Morningstar | CNR Updated Star Rating from 24 Oct 2018
Canadian National reported it realized strong third-quarter demand and expects the fourth quarter will be robust as well. The firm grew revenue 14% on 4.4% higher revenue ton miles and improved same-store pricing by 4.5% (one of the best same-store rates in several years). The rail grew normalized earnings per share 15% year over year. We maintain our wide moat rating and expect to increased our fair value estimate modestly due to stronger pricing than we previously anticipated.CN produced a solid 59.5% operating ratio, though this degraded 230 basis points from the prior-year period. Expenses grew due to fuel prices, labor costs as the rail hired and trained employees, increased volumes, the weaker Canadian dollar, and operating performance metrics slightly worse than in 2017. We attribute this to constrained capacity amid solid demand. For example, all of the top 10 workload days in CN’s history (in terms of gross ton miles) occurred in October.
Expanding capacity has been a top priority for CN this year, and the firm has completed 22 of 27 expansion projects. As well, to better handle the work, CN brought on 30 of the 60 locomotives planned for this year--the rest will come in the fourth quarter, and CN will bring on an additional 140 next year. CN will return 24 leased locomotives as this owned equipment comes on line. Finally, the firm continued to build its workforce, but hiring has plateaued to normalized levels.
Looking forward, management indicated it expects 2018 pricing will exceed inflation, adjusted EPS will be CAD 5.30-CAD 5.45 versus CAD 4.99 in 2017, and volume in revenue ton miles will grow 5% over the prior-year period. The latter guidance was previously 5%-7%, but the current 5% estimate implies fourth-quarter volume will grow at a strong double-digit rate. We particularly like what we heard about CN's choosing to pursue some price instead of volume given its capacity constraint this period.
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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