CN posts “very solid” first-quarter results

Noting “a challenging economic environment,” CN announced a “very solid” first-quarter performance for 2016. 

First-quarter 2016 financial highlights

• Net income increased 13% to C$792 million, while diluted EPS increased 16% to C$1.00, compared with the first quarter of 2015.
• Operating income increased 14% to C$1.22 billion.
• Operating expenses declined 14% to C$1.75 billion.
• Operating ratio of 58.9%, an improvement of 6.8 points over the prior-year quarter.
• Free cash flow for first-quarter 2016 was C$584 million, up from C$521 million for the year-earlier quarter.
• Revenues decreased by 4% to C$2.96 billion. Carloadings declined 7% and revenue ton-miles declined 9%.

Illustrating continuing industry trends, “The decrease in revenues was mainly attributable to decreased shipments of energy-related commodities including crude oil, frac sand, drilling pipe and semi-finished steel products as a result of declining energy markets.”  Specifically, declines of petroleum and chemicals (-10%), metals and minerals (-18%), and coal (-42%). 

On the upside, revenues increased for automotive (18%), forest products (11%), and intermodal (1%).

Claude Mongeau, president and chief executive officer, headlined other points of the first-quarter: “We successfully aligned our resources with the reduced volume level to achieve strong efficiency gains, while continuing to offer superior customer service and significantly improving our safety performance. These achievements allowed the CN team to deliver record first-quarter financial results.”

Read the full 1Q 2016 release HERE.  

CN is “one of the best positioned to weather industry headwinds,” said Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “With the industry’s best operating ratio and lowest coal exposure, CN should continue to act as a relative refuge for rail investors in a challenging environment. However, the tempered outlook, although not a big surprise, will likely pressure the stock in the near term. We maintain our long-term favorable view. CN lowered its 2016 earnings growth guidance from mid-single digits to flat relative to 2015. Given the tempered outlook commentary from other Class I’s CN’s guidance reduction should not come as a big surprise. In absence of favorable demand dynamics, the railroads have sharpened their focus on improving operating metrics, and CN has once again proven that it is the best operator in the space. The improvements achieved in all four quarters of 2015 continued in 1Q16, with just about every key operating metric improving year-over-year, including train speed, up 8%, and terminal dwell, down 15%.

“We are adjusting our Canadian dollar EPS estimates from C$4.60 to C$4.55 in 2016 and leaving our 2017 estimate of C$5.10 unchanged. Despite the guidance reduction to CAD-denominated earnings, once we adjust our fuel assumptions and our FX rate to reflect the forward curve, our 2016 and 2017 USD EPS estimates rise to $3.60 and $4.03, from $3.36 and $3.83, respectively. Our USD-denominated price target rises from $61.50 to $69.00 based on our new USD 2017 EPS estimate and a 17x multiple, which is more reflective of the company’s impressive execution and more in line with its historical average than our prior 16x multiple.”