Update: Canadian National Railway Q2 Earnings Are Impressive

| About: Canadian National (CNI)


Canadian National Railway reported strong earnings that grew 18% (21% on a per-share basis) on revenue growth of 17% in CAD terms.

This growth is below my expectations from last June, especially given the strength we've seen in the USDCAD cross.

Given this and given that the stock has nearly reached my conservative price target of $70/share I would hold off on buying, although the long-term thesis is intact.

Canadian National Railway (NYSE:CNI)--Canada's largest rail transport company--reported earnings of C$1.03/share that beat analyst expectations by C$0.04/share. The company grew its EPS by 21%, its earnings by 18% and its revenues by 17%. These are all impressive figures on the surface.

The revenue growth rate is significantly stronger than my expectations of 10% but we need to consider that the CAD has weakened by about 5% during that time frame, meaning that in USD terms the company grew revenues by about 12%. This is still strong, but when we apply the currency conversion to earnings we get a different takeaway. Earnings grew 13% in USD terms. Now this is impressive but it falls well short of the company's historic 20% growth rate.

With this in mind I want to use the more conservative of the two price targets that I provided in my June article, or $70/share (split adjusted) as opposed to the more aggressive $87.5/share (split adjusted) target. Given the growth we have seen in the past year this $70/share figure should be closer to $80, although it is clear that most of the upside is behind us with shares trading at $68.5/share, and I would not be adding shares at the current valuation. Investors should be happy with the 37% increase that we have seen in the past year and realize that while this is a solid long-term investment that the market has come to recognize this. Shares trade at over 20 times earnings and the company's dividend is just 1.4%. The stock is worth reconsidering on a pullback but for now I would rather buy shares in one of the less expensive railroad stocks.

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