CN Forecasts 10% EPS Increase with Operational Enhancements

Key Takeaways

• CN reported lower adjusted EPS for both Q4 and full year of 2023, but expects sequential improvement in volumes.
• The company forecasts a 10% EPS growth and continued economic improvement for 2024.
• Operational metrics for Q4 showed improved car velocity and dwell time.
• CN anticipates mid-single-digit growth in revenue ton-miles (RTMs) and a 7% dividend increase for 2024.
• The company announced a new share buyback program of up to 32 million shares.
• CN faces $200 million in cost headwinds, but aims to offset with operating efficiency and capacity leverage.
• The company is hiring to match anticipated volume recovery and aims for pricing to be above rail inflation.

Company Outlook

• CN forecasts a more constructive 2024 compared to 2023, with slight positive industrial production growth and stabilizing interest rates.
• The company predicts mid-single-digit RTM growth and 10% EPS growth for 2024.
• Capital expenditure for 2024 projected to be around $3.5 billion with a targeted return on invested capital (ROIC) of 15% to 17%.
• CN expects a gradual recovery in sectors such as intermodal, international, and forest products, aiming to stabilize to pre-pandemic levels.

Bearish Highlights

• The company acknowledges the volatile environment due to monetary policy and geopolitical risks.
• CN anticipates cost headwinds related to depreciation, incentive compensation, and pensions.
• Weak sectors like intermodal, international, and forest products are gradually recovering but have affected recent performance.

Bullish Highlights

• CN is confident in its strong balance sheet and financial flexibility to seize opportunities.
• The company has delivered seven consecutive quarters of strong operating and financial performance.
• CN is focused on improving margins in 2024 despite anticipated cost headwinds.

Misses

• The company did not provide specific revenue forecasts but is satisfied with the overall forecast.
• CN finished 2023 slightly below leverage target due to a long-term approach.
• Grain volumes declined in Q4 2023 due to Canadian farmers withholding sales in response to lower global prices.

Q&A Highlights

• Labor costs are being examined in light of new hours of service regulations.
• CN is working on improving destination performance and reducing gaps between launch and land.
• The company is cautious about share repurchases but is open to opportunistic approaches.
• While fuel surcharges had a favorable lag in Q4, they are not expected to significantly impact yield moving forward.

Insights

Canadian National Railway Co. remains a formidable name in the transportation sector, and recent data from InvestingPro provides insights that may interest investors looking at the company’s financial health and market performance.