Canadian National Railway (CNI) Down 4.1% Since Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Canadian National Railway Company (NYSE:CNI) . Shares have lost about 4.1% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Third Quarter Earnings

Canadian National Railway’s third-quarter 2017 earnings per share (excluding 3 cents from non-recurring items) of $1.05 (C$1.31) fell short of the Zacks Consensus Estimate of $1.06. The bottom line however, climbed 9.4% from the year-ago figure.

Quarterly revenues of $2,576.8 million (C$3,221) also lagged the Zacks Consensus Estimate of $2,620.7 million but increased 11.5% year over year. Rail freight revenues, accounting for bulk of the top line in the quarter, improved 7%. The top line got a boost from increased volumes in segments namely, Overseas Intermodal, Frac sand, Coal and Petroleum coke exports, and Canadian grain.

Operating Results

On a year-over-year basis, freight revenues increased in segments like Metals and Minerals (31%), Coal (23%), Intermodal (12%) and Automotive (4%). However, the same declined in segments like Forest Products (2%) and Grain and Fertilizers (1%). Petroleum and Chemicals revenue remained flat year over year. Overall, carloads (volumes) expanded 11% and revenue ton miles (RTMs) rallied 10% year over year. Rail freight revenues per carload declined 4%in the reported quarter.

The Metals and minerals sub group performed most impressively with respect to car loads that surged 23%. The other segment to report double-digit volume growth is Intermodal, showing a 20% rise. Petroleum and Chemicals segment reported an increase of 3% year over year. However, Forest Products and Coal volumes decreased 2% and 7%, respectively. Grain and Fertilizers, and Automotive volumes contracted 3% each.

In the quarter under review, operating income grew 3.7% year over year to C$1,459. Operating ratio (defined as operating expenses as a percentage of revenues) was 54.7% compared with 53.3% in the year-ago quarter. Higher fuel costs contributed to this key metric’s deterioration.

Liquidity

The company exited the third quarter with free cash flow of C$662 million compared with C$574 million a year ago. Adjusted debt at the end of the quarter was C$10,894 million compared with C$11,245 million a year ago.

Guidance

Canadian National continues to expect full-year 2017 earnings per share in the band of C$4.95-C$5.10 compared with C$4.59 a year ago.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There have been four revisions lower for the current quarter.

Canadian National Railway Company Price and Consensus

Canadian National Railway Company Price and Consensus | Canadian National Railway Company Quote

VGM Scores

At this time, Canadian National Railway's stock has an average Growth Score of C, though it is lagging a bit on the momentum front with a D. The stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks' style scores indicate that the company's stock is suitable for value and growth investors.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. Notably, the stock has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.