Why is CN (CNI) up 7.5% since its last earnings report?

It’s been a month since Canadian National’s (CNI) last earnings report. Shares have risen about 7.5% in that time, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is CN headed for a decline? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the key drivers.

Canadian Revenue Officer in the second quarter

The Canadian’s earnings (excluding 36 cents from non-recurring items) of 92 cents per share ($0.77 CAD) were in line with the Zacks Consensus Estimate. However, the financial result decreased by 28.7% year-on-year.

Quarterly revenues of US$2,315 million (CAD 3,209 million) missed the Zacks Consensus Estimate of US$2,407.6 million and declined 21.8% year-over-year. The decline was mainly due to lower sales volumes in most commodity groups caused by Covid-19 and lower fuel surcharge rates.

Weak freight demand also had a negative impact on revenues. Freight revenues, which accounted for 94.7% of revenues, declined 19.2% year-on-year. On a year-over-year basis, freight revenues declined across all segments. Freight revenues in the Petroleum & Chemicals, Metals & Minerals, Forest Products and Coal segments declined by 25%, 30%, 15% and 21%, respectively. Moreover, the same has also declined in the Automotive (72%) and Intermodal (12%) segments. However, revenues in the Cereals and Fertilizers segment increased by 1%.

While total vehicle freight fell 15.9% year-over-year, revenue per tonne miles (RTM) fell 18.4%. Segmentally, vehicle loads decreased in the Petroleum & Chemicals, Metals & Minerals, Forest Products, Coal & Grains and Fertilizers segments by 25%, 19%, 17%, 21% and 3%, respectively. The rate also declined in the automotive and intermodal segments by 72% and 8%, respectively. Additionally, freight revenue per carload declined 3.9% in the reported quarter. Freight revenues on an RTM basis also decreased by 1%.

Second quarter operating expenses increased 6% to C$2,424 million, primarily due to a loss on assets held for sale. Adjusted operating income decreased 24% year-over-year to C$1,271 million. The adjusted operating ratio (defined as the percentage of operating expenses in revenues) deteriorated to 60.4% from 57.5% in the same quarter last year. It is worth noting that a smaller metric value is desired.

Liquidity

The company ended the June quarter with cash of C$375 million compared to C$64 million reported at the end of 2019. In the second quarter of 2020, the company generated free cash flow of C$1,008 compared to the year-ago quarter for C$513 million . Long-term debt was C$13,107 million as of June 30, 2020, compared to C$11,866 million at the end of 2019.

Dividend

The company’s management maintains a quarterly dividend of CAD 0.575, which will be paid to existing shareholders on September 30 at the close of business on September 9.

How have estimates changed since then?

It turns out that the estimates have not changed in the last month.

VGM results

At this point, CN has an average Growth Score of C, although it lags well behind its Momentum Score of F. However, the stock is rated C on the value side, ranking in the middle 20% for this investment strategy.

Overall, the stock has a Total VGM Score of D. If you’re not focused on one strategy, this score should interest you.

Perspectives

CN carries a Zacks Rank #3 (Hold). We expect a linear rate of return on the stock over the next few months.

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