Canadian National Railway’s CNI robust growth initiatives are boosting the company’s prospects. The shareholder-friendly approach is encouraging. However, the economic downturn does not bode well for CNI.
Factors Favoring CNI
Despite a challenging macroeconomic environment, CNI’s growth initiatives remain on track. The company is seeing positive progress in key areas, such as expanding frac sand terminal capacity to support drilling activities in Northeast BC and Alberta, with a unit train terminal set to open by year-end and plans for two more next year.
CNI is making strides in the renewable sector, ramping up crushed plant capacity. The Greater Toronto Area fuel terminal is also performing as expected, with increasing volumes of gasoline, diesel and ethanol flowing into a growing market. These developments demonstrate CNI's ability to drive growth and adapt to market conditions, positioning the company well for continued success.
CNI’s proactive approach to safety is evident in its comprehensive programs designed to reduce risks and improve frontline performance. The company has trained nearly 500 frontline managers on exposure reduction and human performance techniques, with plans to reach 1,000 by the end of the year.
Moreover, the company uses leading safety indicators and innovative tools like the slack simulator and walking simulator to prepare employees for real-world challenges in a controlled environment. This focus on safety resulted in a 30% improvement in accident frequency and a 4% improvement in injury frequency in the third quarter. CNI remains committed to its goal of zero injuries and accidents, reflecting its strong safety culture.
Canadian National’s commitment to rewarding shareholders through dividends and share repurchases is encouraging. In the fourth quarter of 2024, CNI declared a quarterly dividend of C$0.8450 per share. Under the company’s current share repurchase program, which runs from Feb. 1, 2024 to Jan. 31, 2025, CNI has repurchased nearly 12 million shares for a total of almost $2.1 billion as of the end of September.
CNI: Key Risks to Watch
The continued economic downturn is significantly impacting CNI’s prospects. The company is mired in several headwinds, including labor uncertainty and work stoppage, wildfires in Alberta and weaker-than-expected demand for forest products and metals.
Canadian National’s financial stability is challenged by increased operating expenses and weak liquidity. In the third quarter of 2024, total operating expenses rose 5.1% year over year. This surge in operating expenses was driven by elevated labor costs, purchased services and material costs and fuel expenses, adversely impacting the company’s bottom line.
In the third quarter of 2024, CNI experienced a 2% increase in labor costs, driven by a 2% higher average headcount. There were also higher short-term unproductive costs related to deadheading, recrews and held-away costs, largely due to the work stoppage in August.
Fuel expenses rose by 5% compared to the same period last year. This increase was attributed to a 2% rise in gross ton miles, a 3% unfavorable fuel efficiency impact and a true-up to intercarrier fuel estimates.
Moreover, CNI exited the September-end quarter with a current ratio (a measure of liquidity) of 0.64. A current ratio of less than 1 is not desirable as it indicates that the company does not have sufficient cash to meet its short-term obligations.
Shares of CNI have declined 11.5% year to date compared with the industry’s fall of 0.3% in the same period.
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CNI's Zacks Rank
CNI currently carries a Zacks Rank #3 (Hold).
Stocks to Consider
Investors interested in the Zacks Transportation sector may consider Westinghouse Air Brake Technologies WAB and SkyWest SKYW.
Westinghouse Air Brake Technologies currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
WAB has an expected earnings growth rate of 2.01% for the current year. The company has an impressive earnings surprise history. Its earnings outpaced the Zacks Consensus Estimate in three of the trailing four quarters and missed once, delivering an average beat of 9.46%. Shares of WAB have risen 73.6% in the past year.
SkyWest currently sports a Zacks Rank #1. SKYW has an expected earnings growth rate of 4.07% for the current year.
The company has an encouraging track record with respect to the earnings surprise, having surpassed the Zacks Consensus Estimate in each of the trailing four quarters. The average beat is 79.12%. Shares of SKYW have climbed 147.5% in the past year.
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