Citi Comments On Canadian National Railway's Earnings Results

Canadian National Railway CNI reported 4Q10 EPS of C$1.08, which beat our estimate but was in line with consensus. CN's results were solid, driven by strong top-line growth with steady volume and yield gains; however, its incremental operating ratio has begun to exhibit resistance at 48.5% for the quarter, worse than Citi's 34.9% target, yielding a 63.4% operating ratio, 120 bps worse than its 62.2% target. While Citi expects CN to obtain its double-digit EPS growth target in 2011, it believes it will be largely achieved through revenue growth and buybacks, as margin improvement for the industry leader slows in 2011. 4Q10 EPS was up 21% YOY and above Citi's C$1.06 estimate (consensus was C$1.08). Revenues were C$2.12 billion, up 12% YOY and above Citi's C$2.09 billion target, with volumes up 10% YOY and yields up 2.2% Citi maintains its Hold rating and $74 price target. That said, Citi is increasing its 2011 EPS estimate 3% to C$4.70, from C$4.56 based on its expectations for continued solid revenue growth, but also a weaker incremental operating ratio. CNI is trading higher at $68.80