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What Drove Canadian National Railway’s Q4 Earnings Higher?

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Canadian National Railway’s earnings

Canadian National Railway (CNI) reported better-than-expected fourth-quarter results. The company’s quarterly revenues and EPS grew significantly on a YoY (year-over-year) basis. The company’s fourth-quarter EPS of 1.49 Canadian dollars was a few cents higher than analysts’ estimate of 1.47 Canadian dollars and registered 24.2% YoY growth. Higher revenues and lower costs mainly drove the company’s bottom-line results. Canadian National Railway registered double-digit earnings growth in all four quarters in 2018.

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Canadian National Railway’s fourth-quarter revenues were 3.81 billion Canadian dollars, which was in-line with analysts’ estimate. The quarterly revenues marked 15.9% YoY growth mainly driven by a 5% rise in the carloadings volume, higher fuel recoveries, and a 4% increase in rail freight revenues per RTM (revenue ton mile).

Canadian National Railway’s adoption of a precision scheduled railroading system continued to help it lower costs and improve its operational efficiency. In the fourth quarter, the company’s adjusted operating ratio (operating expenses as a percentage of revenues) contracted by 150 basis points YoY to 61.2%.

The improved operating ratio led to an increase in the company’s adjusted operating margin. The company reported an adjusted operating margin of 38.8%, which is 150 basis points higher than 37.3% in the fourth quarter of 2017. In absolute terms, Canadian National Railway’s fourth-quarter operating income grew 19% YoY to 1.45 billion Canadian dollars.

For fiscal 2018, Canadian National Railway reported revenues of $14.32 billion, which beat analysts’ expectations of $14.31 billion and grew 9.8% YoY. The company’s EPS of $5.50 beat the consensus estimate by three cents and marked a YoY improvement of 10.2%.

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All of the major US railroad companies (IYT) have registered strong YoY growth in their respective fourth-quarter EPS. CSX (CSX), Canadian Pacific (CP), Union Pacific (UNP), and Kansas City Southern (KSU) have reported a YoY increase of ~58%, ~41%, ~39%, and ~13 in their respective fourth-quarter EPS.

Outlook and shareholders’ distribution

Buoyed by the strong fourth-quarter and fiscal 2018 performance along with the strong economic scenario, Canadian National Railway expects its RTM to grow in the high-single-digit range in 2019. The company expects higher revenues along with efficient cost management to drive its 2019 EPS higher in the low-double-digit range from 5.50 Canadian dollars reported in 2018.

In 2018, Canadian National Railway returned 3.33 billion Canadian dollars in the form of share repurchases and dividend payments. The company has raised its quarterly cash dividend rate 18% to 0.5375 Canadian dollars, which is effective in the first quarter of 2019.

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