Getting Onboard the Canadian Railroad Stocks

Railroad stocks have held up well in this volatile market. Major US railroads like Burlington Northern Santa Fe Corp (BNI), Norfolk Southern (NSC), CSX Corp (CSX), Union Pacific Corp (UNP) reported strong second quarter numbers and they seem to have provided shelter to investors fleeing the battered financial stocks. While fuel prices increased for many months, the railroads have been able to pass on the increased costs to customers in the form of fuel surcharges. This stable performance of the US railroads triggered the following question in my mind: How are the two Canadian railroads - Canadian Pacific (CP) and Canadian National (CNI) performing in this market?.

Overview of Canadian Pacific and Canadian National

Note: Data used here is thought to be accurate.Do your own research before making any investment decisions.

Canadian National is the largest railroad in Canada. It operates a total of 20,400 route miles and has significant operations in the US as well with about 5,000 of its workforce. Domestic US operations accounted for about 19% of total revenue in 2007.It is the only Canadian railroad that connects the Pacific Coast, Atlantic Coast and the Gulf Coast in the US.Memphis, TN is one of the major hubs for CN.

Canadian Pacific was the first railroad in North America to connect coast-to-coast in 1885. Besides Canada, this Calgary, Alberta based railroad operator has operations in the US NorthEast and the MidWest. CP generates most of its revenue from operations in the western Canada.Today the company has 13,200 route miles and is a major force in the movement of natural resources and goods from the western provinces of Canada to the US and other world markets.

Comparison of CN Vs.CP
Canadian National’s market cap. is about three times that of Canadian Pacific. The dividend yield of 1.73% is comparable to CP and US peers. In the past 5-years average annual dividend growth and EPS growth has been 24% and 26% respectively.

Last year forest products and automotive accounted for 26% of total revenue. For the second quarter of 2008, these two groups were down 14% and 13% respectively due to the slowdown in the US housing sector and the auto industry. CN transports large number cars assembled in Ontario factories to the US. Groups that had revenue increase int he last quarters were inter-modal,coal and other commodity related items. With the highly anticipated Prince Rupert container terminal in the Pacific Coast providing great access to the Asian markets it will be interesting to watch the impact of this investment in future quarters as inter-modal group revenue continues to remain strong. Even if the US economy continues to be in recession mode, CN should have stable revenues coming in from the movement of grains, oil, coal, chemicals etc. CN is probably a better play than CP because it has a larger US presence and is well diversified in terms of various commodity items transported.

The average annual dividend and EPS growth rate in the past 5 years for Canadian Pacific is 14% and 12% respectively. Canadian Pacific should continue to benefit from the demand for coal and oil from Alberta’s tar sands.

Last quarter CP reported flat revenue growth when compared to 2Q,2007. Recession in the US and the higher price of fuel forced CP to revise its 2008 guidance downward to $4.00 to $.20 diluted EPS from $4.40 to $4.60 announced earlier. Like CN, CP also experienced a decrease in revenue for the forest products group and growth in industrial, chemical,coal transportation.

Summary
Canadian Railroad stocks have had pullbacks in the past couple of months due to the crash in commodity markets and North American economic conditions. However these two stocks have solid fundamentals and are good picks for long-term growth. An investor looking to add some Canadian stocks to their well diversified portfolio may consider these two stocks. They are a proxy for the industrial sector and indirect plays of the Canadian natural resource story.

Disclosure: Long CNI,NSC,CSX

Comments

[sandspider:]

A good article and I am long on CNI as well. Good explination and good info. Glad to see it.

2008 Sep 26 10:58 AM

[wallyjm:]

let's get more trucks off the road and we'll all breath easier!

2008 Sep 26 12:51 PM

[Urbane Gori...:]

I think wallyjm means reduce the number of long distance truckers.... If rails are up,you should see an increase in local truckers. In other words, you need to move the goods from the rails to the warehouses on a local basis. I've got a couple flagged for when they begin to move up, but can't really remember the names... But I don't mean UPS and FEDEX necessarily. There are truckers that operate warehouses, small parcel rucks and handle the logistics that should move if rails do. And as oil is down, you should also see a reduction in their overhead.

Just an aside..... Can you imagine how effective the rail system would be if the Federal Government spent as much on rails as it does on Air? Could be a Rennaisance for rails!

jegan ;-)

*** VOTE GOP AGAIN!! NOVOCAIN/PAIN in 2009!!! ***

2008 Sep 26 02:25 PM

[David Hunkar:]

Thanks sandspider for your kind words. Glad you like it.

2008 Sep 27 11:50 AM

[PeteK:]

Don't forget, Canada has the highest tax rates on earth.
It tax everything to death. That's why all their good doctors are now working in the USA.

2008 Sep 28 02:29 AM

[swellman:]

Personally, I think all railroads are ready for a severe correction. CP has been acting very badly technically, thus I am short that company. CN has been a lot stronger in comparison but looks very toppy. The U.S. railroads are also showing early signs of correcting. These are just my opinions but the action they are showing me indicate to step aside these for a while.

2008 Sep 28 09:44 PM