On Monday, Canadian National Railway (TSX:CNR)(NYSE:CNI) posted its earnings for Q1 2019, following a particularly harsh winter that resulted in increased costs and grain harvest delays. Despite the headwinds, CN managed to increase revenue by 11% and adjusted diluted EPS by 17%, owing to strong growth in crude by rail. CN’s bottom line earnings missed analysts’ estimates slightly, but overall, show that the company continues to grow even in the most trying conditions. To understand how CN managed to keep up its strong growth in a winter that crushed competing railways, we need to look at how crude shipments affected the company’s bottom line.
Crude by rail drives strong growth
For years, crude by rail has been the main driver of CN’s revenue growth, increasing by the high double digits year-over-year. This past quarter, the trend continued, with crude shipments increasing by 30%. In its crude by rail shipping business, CN benefits from the continued delays and setbacks that face pipeline projects like Keystone XL and Trans Mountain. With Canada’s pipelines filled to capacity, oil producers need to ship oil somehow, and as long as no new pipelines are built, it will be by rail. Consequently, CN’s crude shipments will continue to rise as long as the status quo is maintained.
Winter takes its toll
In less encouraging news, harsh winter conditions took a toll on CN’s overall growth numbers, as they caused grain shipment delays, which drove costs higher. The winter of 2019 saw particularly harsh conditions that resulted in lower grain harvests, which translated to fewer grain shipments. CN makes money by charging fees for shipping freight, so fewer shipments mean less revenue. Granted, CN’s grain shipments still grew year-over-year. However, the growth was not what it might have been had the winter been milder.
A related problem this past winter was car loading. Low temperatures force railways to send smaller cars with fewer connections, which means more cars need to be sent in total. This results in higher fuel and staff costs; in Q1, this resulted in a 14% jump in expenses for CN.
Results vs. expectations
As a result of the harsh winter conditions seen in Q1, net income came in slightly short of what analysts were expecting. Specifically, analysts expected to see $1.18, while CN delivered $1.17. This is a difference of less than 1%, and is almost entirely attributable to unprecedented winter conditions; the fact that CN managed to nearly hit analysts’ expectations despite the weather is proof that the company’s fundamentals are sound.
After growing revenue by 11% and adjusted EPS by 17% in Q1, CN has nowhere to go but up. As the winter begins to fade, the main stumbling blocks to CN’s successful operation will, quite literally, melt away, and in all likelihood the company will meet or even exceed its 2019 earnings targets.
