Canadian National Banks On North America, Coal Woes Stay

Canadian National Railway Company CNI, which delivered higher-than-expected earnings in the third quarter of 2014, foresees strong demand across North America and expects to grow at a faster pace than the economy,  maintaining lower incremental cost alongside. The company foresees strong demand across most of its businesses with improvements in consumer confidence in the U.S. and domestic retail markets, underpinning mid-to-high single-digit growth in business volumes in 2014.

We expect the operating ratio to remain at the current level of around 60% on higher productivity from improving system velocity and fuel efficiency. In view of these positives, we believe that the company will be able to achieve its double-digit year-over-year earnings growth projection in 2014.

In Sep 2014, Canadian National announced the sale of a segment of its rail line in Georgetown-Kitchener, Ontario to regional transportation agency – Metrolinx. The segment was used by GO Transit (a division of Metrolinx) commuter trains previously.  Although no financial terms were disclosed, Canadian National will retain freight operating rights over the line segment sold to Metrolinx. We believe the new deal will enable Canadian National to consolidate its assets and also invest the gains from the asset sale to further growth.

On the flip side, Canadian National faces significant competition from rail carriers and other modes of transportation. It faces rivalry specifically from Canadian Pacific Railway, which operates the other major rail systems in Canada and services almost similar areas in which Canadian National serves. It also faces intense competition from trucking companies in eastern Canada.

Uncertainties regarding the coal market have been a major headwind for Canadian National particularly due to lower export of pet coke. Offshore coal export is expected to remain challenged going forward. Lower coal shipments will offset the positive impact of other products lines thus affecting the company's revenues.

Canadian National Railway currently has a Zacks Rank #3 (Hold).

Stocks to Consider

Better-ranked stocks worth considering in this sector include CSX Corp. CSX, Kansas City Southern KSU and Union Pacific Corporation UNP. All these stocks hold a Zacks Rank #2 (Buy).