Stock to watch: Canadian National Railway (USA) (NYSE: CNI)

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Canadian National Railway (USA) (NYSE: CNI) rose 0.3% (as of 24 Apr, 12:57 PM GMT-4; Source: Google finance) as the analysts have already forecasted weaker first-quarter results due to the harsh winter and network delays. The Net income fell to $741 million in the first quarter, reflecting a fall of 16% over the same quarter last year. The diluted earnings per share fell 14% to $1.00 per share, over the first quarter in 2017.

The operating income also declined 16% to $1,030 million. Operating expenses rose 9% in the first quarter to $2,164 million as the costs associated with leasing additional locomotives and crews to clear the backlog caused by prior delays.

Free cash flow fell $526 million in the first quarter to $322 million. Canadian National’s operating ratio also slipped in the first quarter, increasing by 6 points to 67.8%, due to the increased demand and weather-related challenges. Revenues in the first quarter were $3.2 billion, which is a decrease of just $12 million from the same time last year while grain and fertilizer revenues fell 11 per cent, more than any other commodity.

Moreover, the capacity constraint issues have put pressure on CNi since late last year, which had led to service disruptions and strained customer relations. To deal with the capacity issues, which have been more pronounced than those at CNI’s rival Canadian Pacific Railway Ltd., the company is increasing its capital program to $3.4 billion, with $400 million dedicated to track infrastructure in Western Canada. However, the company should have triggered the action plan that includes investing capital in the network infrastructure in April or June of last year.

In addition, CNI has taken steps to resolve both current and long-term issues. Following the February delays, Canadian National leased an additional 130 locomotives and crews to increase service and clear the backlog across its network. Due to the harsh weather, CNI was able to meet just 17% of its orders in February. The weather-induced delay meant that farmers were left waiting for a freight car to arrive to haul goods to market, thereby pushing that delay to other segments of the economy.

On the other hand, for 2018, CNI expects to post the adjusted diluted earnings per share of $5.10 to $5.25, down from its previous target of $5.25 to $5.40. The adjusted diluted EPS from the previous year came in at just $4.99 per share. Meanwhile, CNI has announced the surprise resignation of chief executive officer Luc Jobin in March, less than two years after he had stepped into the role. The decision came as CNI grappled with record volume growth that put pressure on its capacity, leading to service disruptions and complaints from customers. The company said the board’s search for its new chief executive is ongoing.

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