CANADIAN NATIONAL RAILWAY CO. $58 (Toronto symbol CNR; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 836.0 million; Market cap: $48.5 billion; Price-to-sales ratio: 4.6; Dividend yield: 1.5%; TSINetwork Rating: Above Average; www.cn.ca) operates Canada’s largest railway. Its 32,350- kilometre network stretches across the country and through the U.S. Midwest to the Gulf of Mexico.
Manufacturers are shipping more goods by rail, thanks to the improving North American economy. At the same time, a lack of pipeline capacity is prompting oil producers to ship more of their product by train.
As a result, CN’s earnings rose 9.0% in the three months ended September 30, 2013, to $724 million from $664 million a year earlier. Due to fewer shares outstanding, earnings per share gained 13.2%, to $0.86 from $0.76 (all per-share amounts adjusted for a 2-for-1 stock split in December 2013).
Revenue rose 9.0%, to $2.7 billion from $2.5 billion. CN reported revenue gains from shipping petroleum (up 16.6%), intermodal containers (up 13.1%), metals and minerals (up 10.6%), forest products (up 7.7%) and automotive goods (up 7.1%). These increases offset declines in grain and fertilizers (down 3.0%) and coal (down 0.5%).
Higher labour costs and depreciation charges pushed up CN’s operating expenses by 6.7% in the latest quarter. But thanks to the higher revenue, its operating ratio improved to 59.8% from 60.6% a year ago. (Operating ratio is calculated by dividing a company’s regular operating costs by its revenue. The lower the ratio, the better.)
In response to new rail-safety regulations following last July’s explosion of a train hauling crude oil in Lac-Mégantic, Quebec, CN will install devices next to its tracks that can detect overheated wheels and other mechanical problems. This gear will cost $10 million.
The company will likely earn $3.10 a share in 2013. The stock trades at 18.7 times that estimate. However, its 2014 earnings could rise to $3.52 a share, and it trades at a more reasonable 16.5 times that forecast. The $0.86 dividend yields 1.5%.
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