Canadian National Railway Company (TO:CNR) reported preliminary financial results for the quarter ended December 31, 2014. Results were better-than expected – Revenues of $3.21 billion were up more than 18% from last year, and importantly, earnings per share of $1.03 beat estimates by $0.06. As an added bonus, the company boosted its dividend by 25% – more than what had been expected.
This earnings release follows the earnings announcements from the following peers of Canadian National Railway Company – Canadian Pacific Railway (NYSE:CP), CSX Corporation (NYSE:CSX), Union Pacific Corporation (NSYE:UNP), Norfolk Southern Corporation (NYSE:NSC) and Kansas City Southern (NYSE:KSU).
See related articles: Union Pacific Corporation (UNP): Strong Earnings but Cautious Outlook , Norfolk Southern Corporation (NSC): Weak Quarter Owing to Revenue Fall, CSX Corporation: Strong Earnings and Strong Outlook, Canadian Pacific Railway (CP-CA): In-line Earnings Performance; No Change in Dividend, Kansas City Southern (KSU): Earnings beat despite revenue shortfalls.
Highlights
- Summary numbers: Revenues of CAD 3207 million, Net Earnings of CAD 844 million, and Earnings per Share (EPS) of CAD 1.03.
- Gross margins widened from 49.73% to 53.79% compared to the same quarter last year, operating (EBITDA) margins now 47.99% from 44.48%.
- Change in operating cash flow of 3.37% compared to same quarter last year trailed change in earnings, earnings potentially benefiting from some unlocking of accruals.
- Earnings growth from operating margin improvements as well as one-time items.
- Earnings per Share (EPS) growth exceeded earnings growth
The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:
Market Share Versus Profits
Companies sometimes focus on market share at the expense of profits or earnings growth.
Compared to the same quarter last year, CNR's change in revenue trailed its change in earnings, which was 32.91%. The company's performance this period suggests a focus on boosting bottom-line earnings. While the revenue performance could be better, it is important to note that this quarterly change in revenue was among the highest in the peer group thus far. Also, for comparison purposes, revenue changed by 2.85% and earnings by -1.06% compared to the immediate last quarter.
Earnings Growth Analysis
The company's earnings growth was influenced by year-on-year improvement in gross margins from 49.73% to 53.79% as well as better cost controls. As a result, operating margins (EBITDA margins) rose from 44.48% to 47.99% compared to the same period last year. For comparison, gross margins were 54.97% and EBITDA margins were 49.52% in the quarter ending September 30, 2014.
Cash Versus Earnings – Sustainable Performance?
CNR's year-on-year change in operating cash flow of 3.37% trailed its change in earnings. This leads Capital Cube to question whether the earnings number might have been achieved from some unlocking of accruals. On a positive note, the increase in operating cash flow was better than the average announced thus far by its peer group.
Margins
The company's earnings growth has also been influenced by the following factors: (1) Improvements in operating (EBIT) margins from 35.23% to 39.29% and (2) one-time items. The company's pretax margins are now 36.76% compared to 31.84% for the same period last year.
EPS Growth Versus Earnings Growth
CNR's change in Earnings per Share (EPS) of 35.53% compared to the same quarter last year is better than its change in earnings of 32.91%. At the same time, this change in earnings is less than the peer average among the results announced by its peer group, suggesting that the company is losing ground in generating profits from its competitors.
Company Profile
Canadian National Railway Co. is engaged in the rail and related transportation business. The company offers integrated transportation services: rail, intermodal, trucking, freight forwarding, warehousing and distribution. It offers movement of a diversified and balanced portfolio of goods including petroleum and chemicals, grain and fertilizers, coal, metals and minerals, forest products, intermodal and automotive. The company operates in three geographic regions: Western, Eastern and Southern. The Western Region, which is based in Edmonton, extends from Diamond, Manitoba to the Pacific Ocean. The Eastern Region, which is based in Toronto, extends east from Dugald, Manitoba to the Atlantic Ocean, and from Chibougamau, Quebec south to the Ontario-Michigan border. The Southern Region, which is based in Homewood, Illinois, extends from Winnipeg, Manitoba, to Chicago, Illinois then on to New Orleans, Louisiana, on the Gulf of Mexico, and from Minneapolis and St. Paul, Minnesota to Sault Ste. Marie, Ontario, and from Sioux City, Iowa and Omaha, Nebraska, heading east to Port Huron and Detroit, Michigan. Canadian National Railway was founded on June 6, 1919 and is headquartered in Montreal, Canada.