Only days after Canadian Pacific Railway (CA:CP) merged with Kansas City Southern to create Canadian Pacific Kansas City Limited, Canadian National Railway (CA:CNR, US:CNI) reported record first-quarter 2023 results. (All figures in Canadian dollars, unless otherwise specified.)

While CP created a big stir south of the border by acquiring Kansas City Southern on April 14 for US$31 billion, CN’s latest earnings report suggests the Montreal-based rail carrier isn’t ready to throw in the towel to the “more profitable” Calgary rival.

With CP set to report its Q1 2023 results on April 26, after the markets close, CN is working hard to rain on CP’s parade.

The Quarter That Was

CN reported record Q1 revenue of $4.31 billion and Q1 operating income of $1.66 billion, 35% higher year-over-year. That’s an operating ratio — operating expenses divided by revenue — of 61.5%, 510 basis points lower than a year ago, and the lowest Q1 operating ratio since 2016. Lastly, its earnings per share increased 38% to $1.82.

The company beat analyst estimates on the top and bottom lines in the first quarter. Revenues were $60 million higher than the consensus estimate, while earnings per share beat expectations by 10 cents.

As a result of its strong quarter, CN raised its guidance for 2023. As a result, it now expects to generate adjusted diluted EPS growth in the mid-single digits over 2022, compared to its previous January guidance in the low-single digits.

The big driver of revenue growth in the quarter was due to higher grain shipments, higher fuel prices, freight rate increases, and a weaker Canadian dollar. However, higher labor expenses and increased employee headcount offset this.

The freight revenue per revenue ton mile (RTM) was 7.04 cents, 10.3% higher than a year earlier, with freight revenue per carload of $3,118, 16.3% higher than Q1 2022.

Excluding currency, CN generated $861 million in revenue from grain and fertilizers, 38% higher than a year ago, making it the second-highest revenue generator in the quarter behind only intermodal at $1.01 billion.

Although grain played a big part in CN’s strong quarter, forest products generated the highest revenue per carload at $6,309, 10% higher than Q1 2022. The highest percentage increase? Coal, up 20%, to $2,023 per carload.

Regarding free cash flow, CN generated $593 million in the first quarter, $22 million higher than a year ago. Its trailing 12-month free cash flow through Q1 2023 is $4.32 billion, a 24.4% margin.

The Battle for Railway Supremacy

On April 24, CN announced Falcon Premium. This new North American container shipping service connects CN’s Canadian coast-to-coast network with Union Pacific’s (US:UNP) Chicago line and GMexico Transportes’ (MX:GMXT) terminals north of Mexico City.

“Falcon Premium service is a game changer for intermodal customers. By leveraging each partner’s best services and routes, we are creating a transformational new product. Our commitment is to run this service with the utmost focus to maximize speed, reliability, and customer satisfaction. This service is an example of how collaboration and cooperation can improve supply chains for customers,” CN CEO Tracy Robinson stated in its press release.

The move is a direct shot across the bow of the newly merged CPKC, whose 32,187-kilometer rail network runs from Regina and Winnipeg, down through Minneapolis and Chicago, into Kansas City Southern’s backyard, through Texas, and to the Pacific Ocean in Mexico. The two Canadian competitors have approximately the same rail kilometers in North America.

Of the 33 analysts who cover CNR stock, 11 rate it as ‘overweight’ or ‘buy;, compared to 20 of the 31 analysts covering CP.

Institutional ownership of CNI stock has stayed steady after building up in the latter half of last year, according to data compiled by Fintel. There are 1,166 institutional owners holding a total of 485.94 million shares. Those holdings dwarf institutional interest in CP stock, which is held by 467 owners, with 149.15 million shares.

The latest earnings, combined with its announcement of Falcon Premium, suggests CNR isn’t going down without a fight.

This article originally appeared on Fintel

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