Canadian National (CNI) reports quarterly earnings after-hours Tuesday. Analysts expect revenue of $2.44 billion and eps of $0.91. The revenue estimate implies a 23% decline Y/Y. Investors should focus on the following key items.

Lack of Top Line Growth

Canadian National's top line is in decline. It is difficult to recommend a stock that cannot generate consistent top line growth, even one as well-run as Canadian National. I am bearish on railroads in general. Since central banks began reducing quantitative easing ("QE") in the second half of 2014 rail traffic has fallen.

The company's Q3 rail traffic was off 7% Y/Y. Four of the company's seven product lines experienced revenue declines. U.S. coal and energy-related products - frac sand, sulfur from energy - represented 70% of the revenue decline. A fuel surcharge application represented the rest. Though oil prices have rebounded above $50, shipments of crude by rail might not rise fast enough to benefit Canadian National this quarter.

North America rail traffic was down 4.5% in 2016. Such headwinds might not bode well for Canadian National's Q4 results. Secondly, former Canadian Pacific (CP) CEO, Hunter Harrison, continues to pursue a role in CSX (CSX). Harrison believes he can bring efficiency gains to CSX. Others believe Harrison's end game is to merge CSX with Canadian Pacific. That said, I saw Harrison's prior unsolicited takeover attempts of CSX and Norfolk Southern (NSC) as de facto admissions that Canadian railroads would have a difficult time growing their top lines standalone. Another quarterly decline in revenue by Canadian National could buttress my thesis.

Efficiency Gains Are Baked Into The Cake

In Q4 Canadian National achieved an operating ration of 53.3% -- a record. It is the most efficient railroad in the industry. It improved its EBITDA margins from 55% in Q3 2015 to 57% last quarter. Canadian Pacific's 52% EBITDA margins rank second. In my opinion, the benefits from further incremental margin improvements might not amount to much. With the top line in the decline the only other lever Canadian National has to pull could be share buybacks.

Over the past five years the company has repurchased 135 million shares, returning C$8 billion to shareholders. In October the board granted permission for Canadian National to repurchase up to 33 million shares, or about 5.1% of common shares outstanding. The impact of financial engineering will likely be narrative until rail traffic finally picks up.

Takeaway

Canadian National trades at 12.5x EBITDA yet earnings growth could be dismal for the near term. Financial engineering can only help earnings but so much. Avoid the stock.