Rail Q3/18 Earnings - Big Week Part 1 (of 3): CNI

October 26, 2018


Delayed gratification – But we know how sweet it will be:  Canadian National’s full comeback is taking a little longer than I, personally had anticipated – while their Q3/18 financial results culminated in an adjusted 15% YOY gain (and beat the Streets by a couple of percent for good measure), they still struggled a bit on service and margin.  While as you are probably aware, I intensely dislike the over-emphasis on the Operating Ratio (OR), but it does bear noting that without huge YOY or sequential changes in mix (in fact intermodal units increased only 2% - RTMs actually declined 3%) the CNI Q3/18 OR increased 230bps to (still not too shabby) 59.5%.  and only 30bps can be attributed to higher fuel prices.  Overall volumes increased “only” 3%, against tough comps and during the capital program “blitz” (more below), and compares to the +5% unit growth at CP.  CP maintained its FY2018 Guidance but did lower its FY18 volume outlook to ~5% from 5-7%....Sequential service numbers suggest stabilization (velocity down 1% Q/Q, for example) but YOY metrics show the service hole that CNI out of which CNI needs to climb (train velocity -14% and terminal dwell up 6%). 

But help is on the way, eh - CNI and especially COO Mike Cory gave a detailed look at the significant project work completed (22/27 projects; 80% of planned work) and still to do in Q4.  On the positive side, along with the reaffirmed short-term outlook:

  • Strong demand (and accelerating demand, given Q4TD performance), with growth in 2019 coming from intermodal, of course, renewed CBR story, Ag and Canadian resources (potash, export coal and wood pellets) more than compensating for declining (US) sand and autos

  • Hiring/training has returned to “normalized” levels; a productivity/efficiency gain

  • Safety improvements (accidents better by 7% YOY; injuries by 8%) provide an advance look into overall operating enhancements; productivity improvements will steadily accompany those (in crews, equipment, etc)

  • Pricing is very, very strong: Q3/18 same/store came in at =4.5% (and renewals, as CEO JJ Ruest points out, the forward looking snapshot, at +4.6%.  Shippers are seeing the recovery at CN, and mostly never doubted it….

  • CNI (like CP) advanced their usual year-end share buyback plan “request”

Delayed but On the Way:  I have absolute confidence that within two quarters we’ll see that both of the continent’s best performing railroads will be “North of the Border”….next stop is JJ Ruest’s speech at RailTrends (www.railtrends.com )– another chance for a recovery/post recovery (and fully into PHH growth plan) update….

Anthony B. Hatch 
abh consulting

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