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Railroad Riddles: Unpacking Canadian National’s Strategy Post-Strike for Sustainable Growth

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  • Financial Performance: Q3 revenues: C$3,987 million, Gross profit: Decreased by 21% to C$1,517 million, Diluted earnings per share: Declined by 22% to C$1.69.
  • Recent Disruptions: Port strike in Prince Rupert caused a temporary decline in container volumes.
  • Strategic Network Expansion: Partnership with Genesee & Wyoming Inc. strengthens operational reach and market penetration.

Canadian National Railway Company (CN) has recently reported results for the third quarter of 2023. Despite a decline in revenue and net income compared to the same period in 2022, CN remains confident in its ability to accelerate sustainable, profitable growth and deliver incremental operating leverage.

Q3 2023 Performance

In the third quarter, CN reported revenues of C$3,987 million, representing a decrease of 12% from the previous year. Gross profit also decreased by 21% to C$1,517 million, while net income declined by 25% to C$1,108 million. Diluted earnings per share saw a decline of 22% to C$1.69.

Segment Performance

CN’s revenue breakdown by segments reveals fluctuations in various sectors. The Petroleum and Chemicals segment experienced an 11% decrease in revenues, attributed to market challenges and economic factors. Conversely, the Grain and Fertilizers segment displayed robust performance with a notable 16% increase in revenues, driven by increased agricultural activities and demand for transportation services. The Automotive segment also showed positive growth, rising by 14%. These diverse performances reflect the balance between various sectors impacting CN’s overall financial landscape.

Segment Revenues (C$ millions) % Change (Fav/Unfav) % Change at Constant Currency (Fav/Unfav)
Petroleum and Chemicals 758 (11%) (12%)
Metals and Minerals 515 (4%) (6%)
Forest Products 466 (15%) (17%)
Coal 242 (6%) (7%)
Grain and Fertilizers 722 16% 15%
Intermodal 880 (34%) (35%)
Automotive 237 14% 12%
Total Freight Revenues 3,820 (13%) (14%)
Other Revenues 167 14% 12%
Total Revenues 3,987 (12%) (13%)

 

Impact of Recent Disruption and Recovery Strategies

Key factors influencing CN’s performance and outlook include the recovery of international intermodal volumes, customer initiatives and new service offerings, margin expansion and operating leverage, strategic network expansion, and financial and operational fortitude. The recent disruption caused by the port strike in Prince Rupert has resulted in a temporary decline in container volumes, but management expects a gradual recovery as the structural advantages of Prince Rupert continue to attract customers. Customer initiatives, such as the Falcon service and partnerships in the EV supply chain, are expected to drive volume growth and generate additional revenue. Margin expansion and operating leverage will be crucial for profitability, and CN’s focus on operational excellence and strategic investments will contribute to its success.

Strategic Network Expansion and Partnerships

CN’s strategic network expansion, including its partnership with Genesee & Wyoming Inc., strengthens its operational reach and market penetration. The company’s financial fortitude, exemplified by a substantial public debt offering, reflects its commitment to growth and value-enhancing initiatives. Furthermore, CN’s upgrade to the Falcon Premium Intermodal Service demonstrates its commitment to offering superior and environmentally friendly transport solutions, enhancing its competitive edge and attracting more customers.

Future Outlook and Financial Targets

Looking ahead, CN aims to achieve compounded annual diluted EPS growth in the range of 10%-15% over the 2024-2026 period. Despite flat to slightly negative year-over-year growth in adjusted diluted EPS expected for 2023, the company remains committed to delivering strong financial results. CN’s disciplined scheduled operation has allowed them to maintain strong customer service, even amid weak consumer demand and external challenges.

Conclusion

In conclusion, despite revenue and net income declines, CN remains confident in its ability to accelerate sustainable growth and deliver incremental operating leverage. With a focus on recovery of international intermodal volumes, customer initiatives, margin expansion, strategic network expansion, and financial fortitude, CN is well-positioned for future success. Based on these factors, we assign an “Outperform” rating to CN’s stock. Nevertheless, prudent monitoring of market dynamics is
required to navigate potential challenges and capitalize on the company’s promising trajectory.

Disclosure: We don’t hold any position in the stock and this is not a recommendation of any kind as investing carries risk.

Read More on this Here: https://equisights.com/

Source: file:///C:/Users/ /Downloads/Q3-2023-Financial-Presentation-en.pdf

 

 

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