong results, despite a softening economy,” said JJ Ruest, President and CEO, CN, and Railway Age’s 2019 Railroader of the Year. “Our team of experienced railroaders swiftly aligned resources with the weaker demand to achieve solid efficiency gains. We remain committed to our long-term agenda of growing faster than the economy at low incremental cost, and to taking Scheduled Railroading to the next level by deploying advanced operating technology.”

3Q19 Compared to 3Q18:

• Revenues increased by 4%, or $C142 million, to $C3.830 billion.
• Diluted EPS increased 8%—or 11% on an adjusted basis—to $C1.66.
• Operating ratio of 57.9%, an improvement of 1.6 points.
• Operating income increased 8%, or $C121 million, to $C1.61 billion.
• Strong balance sheet with adjusted debt-to-adjusted-EBITDA of less than 2.0X.

“In light of the deterioration in North American rail demand, as the economy continues to weaken, CN is now targeting to deliver 2019 adjusted diluted EPS growth in the high-single-digit range this year versus last year’s adjusted diluted EPS of $C5.50, compared with its July 23, 2019 financial outlook, which called for low-double-digit growth in adjusted diluted EPS. This now assumes slightly negative volume growth in 2019 in terms of revenue ton-miles (RTMs),” CN said.

3Q19 revenues were $C3.830 billion, an increase of $C142 million when compared to the same period in 2018. The increase was mainly due to freight rate increases and higher intermodal revenues, CN noted.

RTMs declined 1% yearly. Freight revenue per RTM increased by 6% over the year-earlier period, mainly driven by freight rate increases and higher intermodal revenues, according to CN.

Operating expenses for 3Q19 increased 1% to $C2.23 billion, mainly driven by increased purchased services and material expense, as well as higher depreciation and amortization expense, partly offset by lower fuel costs and record fuel productivity, CN said.

Cowen Insight

“CN lowered its 2019 EPS growth outlook slightly to high single-digits from low double-digits previously,” according to Cowen and Company analysts Jason H. Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Adam Kramer. “This compared to our model assumption of 10% and the consensus estimate of 11%. CN now expects slightly negative 2019 volume growth in terms of revenue ton-miles. While CN maintained its $3.9 billion capex target for the year, it noted that next year should return to more normal levels (likely meaning several hundred million dollars lower), which should help boost 2020 cash flow.”

“Despite tough freight conditions, CN was still able to achieve its goal of outperforming industry growth, registering a modest 0.4% carload increase, compared to a ~4.5% decline for the industry” the analysts noted. “While the Canadian grain crop looks strong, a delayed harvest led to disappointing traffic, but the company is well-positioned to eventually move this large crop. On the coal front, the ramp-up of Coalspur’s new mine had some challenges that appear to be subsiding.”

“In terms of CBR (crude by rail), CN moved 180K barrels per day in September but maintains capacity to move 300K barrels per day (management further noted that it believes there is demand of 200K per day just sitting on the sidelines currently),” they added. “With the Alberta government contracts expected to go to the private sector, possibly by the end of October, the company’s crude traffic could begin to increase on a sequential basis, but on a year-over-year basis, 4Q19 comparisons are difficult, given that wide oil differentials last year drove shipments of about 230K barrels per day on average in 4Q18.”