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Canadian National (CNI) Q1 Earnings: Disappointment in Store?


Canadian National Railway Company CNI is scheduled to report first-quarter 2018 results on Apr 23, after the market closes. The company reported lower-than-expected earnings per share in each of the preceding two quarters, with high costs hindering bottom-line growth.

What is worse is that the dismal performance is likely to continue in the soon-to-be reported quarter as well. This railroad operator’s disappointing price performance in the first quarter (January-March period) further highlights the gloomy scenario. The stock has lost 11.4% of its value in the three-month period, faring worse than its industry’s 3.4% decline.

The negative sentiment surrounding the stock can also be gauged from the fact that the Zacks Consensus Estimate for first-quarter earnings moved south 11.1% over the last 60 days. The consensus mark for the same too decreased 9.1% on year-over-year basis.

Given this backdrop, let’s delve deep to unearth the factors that are likely to influence the company’s first-quarter results:

We expect Canadian National’s results to be hurt by the network congestion problems that have led to customer dissatisfaction due to service delays. In February 2018, oilfield service major — Halliburton Company's HAL — stated that Canadian National’s service delays have been affecting its bottom line, thus underlining the gravity of this situation.

Additionally, rival Canadian Pacific Railway Limited’s CP commentary about its increasing network fluidity highlights the fact that these operational issues are likely to affect Canadian National’s customer base. This, in turn, might adversely impact its growth prospects in the to-be-reported quarter, unless resolved quickly.

In fact, Canadian National announced a change at its helm in the first week of March to primarily address the service issues. The new CEO (interim) — Jean-Jacques Ruest — has apologized to its customers for the service woes and promised an improvement on the service front. Even if the new CEO fulfills his promise, we believe that it will take time and the change is unlikely to significantly impact the railroad’s first-quarter results.

Service issues apart, high labor and fuel costs are expected to weigh on Canadian National’s bottom line. Rise in costs are likely to hurt operating ratio (operating expenses as a percentage of revenues) in the soon-to-be-reported quarter.

Moreover, Canadian National’s high debt levels remain potent threats. However, we are impressed by the 10% dividend hike announced by the company in January 2018.

What Does the Zacks Model Unveil?

Considering the above-mentioned downsides, our proven model too does not show that Canadian Nationalis likely to beat earnings estimates this quarter. A stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can see the complete list of today’s Zacks #1 Rank stocks here. But that is not the case here as you will see below.

Zacks ESP: Canadian National’s has an Earnings ESP of -2.10% as the Most Accurate estimate is pegged at a cent below the Zacks Consensus Estimate of 80 cents per share. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Canadian National’s Zacks Rank #4 (Sell) further decreases the predictive power of ESP, making us even less confident of an earnings beat.

As it is, we caution against Sell-rated stocks (#4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stock to Consider

With Canadian national likely to disappoint, investors interested in the railroad space may consider Union Pacific Corporation UNP. Our model shows that Union Pacific possesses the right combination of elements to post an earnings beat in its next release.

Union Pacific has an Earnings ESP of +0.21% and a Zacks Rank of 3. The company will release first-quarter 2018 results on Apr 26.

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