Morningstar | CN Grows 1Q Top Line 11% on Rates; Extreme Winter Challenges Profitability Improvement
Overall, carloads were lower than we modeled for the full year, pricing was much greater than we expected, the normalized operating ratio improved modestly, and we still project full-year OR betterment of about 1 percentage point, to 60.5%. We expect to increase our fair value estimate by 3% or so as we update our full-year expectations. Our wide economic moat rating remains in place, and bolstering this, CN continues to invest in capacity, with plans to double-track about 80 additional miles and to add 140 high horsepower locomotives this year.As at other rails this season, CN contended with extreme winter weather during the first quarter. Operations personnel from both Canadian railroads referred to this year as equal to the most challenging weather they had experienced in their careers. Train length is critical to maximizing velocity and use of manpower and motive power. When in the quarter the rail met multiple nights below minus 40 degrees Fahrenheit, train length was compromised despite adding air cars and distributed power to the consist in order to improve brake function.
Despite the obstacle of the elements, CN was able to increase total carloads a soft 70 basis points year over year, with 10% petroleum and chemicals growth offset by declining metals and minerals and forest products; intermodal was flat. In terms of revenue ton miles, volume increased 3%. However, CN expanded first-quarter consolidated pricing (revenue per carload) an impressive 11% as mix favored more expensive freight and the rail raised revenue per carload at a double-digit rate for four major commodities. OR deterioration from 67.8% to 69.5% was no surprise given the inefficiencies caused by weather, but in fact CN improved year over year to 67.2% excluding the nonrecurring replacement of the positive train control back office system.
Canadian National Railway, together with its wholly-owned subsidiaries, is engaged in the rail and related transportation business. Co.'s network of approximately 20,000 route miles of track spans Canada and mid-America, from the Atlantic and Pacific oceans to the Gulf of Mexico. Co.'s network and connections to all Class I railroads provide access to all three North American Free Trade Agreement nations. Co. handles and carries cargo, serving exporters, importers, retailers, farmers and manufacturers. Co. is engaged in the movement of a portfolio of goods, including petroleum and chemicals, grain and fertilizers, coal, metals and minerals, forest products, intermodal and automotive.
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