Canadian National Railway (CNI) has experienced a strong top line, largely attributed to its robust segmental performance. The company has successfully expanded and upgraded its fleet, demonstrating a commitment to efficiency and growth. However, this positive outlook is somewhat dampened by rising operating expenses and a concerning liquidity situation.
Factors Favoring CNI
The company’s revenue growth is driven by increasing volumes across various segments, including intermodal, grain, fertilizer, petroleum, and chemicals. This reflects CNI’s effective network management and ability to attract and retain substantial business. In the second quarter of 2024, revenue ton miles (RTMs) saw a 13% year-over-year increase, largely fueled by a 19% surge in the international intermodal segment and a 12% rise in the Petroleum and Chemical segment.
Canadian National’s proactive approach to fleet expansion is commendable. The company’s 2024-2025 Grain Plan showcases its commitment to enhancing operational capabilities and efficiently transporting the Canadian grain crop. Key components of this plan include the delivery of 750 new high-efficiency grain hopper cars, a continued focus on scheduled railroading, the deployment of new firefighting equipment to protect the supply chain, and the implementation of new technologies to improve safety.
Furthermore, CNI’s efforts to reward its shareholders through dividends are encouraging. The company declared a quarterly dividend of C$0.8450 per share in the second quarter of 2024. As of March 31, 2024, CNI repurchased 3.5 million common shares for $597 million under its ongoing Normal Course Issuer Bid. The company intends to repurchase up to 32 million common shares between February 1, 2024, and January 31, 2025, under its current NCIB.
Key Risks Faced by CNI
Despite these positive developments, CNI faces significant challenges. The upward trend in operating expenses is negatively impacting the company’s bottom line. Total operating expenses rose 12.8% year over year in the second quarter of 2024, primarily driven by increased labor costs. In the first quarter of 2024, labor costs, comprising salaries and benefits (accounting for 30.7% of total operating expenses), increased by 13.8% year over year. Fuel costs, accounting for 19.7% of total operating expenses, jumped by 12.6% year over year.
Another cause for concern is the company’s liquidity position. Canadian National exited the second quarter of 2024 with a current ratio of 0.63. A current ratio below 1 indicates a potential struggle for the company to meet its short-term financial obligations. This is reflected in the share price performance, with CNI shares declining 6.6% year-to-date, compared to its industry’s growth of 0.5% in the same period.
Investor Considerations
While CNI exhibits strength in revenue generation and fleet expansion, the rising operating expenses and weak liquidity present significant challenges. Investors should exercise caution and consider these factors before making investment decisions.
Alternative Investments
For investors seeking alternative options in the transportation sector, C.H. Robinson Worldwide (CHRW) and Westinghouse Air Brake Technologies (WAB) are worth considering.
CHRW currently holds a Zacks Rank #1 (Strong Buy) and boasts an expected earnings growth rate of 25.2% for the current year. The company has a positive earnings surprise history, exceeding Zacks Consensus Estimates in three out of the last four quarters. Shares of CHRW have gained 9.9% in the past year.
WAB holds a Zacks Rank #2 (Buy) and anticipates an earnings growth rate of 26% for the current year. The company has consistently exceeded Zacks Consensus Estimates in the past four quarters, demonstrating strong performance. Shares of WAB have climbed 46.2% in the past year.
While CNI shows promise, its current financial challenges require careful consideration from investors. Alternative options in the transportation sector, such as CHRW and WAB, offer attractive growth potential and solid earnings track records.
