uploads///CNI Operating Margins

Will CNI Maintain Industry Leadership with 2Q16 Operating Margins?

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Jul. 22 2016, Updated 12:09 p.m. ET

CNI’s 2Q16 operating margins

Analysts are estimating that Canadian National (CNI) will report operating margins of 43.6% in 2Q16. In the same period last year, the company recorded an operating margin of 43.6%. Thus, analysts aren’t expecting any improvements in the margins on a year-over-year basis. We’ll see why in a later part of this article. On a yearly basis, analysts forecast that CNI will achieve operating margins of 43.5% and 43.7%, respectively, for 2016 and 2017.

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Can CNI cut costs further?

The above graph suggests that analysts aren’t expecting CNI to improve its operating margins in the next four quarters. With the shaky rail industry fundamentals, the company swung into action. It has reduced its workforce by 2,400 so far, or 10%. Going forward, we might see further action on that front if the volume scenario deteriorates further.

Secondly, with the crude prices up by almost 60% from their lowest in the first half of 2016, the fuel cost advantage will likely taper off in 2Q16 and in coming quarters. So, the proportion of fuel cost to total operating cost may not decline significantly on a year-over-year basis as it did previously.

Peer group operating margins

Among all the class I railroads, CNI and Canadian Pacific Railway (CP) have been achieving sub-60% operating ratios in the last few quarters. Since the operating ratio is the flip side of operating margins, this translates to operating margins of over 40% in recent quarters. Even CNI’s US counterparts like Union Pacific (UNP), CSX (CSX), and Norfolk Southern (NSC) don’t come close to the operating margins of Canadian freight rail giants.

Major US railroads (XLI) make up 24.2% of the portfolio holdings of the iShares Transportation Average ETF (IYT).

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