uploads///CNI OpMarg

Why CNI’s Operating Margins Ran on an Elevated Track in 2015

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Mar. 2 2016, Updated 8:06 a.m. ET

Operating margins

In this part, we will see how Canadian National Railway (CNI) seems to be ahead of the game in improving its operating margin. It represents the flip side of the operating ratio, which is an important metric for gauging the operating efficiency of railroads. The higher the operating efficiency, the higher the operating margin and return on assets will be, and vice versa.

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Canadian National’s operating margins

CNI proved itself to be the most efficiently run railroad in the North American Class I railroad industry. The company achieved the industry’s best-ever operating margin of 42.8% in fiscal 2015. Its operating margins are the talk of the railroad industry. From an operating margin of a mere 23.2% in 2003, Canadian National successfully elevated it to ~43%. It translates into almost doubling the margins in a span of 12 years.

The company was able to achieve this through network realignment, pricing power, productivity gains, and effective matching of resources with volumes in challenging times. E. Hunter Harrison, president and chief executive officer of Canadian Pacific (CP), was the CEO of Canadian National Railway from 2003–2009. He laid the foundation of a seamless operations culture of controlling costs and asset optimization. The present team of CNI, led by the company’s CEO, Claude Mongeau, has successfully carried over Harrison’s legacy.

Peer group margins

Since Genesee and Wyoming (GWR) operates in North America, Europe, and Australia, it reports segmental operating margins. Let us compare the fiscal 2015 operating margins of CNI’s peers:

  • Norfolk Southern (NSC): 27.4%
  • Canadian Pacific Railway (CP): 40%
  • CSX Corporation (CSX): 31.3%
  • Union Pacific (UNP): 36.9%
  • Kansas City Southern (KSU): 33.6%

The iShares US Industrials ETF (IYJ) has about 2.92% of its total holdings in Union Pacific (UNP), 1.04% in CSX Corporation (CSX), 0.95% in Norfolk Southern (NSC), 0.14% in Genesee and Wyoming (GWR), and 0.39% in Kanas City Southern (KSU)—all major US railroads.

Keep reading to learn more about Canadian National’s capital expenditure and its mix.

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