Here's Why You Should Retain Canadian National Stock for Now

Canadian National's CNI top line is bolstered by its strong segmental performance. The company's efforts to expand and upgrade its fleet are praiseworthy. However, rising operating expenses and weak liquidity are hurting the company's bottom line.

Factors Favoring CNI

Canadian National's top line is benefiting from robust segmental performance. The increase in volumes across its segments, such as intermodal, grain, fertilizer, petroleum and chemicals, highlights CNI's effective network management and ability to attract and retain significant business. In the second quarter of 2024, overall RTMs (revenue ton miles) grew by 13% year over year. This increase in RTMs was primarily driven by a 19% rise in the international intermodal segment and a 12% rise in Petroleum and Chemical.

CNI's proactive efforts to expand its fleet are commendable. The 2024-2025 Grain Plan reflects the company's commitment to enhancing its operational capabilities and delivering on its promise to efficiently transport the Canadian grain crop. One of the key highlights of the Grain Plan is the delivery of 750 new high-efficiency grain hopper cars, a continued focus on scheduled railroading, deployment of new firefighting equipment to help protect the supply chain and the use of new technologies to improve safety.

The company's efforts to reward its shareholders through dividends are encouraging. In the second quarter of 2024, CNI declared a quarterly dividend of C$0.8450 per share. As of March 31, 2024, the company repurchased 3.5 million common shares for $597 million under its current Normal Course Issuer Bid. Canadian National intends to repurchase up to 32 million common shares between Feb. 1, 2024 and Jan. 31, 2025 under its current NCIB.

Key Risks Faced by CNI

The northward movement in operating expenses is adversely impacting CNI'sbottom line. In the second quarter of 2024, total operating expenses increased by 12.8% year over year. This surge in operating expenses was primarily driven by the increase in labor costs.In the first quarter of 2024, labor costs, comprising salaries and benefits (accounting for 30.7% of the total operating expenses), rose by 13.8% year over year. 

Fuel costs, comprising 19.7% of the total operating expenses, jumped by 12.6% year over year.

The company's liquidity position is also a concern. Canadian National exited the second quarter of 2024 with a current ratio (a measure of liquidity) of 0.63. A current ratio of less than 1 indicates that the company is likely to struggle to meet its short-term obligations.

Shares of CNI have declined 6.6% year to date compared to its industry's growth of 0.5% in the same period.

Image Source: Zacks Investment Research

Zacks Rank

CNI Currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks for investors' consideration in the Zacks Transportation sector include C.H. Robinson Worldwide CHRW and Westinghouse Air Brake Technologies WAB.

C.H. Robinson Worldwide currently sports a Zacks Rank #1 (Strong Buy). CHRW has an expected earnings growth rate of 25.2% 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 surprise of 7.3%. Shares of CHRW have risen 9.9% in the past year.

WAB holds a Zacks Rank #2 (Buy) at present and has an expected earnings growth rate of 26% 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 11.8%. Shares of WAB have climbed 46.2% in the past year.

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