Canadian National Railway Company (TSX: CNR)(NYSE: CNI), Canada’s largest rail network operator, announced third-quarter earnings on October 21 and its stock has responded by making a slight move to the downside. Let’s take a look at the five most important factors from the report to decide if this weakness is a long-term buying opportunity or if it is a warning sign to stay away.
1. The results surpassed analysts’ expectations
Here is a chart of what Canadian National Railway accomplished in the third quarter versus what analysts had anticipated and its results in the same period a year ago.
|Earnings Per Share||$1.04||$1.03||$0.86|
|Revenue||$3.12 billion||$3.11 billion||$2.70 billion|
Source: Financial Times.
2. Operating profit increased, but the operating margin contracted
Canadian National Railway’s operating profit increased 4.9% to $967 million, but its operating margin contracted 120 basis points to 35.2% as a result of operating expenses rising 10.3%. In the first three quarters of fiscal 2014, operating profit increased 5.1% to $3,873 million and the operating margin contracted 50 basis points to 36.6% compared to the same period a year ago.
3. The company generated over $700 million in free cash flow
Canadian National Railway reported $1,328 million in net cash provided by operations and $620 million in capital expenditures in the third quarter, resulting in a very health $708 million in free cash flow. In the first nine months of fiscal 2014, the company generated approximately $1,896 million in free cash flow, which surpassed the $1,623 million that was generated in all of fiscal 2013.
4. The company returned more than $550 million to shareholders
During the third quarter, Canadian National Railway repurchased approximately $383 million worth of its common stock and paid out approximately $180 million in dividends. In the first nine months of fiscal 2014, the company has repurchased approximately $1,095 million worth of its common stock and has paid out approximately $616 million in dividends, which puts it on pace to surpass the $1,400 million in repurchases and $724 million in dividend payments that were reported in fiscal 2013.
5. The company reaffirmed its full-year outlook
As a result of its strong performance in the first nine months of fiscal 2014, Canadian National Railway reaffirmed its full-year outlook in its third-quarter report. This outlook calls for earnings per share growth in the double-digit percentage range compared to the $3.06 earned in fiscal 2013 and free cash flow in the range of $1.8 billion-$2.0 billion compared to the $1.62 billion that was reported in fiscal 2013.
Should you consider initiating a position today?
Canadian National Railway is one of the largest and most important transportation providers in Canada and the growing demand for its services led the company to a very strong financial performance in the third quarter. The company’s stock has reacted by making a slight move to the downside, but I think this is a long-term buying opportunity. Investors should take a closer look, because the stock is now more than 8% below its 52-week high, trades at approximately 18 times forward earnings estimates, and has a very healthy dividend yield of about 1.3%.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Joseph Solitro has no position in any stocks mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. Canadian National Railway is a recommendation of Stock Advisor Canada.