What’s Next for CNR Stock After its Weak Q3 Earnings?

Freight Train
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Written by Jitendra Parashar at The Motley Fool Canada

Canadian National Railway (TSX:CNR) recently announced its weak third-quarter financial results. Its investors, however, seemingly welcomed its latest quarterly results as its share prices rose 1.1% a day after its earnings event, even as the broader market continued to decline.

Before we discuss where CNR stock is headed next, let’s take a closer look at its September quarter earnings report and find out why investors might have reacted positively to it.

Canadian National’s earnings fell in the third quarter

If you don’t know it already, Canadian National Railway is a Montréal-headquartered transportation giant with a market cap of about $95 billion as CNR stock trades at $146.57 per share after losing nearly 9% of its value in 2023 so far. By comparison, the main TSX index has slid 2.3% year to date. The company currently generates most of its revenue from its intermodal container services among all its key business segments.

In the quarter ended in September 2023, Canadian National’s total revenue fell 11.7% YoY (year over year) to $4 billion, taking its year-to-date revenue decline to about 2%. Lower demand for freight services, weaker volumes of intermodal, and a decline in the fuel surcharge revenue due to weaker fuel prices were the key factors affecting its topline last quarter.

With weaker revenue, Canadian National’s adjusted quarterly earnings slipped by 20.7% YoY to $1.69 per share, missing Street analysts’ estimate of $1.72 per share with a narrow margin.

But why did investors remain positive?

It’s important to note that the recent decline in Canadian National’s earnings and revenue is largely driven by the ongoing macroeconomic challenges and volatile commodity prices. It’s true that temporary economic downturns can affect most large and small businesses. Nonetheless, large-cap companies with strong financial positions and robust business models, like Canadian National Railway, have the ability to navigate such periods of economic uncertainty without facing big troubles.

Also, Canadian National’s profitability hasn’t seen a drastic weakness, despite the ongoing economic challenges. In fact, the company’s average adjusted net profit margin in the first three quarters of 2023 stood firm at 28.3%, even amid a challenging macroeconomic environment.

These could be some of the primary reasons why investors showed confidence in Canadian National despite the release of its slightly weaker-than-expected third-quarter earnings.

Where CNR stock is headed next

Indeed, Canadian National Railway’s financial growth in the last couple of quarters has suffered due to various macroeconomic factors I discussed above. However, the impact of these short-term economic challenges is likely to be negligible on the company’s long-term fundamental growth outlook as the demand for its quality transportation is expected to increase over the next few years. Considering that and its strong profit margins, CNR stock looks attractive to buy for the long term, especially after losing about 9% of its value year to date.

In addition, CNR stock also offers a decent annualized dividend yield of 2.2%. More importantly, the company has been raising its dividend per share for the last 27 consecutive years. In the five years between 2017 and 2022, Canadian National’s dividend payout witnessed an excellent 76% positive growth, reflecting its management’s focus on rewarding loyal investors with increasing dividend income, which makes CNR stock even more attractive to hold for years.

The post What’s Next for CNR Stock After its Weak Q3 Earnings? appeared first on The Motley Fool Canada.

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The Motley Fool recommends Canadian National Railway. The Motley Fool has a disclosure policy. Fool contributor Jitendra Parashar has no position in any of the stocks mentioned.