CNR Slightly Beats Q3 Earnings

Canadian National Railway CNR reports Better than expected Q3 earnings (all $ amount in CAD):

Quarterly revenue increased 3% YoY to $4.11 billion
EPS grew 2% YoY to $1.72 for the quarter
Free cash flow (FCF) was flat compared to last year at $584 million
RTM increased 2% to 56,548 million (RTM: weight of revenue-earning shipment in tons multiplied by the number of miles)
Quarterly dividends grew 7% to $0.845 per share, well above the rate of inflation

CNR was still able to grow its shipment volume, revenue and earnings despite the recent strike, showing the resiliency of the business. The EPS and FCF growth rate are much lower than what I wanted, but this was expected giving the economic and labour challenges the company faced recently. I plan to hold CNR for a few more years to see how it goes and hopefully the profitability will improve. The fair value estimation using DCF model is about $159 and a CAGR of 10%, here are the assumptions:

TTM FCF $3.565 Billion
FCF growth rate of 10% YoY (5YR AVG 11.85%)
Share repurchase of 1% of total shares outstanding per year (5YR AVG 2.57%)
Future Price/FCF ratio of 25 (5YR AVG 30.7)- Discount rate of 10%

I projected a lower annual share repurchase rate because the management is determined to keep the debt-to-EBITDA ratio below 2.5. The company bought back less shares this quarter to pay down debt, only repurchasing $427 million worth of shares compared to$ 1196 million a year ago. The good news is that the debt-to-EBITDA ratio is already at 2.51 in Q3, so I expect the share repurchase amount to increase back to normal soon.

I plan to continue DCA buying CNR every month as the stock is still trading at around fair value. I continue to believe that railroads are critical to north American economies, and past records have proven that class 1 railroads like CNR will deliver satisfactory returns over the long-term with relatively lower risks. You can also see my past CNR stock analysis using this link.

Holdings Disclosure

SoloFIRE CNR ownership: 6% of portfolio
SoloFIRE CNR Average Cost Paid: $156.05
CNR price as of writing: CA$155.07
Holding time: 2 years

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Comments and Questions

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DISCLAIMER: Solofire is not a registered financial advisor. This post contains author's personal opinion only and it should NOT be considered financial advice.