Canadian National Railway Co. :CNI-US: Earnings Analysis: Q4, 2016 By the Numbers : January 26, 2017

Canadian National Railway Co. reports financial results for the quarter ended December 31, 2016.

We analyze the earnings along side the following peers of Canadian National Railway Co. – Canadian Pacific Railway Limited, Norfolk Southern Corporation, Kansas City Southern, CSX Corporation and Union Pacific Corporation (CP-US, NSC-US, KSU-US, CSX-US and UNP-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 2,410.89 million, Net Earnings of USD 762.91 million.
  • Gross margins widened from 48.23% to 49.80% compared to the same period last year, operating (EBITDA) margins now 53.00% from 51.93%.
  • Year-on-year change in operating cash flow of 6.36% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth from operating margin improvements as well as one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2016-12-31 2016-09-30 2016-06-30 2016-03-31 2015-12-31
Relevant Numbers (Quarterly)
Revenues (mil) 2410.89 2310.65 2204.61 2157.55 2370.96
Revenue Growth (%YOY) 1.68 -6.17 -13.25 -13.58 -16.04
Earnings (mil) 762.91 745.17 665.57 576.51 704.7
Earnings Growth (%YOY) 8.26 -3.18 -7.63 1.62 -5.18
Net Margin (%) 31.64 32.25 30.19 26.72 29.72
EPS 0.99 0.96 0.85 0.73 0.88
Return on Equity (%) 27.05 26.03 23.32 20.79 26.16
Return on Assets (%) 10.93 10.65 9.6 8.49 10.56

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Market Share Versus Profits

Revenues History
Earnings History

CNI-US‘s change in revenue this period compared to the same period last year of 1.68% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that CNI-US is holding onto its market share. Also, for comparison purposes, revenues changed by 4.34% and earnings by 2.38% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

The company’s earnings growth was influenced by year-on-year improvement in gross margins from 48.23% to 49.80% as well as better cost controls. As a result, operating margins (EBITDA margins) rose from 51.93% to 53.00% compared to the same period last year. For comparison, gross margins were 51.99% and EBITDA margins were 57.03% in the last reporting period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Cash Versus Earnings – Sustainable Performance?

CNI-US‘s change in operating cash flow of 6.36% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The company’s earnings growth has also been influenced by the following factors: (1) Improvements in operating (EBIT) margins from 42.77% to 43.36% and (2) one-time items. The company’s pretax margins are now 42.37% compared to 39.51% for the same period last year.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

Canadian National Railway Co. is engaged in the rail and related transportation business. The company offers integrated transportation services: rail, intermodal, trucking, freight forwarding, warehousing, and distribution. It offers movement of a diversified and balanced portfolio of goods including petroleum and chemicals, grain and fertilizers, coal, metals and minerals, forest products, intermodal and automotive. The company operates in three geographic regions: Western, Eastern and Southern. Canadian National Railway was founded on June 6, 1919 and is headquartered in Montreal, Canada.

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