Morningstar | CN's Growth Defies Sluggish Freight Market, Operating Ratio Snaps Back From 1Q Travails
We have increased our fair value estimate for Canadian National Railway by about 7% as we incorporate stronger volume projections for this year and next, and as our model adds the time value of money since our prior update. We maintain our wide moat rating. The shares trade around our fair value estimate.CN attained record quarterly revenue, EBIT, and earnings per share and cranked out a strong 57.5% operating ratio. Most of the 9% revenue increase was due to an acquisition (CAD 100 million from TransX in the intermodal segment), rate improvement, and carload growth in grains and crude. In terms of revenue ton miles, the firm expanded 2% from the prior-year period. CN's 57.5% OR is 70 basis points improved from the prior-year period and substantially better than the reported 69.5% and adjusted 67.2% first-quarter performance (CN's all-time best OR was 53.3% in the third quarter of 2016). CN increased carloads in most categories excluding forest products, but petroleum and chemicals were up steepest, 12.3% year over year. Crude moves are attractive in part due to the long haul into the Gulf Coast refinery region. The rail expects U.S. coal, grain, and intermodal to increase volume in the second half of the year.
We expect CN to continue to improve its OR even though it has led the industry for years. The firm brought on board new chief operating officer Rob Reilly to the call for the first time; he is a 30-year veteran of BNSF and predecessor railroads. Concerning capacity and smoothing operations from struggles in the past couple of years, the firm took 125 of its 140 ordered new locomotives and has capacity to return less efficient, expensive leased power. Also, significant track expansion initiatives are on track for third-quarter completion. The firm continues to rightsize head count, targeting 5,700 management jobs at year-end compared with 6,030 currently and 6,900 in October 2018. It seems CN is not content to sit still.
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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