Lost your password?

Canadian National Railway (TSE:CNR; NYSE:CNI) announced results that beat expectations.

Revenue came in at C$3.58 billion, a slight beat to consensus of $3.54 billion while earnings per share of C$1.25 beat the consensus estimate of C$1.21 by 3% but were down 20% from the same quarter in 2018.

Revenue ton miles, an indicator for the level of fleet activity declined again this quarter, down 13% over last year.

The operating ratio, a measure of efficiency disappointed, up to 65.2% from 57.9% last quarter and 61.9% in Q4 of 2018.

A lower operating ratio means lower costs.

An earnings beat was commendable with such a big increase in costs in the quarter but it doesn’t change the medium-term headwinds facing the entire railroad industry.

Even though CN is doing a good job cutting costs and increasing efficiency to offset weaker revenue growth, railroad stocks are not what you want to own near the tail end of a decade long economic boom. These are stocks that perform best when purchased at the tail end of recession and sold a year or two later.

CN Underperforming Peers and the Dow Jones

CN is middle of the pack when it comes to revenue growth and is dealing with the same negative economic growth trends affecting all the railroads.

Revenue Growth is Declining for the Whole Group

Source: YCharts

On the positive side debt to cashflow is low, making CN one of the least risky railroad stocks to own.

When an economic contraction eventually comes, and it will, CN will have no trouble dealing with a period of negative cashflow as it has significant wiggle room to borrow debt as a cashflow bridge.

Debt to Cashflow Lowest in the Group

Source: YCharts

Lastly, looking at valuations, CN is still priced rich vs peers for its growth rate.

The market expects 0% earnings growth from CN in 2020 compared to 2%-10% for the other railroads.

So even though the stock is underperforming, there are still no discounts to be found.

CNR Trades a Premium Multiple of Earnings

Source: Grizzle Estimates, YCharts

About Author

Scott Willis

Scott has over 15 years of institutional investment management experience analyzing both debt and equity securities. He has held senior investment research roles at Credit Suisse, and TD Asset Management. His core areas of investment coverage at Grizzle include marijuana, energy and technology. Scott is a CFA charterholder and has been featured on Bloomberg, CBC, CNBC and Macleans.

See author's posts

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Grizzle hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.