Canadian National Railway Company (NYSE:CNI) has experienced some truly impressive growth since the Great Recession, especially considering the mature industry it services. The stock has grown by close to 200% in the past five years and has managed to double its EPS and grow its dividend.
Even as the market shows signs of weakening, it is the defensive industrials like CNI that will continue to be a safe portfolio play while we see what happens next. The stock has proven that it can gain with the broad market while also providing the safety that investors have come to expect from CN Rail. The growth of the company relative to the industry and its increasing market share are going to be critical to the long-term outlook of this stock. CN's clear market leadership and ability to distance itself from the pack will be a deciding factor if times were to get tough.
The "Defensive" Stock's Growth Profile
As mentioned above, the stock has seen an impressive increase during the recovery that have even surpassed what the broad market index has done. The company also has experience some impacts from the depreciation of the Canadian dollar as of late, but these impacts seem to be mostly hedged through the use of US-denominated debt.
In addition to the stock price, the company has shown some impressive growth statistics itself to warrant such an impressive run during the latest bull market. First, the company has increased dividends from $0.38 in 2008 to $0.86 in 2014, which is a larger increase than its overall stock return.
Over the past 10 years, the company has managed to double revenues while increasing its net profit margin and lowering its effective tax rate. Although the ETR has increased since the financial crisis, the overall trend is great to see especially considering the growth in the top and bottom lines to accompany it. During this period, the company also increased its dividend over 400%.
Source: Capital IQ
All of this revenue growth has allowed CN, which is the market leader, to actually increase their market share; an impressive feat that any market leader struggles to do especially while growing their bottom line at the same rate.
Company Fundamentals
As mentioned above, the company has improved many aspects of their financials and some of the more important metrics are showcased below.
CN Rail has continued to impress investors with their ability to grow while being in a relatively stable and defensive industry.
Some reasons for this growth include strategic acquisitions that increased the reach of CN as well as growth in their intermodal volumes. I believe that the value of these acquisitions, including Elgin, Joliet & Eastern Railway from US Steel has yet to be fully realized and there is still plenty of room for the company to grow.
In addition to their ability to grow the top and bottom line, CN Rail has also managed to keep their debt levels at a manageable level and even below their industry average.
Although the graph shows a downward than upward trend in the overall L/T debt levels, the company is keeping debt/capital below industry averages so it's not as concerning as it appears. Even though the company has leveraged themselves alongside their growth, they seem to be keeping it within reason and thus it remains a good sign for the future. In addition, this debt seems to be helping to lower the company's ETR as shown above. As long as the company keeps their debt levels in-line with the industry, it will continue to be a strategic use of debt.
Finally, the company has continued to show that they can produce and increase their returns and this is a great sign for the future. These ratios continue to top industry averages and show no signs of slowing down.
Industry Outlook
As a mature industry, every opportunity for growth comes at a potentially greater price. Although I expect overall rail traffic to be flat for the year, the real opportunities will lie in increasing fuel efficiency and by extension lowering costs. If CN can continue to improve its fleet and introduce new and more environmentally-friendly machinery, they will reap the rewards in the long-term.
Where the stock can go
The growth in CN Rail, a notoriously defensive and "boring" stock pick, has me more than impressed with the company as a whole and how it has handled itself during the recent financial crisis. The fundamentals of the company speak for itself and although the relative valuation won't put CNI anywhere near "deep value" status, its ability to churn cash and return it to investors at a growing rate makes it a great pick. This, coupled with the company's ability to remain stable during recessions and financial difficulties, make it a great addition to the portfolio for not only the returns but also the protection.
As shown above, the stock continues to chug along and but shows signs of being overbought. Given all the fundamentals and the growth potential that is still ahead of us, I would suggest waiting for a pullback before getting into this stock. With the steady dividend, impressive growth profile, and overall defensive nature of the industry it will make a great long-term play in any diversified portfolio.
