Company Reports

Wide-moat Canadian National's first-quarter revenue declined roughly 1.5% year over year due to a slight volume decline, along with easing accessorial income and lower fuel surcharges, which reduced total yield. Core carload pricing remains positive. Revenue was slightly shy of our expected run rate, partly because of coal, which should see sequential recovery in the quarters ahead.

While peers have caught up over the years, especially Canadian Pacific, Canadian National was long the highest-margin (lowest operating ratio, or OR) Class I railroad due to being the precision railroading pioneer in the 2000s. Recall that PSR architect Hunter Harrison left CN in 2009 and subsequently ended up applying his playbook at CP. Historically speaking, CN bolstered its velocity by making greater use of distributed-power locomotives and extending sidings at port staging areas. Running a scheduled railroad requires commitment to on-time train departures from both employees and customers queuing cars for departure. We think PSR is still in CN's DNA, though we sense management was focused more on growth than margins between 2019 and 2021, before the 2022 leadership changes (albeit growth was tempered by external events like congestion, strikes, blockages, tough weather, and so forth).

While peers have caught up over the years, especially Canadian Pacific, Canadian National was long the highest-margin (lowest operating ratio, or OR) Class I railroad due to being the precision railroading pioneer in the 2000s. Recall that PSR architect Hunter Harrison left CN in 2009 and subsequently ended up applying his playbook at CP. Historically speaking, CN bolstered its velocity by making greater use of distributed-power locomotives and extending sidings at port staging areas. Running a scheduled railroad requires commitment to on-time train departures from both employees and customers queuing cars for departure. We think PSR is still in CN's DNA, though we sense management was focused more on growth than margins between 2019 and 2021, before the 2022 leadership changes (albeit growth was tempered by external events like congestion, strikes, blockages, tough weather, and so forth).

Wide-moat Canadian National's fourth-quarter revenue fell 2% year over year on lower—albeit stabilizing—intermodal volumes, easing accessorial income, and lower fuel surcharges. Core carload pricing remains positive. Revenue was slightly better than we expected.

While peers have caught up over the years, especially Canadian Pacific, Canadian National was long the highest-margin (lowest operating ratio, or OR) Class I railroad due to being the precision railroading pioneer in the 2000s. Recall that PSR architect Hunter Harrison left CN in 2009 and subsequently ended up applying his playbook at CP. Historically speaking, CN bolstered its velocity by making greater use of distributed-power locomotives and extending sidings at port staging areas. Running a scheduled railroad requires commitment to on-time train departures from both employees and customers queuing cars for departure. We think PSR is still in CN's DNA, though we sense management was focused more on growth than margins between 2019 and 2021, before the 2022 leadership changes (albeit growth was tempered by external events like congestion, strikes, blockages, tough weather, and so forth).

Wide-moat Canadian National's third-quarter revenue declined 12% year over year on persistent intermodal weakness, easing accessorial income and lower fuel surcharges. Revenue missed our forecast on greater-than-anticipated intermodal volume declines, which saw incremental pressure from the Canadian West Coast port strikes. Core carload pricing remains positive.

While peers have caught up over the years, especially Canadian Pacific, Canadian National was long the highest-margin (lowest operating ratio, or OR) Class I railroad due to being the precision railroading pioneer in the 2000s. Recall that PSR architect Hunter Harrison left CN in 2009 and subsequently ended up applying his playbook at CP. Historically speaking, CN bolstered its velocity by making greater use of distributed-power locomotives and extending sidings at port staging areas. Running a scheduled railroad requires commitment to on-time train departures from both employees and customers queuing cars for departure. We think PSR is still in CN's DNA, though we sense management was focused more on growth than margins between 2019 and 2021, before the 2022 leadership changes (albeit growth was tempered by external events like congestion, strikes, blockages, tough weather, and so forth).

Wide-moat Canadian National's second-quarter revenue swung negative year over year, falling 9% excluding foreign exchange, on lower volumes and falling fuel surcharges. Revenue came in shy of our forecast due to greater-than-expected intermodal deterioration and network disruption from the Canadian wildfires.

Canadian National held an investor day during which management highlighted its reinvigorated focus on precision scheduled railroading over the past year, under new CEO Tracy Robinson and with help from hiring railroading veteran Ed Harris as COO. We believe the PSR playbook took somewhat of a back seat in previous years, as the rail focused to a greater degree on top-line growth—a dynamic that likely tempered operating efficiency. However CN's return to a more disciplined "scheduled operating plan" seems to have made a difference (lifting velocity and asset utilization) considering its adjusted operating ratio improved 130 basis points in 2022—despite labor constraints and wage inflation—thus narrowing the gap relative to peers.

While peers have caught up over the years, especially Canadian Pacific, Canadian National was long the highest-margin (lowest operating ratio, or OR) Class I railroad due to being the precision railroading pioneer in the 2000s. Recall that PSR architect Hunter Harrison left CN in 2009 and subsequently ended up applying his playbook at CP. Historically speaking, CN bolstered its velocity by making greater use of distributed-power locomotives and extending sidings at port staging areas. Running a scheduled railroad requires commitment to on-time train departures from both employees and customers queuing cars for departure. We think PSR is still in CN's DNA, though we sense management was focused more on growth than margins between 2019 and 2021, before the 2022 leadership changes (albeit growth was tempered by external events like congestion, strikes, blockages, tough weather, and so forth).

Wide-moat railroad Canadian National's first-quarter revenue grew 12% year over year (removing foreign exchange) on higher fuel surcharges, core rate gains, and slight volume growth. Revenue came in ahead of our forecast because of strong yield improvement (up 12%). Relative to the first quarter of 2022, total volume rose slightly less than 1% on service improvement (hiring progress and less winter-weather disruption), strong Canadian grain (favorable harvest), higher export coal, and recovering auto carloads (increased vehicle production). These factors were largely offset by slowing industrial end markets and pronounced weakness in international intermodal activity rooted in retail-sector inventory destocking and loose capacity in the competing full-truckload sector.

While peers have caught up over the years, especially Canadian Pacific, Canadian National was long the highest-margin (lowest operating ratio, or OR) Class I railroad due to being the precision railroading pioneer in the 2000s. Recall that PSR architect Hunter Harrison left CN in 2009 and subsequently ended up applying his playbook at CP. Historically speaking, CN bolstered its velocity by making greater use of distributed-power locomotives and extending sidings at port staging areas. Running a scheduled railroad requires commitment to on-time train departures from both employees and customers queuing cars for departure. We think PSR is still in CN's DNA, though over the past few years, we sense management was focused more on growth than margins (albeit growth has been tempered in recent years by external events like congestion, strikes, blockages, tough weather, and so forth).

The U.S. Surface Transportation Board announced that it has approved the merger of Canadian Pacific and Kansas City Southern. CP bought KCS in December 2021 for an implied enterprise value near $31 billion but placed the shares into a voting trust (with KCS run independently) pending regulatory approval. We'd been expecting STB approval, but there was incremental uncertainty recently, given political pushback on the deal following Norfolk Southern's East Palestine derailment. The press release said CP is reviewing the decision and "in the coming days will announce its plans with respect to the creation of CPKC [Canadian Pacific Kansas City]," but we expect the rail to take control of KCS on or around April 14, when permitted.

While peers have caught up over the years, especially Canadian Pacific, Canadian National was long the highest-margin (lowest operating ratio, or OR) Class I railroad due to being the precision railroading pioneer in the 2000s. Recall that PSR architect Hunter Harrison left CN in 2009 and subsequently ended up applying his playbook at CP. Historically speaking, CN bolstered its velocity by making greater use of distributed-power locomotives and extending sidings at port staging areas. Running a scheduled railroad requires commitment to on-time train departures from both employees and customers queuing cars for departure. We think PSR is still in CN's DNA, though over the past few years, we sense management was focused more on growth than margins (albeit growth has been tempered in recent years by external events like congestion, strikes, blockages, tough weather, and so forth).

Wide-moat Canadian National Railways' fourth-quarter revenue grew 16% year over year (removing foreign exchange) on higher fuel surcharges, core rate gains, and modest volume growth. Revenue was mostly in line with our forecast, but that was largely because strong yield gains (up 15%) offset lower-than-expected total-volume growth. The volume shortfall relative to our forecast stems from a faster-than-expected falloff in international-intermodal activity as retail-sector inventory restocking has dried up quickly. Relative to fourth quarter 2021, total volume rose 2% on strong Canadian grain (favorable harvest), higher export coal, and recovering auto carloads (easing of the semiconductor shortage for original equipment manufacturers, or OEMs), offset in part by flattish chemicals and plastics shipments (easing industrial production, or IP) and declines in intermodal and forest-product volumes.

While peers have caught up over the years, especially Canadian Pacific, Canadian National was long the highest-margin (lowest operating ratio) Class I railroad due in large part to being the precision railroading pioneer in the 2000s. Recall that PSR architect Hunter Harrison left CN in 2009 and subsequently ended up applying his playbook at CP. Historically speaking, CN bolstered its velocity by making greater use of distributed-power locomotives and extending sidings at port staging areas. Running a scheduled railroad requires commitment to on-time train departures from both employees and customers queuing cars for departure. We think PSR is still in CN's DNA, though over the past few years, we sense management was focused more on growth than margins (albeit growth has been tempered in recent years by external events like congestion, strikes, blockages, tough weather, and so forth).

While peers have caught up over the years, especially Canadian Pacific, Canadian National was long the highest-margin (lowest operating ratio) Class I railroad due in large part to being the precision railroading pioneer in the 2000s. Recall that PSR architect Hunter Harrison left CN in 2009 and subsequently ended up applying his playbook at CP. Historically speaking, CN bolstered its velocity by making greater use of distributed-power locomotives and extending sidings at port staging areas. Running a scheduled railroad requires commitment to on-time train departures from both employees and customers queuing cars for departure. We think PSR is still in CN's DNA, though over the past few years, we sense management was focused more on growth than margins (albeit growth has been tempered in recent years by external events like congestion, strikes, blockages, tough weather, and so forth).

Wide-moat Canadian National Railway's third-quarter revenue grew 23% year over year (removing foreign exchange). Revenue once again came in slightly ahead of our forecast on continued strong yield gains (up 21%), including higher fuel surcharges, as total carload volume was largely in line with our expectations.

While peers have caught up over the past several years, especially Canadian Pacific, Canadian National was long the highest-margin (lowest operating ratio) Class I railroad due in large part to being the precision railroading pioneer in the 2000s. Recall that PSR architect Hunter Harrison left CN in 2009 and subsequently ended up applying his playbook at CP. Historically speaking, CN bolstered its velocity by making greater use of distributed-power locomotives and extending sidings at port staging areas. Running a scheduled railroad requires commitment to on-time train departures from both employees and customers queuing cars for departure. We think PSR is still in CN's DNA, though over the past few years, we sense management was focused more on growth than margins (albeit growth has been tempered in recent years by external events like congestion, strikes, blockages, tough weather, and so forth).

The U.S. Class-I railroads and two remaining union holdouts struck a tentative labor agreement, averting what seemed to be an imminent strike. Recall that last month a White House-appointed Presidential Emergency Board, or PEB, put forth a nonbinding proposal, which split the difference between both sides' proposals down the middle. Until the Sept. 14 bargaining session, the two largest (of 12) railroad unions had yet to agree to a settlement. We understand the finalized agreement largely reflects the PEB's proposal, with the addition of a few sweeteners related to time off. The agreement will now enter the ratification process (approval from the rank and file), and during that time the unions have agreed not to strike.