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  • Canadian National: Investors Are Buying Faster Trains and Less Idle Time 0 comments
    May 22, 2010 1:01 AM | about stocks: CNI

    Canadian National Railway (CNI - $56.38) is the largest railroad company in Canada with adjunct operations in the US.   CNI rail routes span from the Atlantic Ocean of Eastern Canada to the Pacific Ocean in Western Canada to the Gulf of Mexico in the Southern US.  CNI operated the only trans-continental rail network in North America, running through 8 Canadian provinces and 16 US states. Canadian National is a major factor in north-south rail traffic across the border and important US rail hubs like Chicago.

    The company operates 21,000 miles of track.  34% of revenues are from cross-border traffic, 23% from domestic Canadian traffic, 23% from domestic US traffic, and 20% from overseas traffic.  The most important commodities to CNI are: grain and fertilizers (18% of revenue), intermodal (18%), petroleum and chemicals (17%), forest products (16%), metal and minerals (10%), coal (6%), auto (5%), and other (10%).

    There are several US and Canadian railroad companies from which to chose.  Generally, rail is a more energy efficient method of shipping many goods long distances, especially bulky commodities, and rail transportation efficiencies are enhanced in a rising oil market.   CNI offers some interesting attributes for long-term investors.

    With the combination of being the largest Canadian railroad and having substantial business in the US, CNI offers investors exposure to both markets. About half its revenues are directly generated in the US and from cross-border traffic.  Unlike US railroads where no company offers extensive coast to coast service, CNI offers a single-source transportation solution for trans-Canadian clients.

    CNI has a diverse freight traffic profile and should benefit from a continuing upturn in economic activity.  Over the next several years, CNI could be a beneficiary in interesting economic trends:  higher petroleum use domestically and for export, higher exports of grains to Asia, higher demand for electric generation and coal usage, higher log / lumber exports to the US and Asia, higher exports of ore and commodity metals.

    One aspect of railroads that is often overlooked is the leverage to higher volumes and revenues.  To generate additional revenues, train lengths are increased to accommodate the added freight.  The incremental cost to increase capacity is lower and higher freight volumes leads to higher operating margins. CNI is well positioned to add capacity as demand continues to improve.

    Higher train speed and quicker terminal turnaround time are excellent matrixes to use to evaluate management’s ability to increase productivity and margins.  Wall Street Strategies offers an interesting table comparing the number of rail cars operating online, average train speed, and average hours that freight cars spend in the terminals: 

     

    Company

    Cars Online

    Speed (mph)

    Terminal Time (hrs)

    CNI

    95,000

    29.2

    8.3

    CP

    95,000

    23.7

    20.1

    CSX

    211,000

    20.8

    24.4

    KSU

    43,000

    27.0

    18.0

    NSC

    198,000

    21.0

    23.9

    UPB

    275,000

    26.3

    24.3


    CNI operates fewer cars than most of its peers, but generates the highest speeds and quickest turnaround times. While there are several factors affecting speed, such a populated service areas and topography, CNI generally operates faster trains with less idle times.

    Canadian National is a dual listed stock, trading on the Toronto and NYSE exchanges. CNI is a large cap company with a market cap of $28.2 bil, has 479 million shares outstanding, carries $6.2 bil in debt, and has $748 mil in cash.  CNI recently raised its dividend to $1.08, for a current yield of 2.0%.

    Canadian National had a good first quarter 2010, exceeding expectations. 1st qtr 2010 revenues increased 6% to $2 bil and operating income improved 21% to $0.80. Earnings estimates have been rising over the past 3 months, and CNI is rated a Buy by most research firms. Almost all brokerage firms like the rail sector as a direct recipient of improving US, Canadian, and global economic growth. 

    Going forward, CNI is anticipated to earn $3.80 a share this year, $4.50 in 2011 and over $5.00 in 2012. Long-term EPS growth could be as high as 10%. Dividends could grow to $1.45 while maintaining a 28% payout ratio. 
    Canadian National’s share price compares well on a valuation basis to its peers. Below is a table comparing current PE, Price to Sales, Price to Book Value, Price to Cash Flow and Dividend Yield, also provided by Wall Street Strategies: 

     

    Company

    PE

    P/S

    P/BV

    P/CF

    Divy %

    CNI

    14.8

    3.8

    2.5

    10.5

    2.0

    CP

    15.0

    2.2

    2.0

    8.6

    1.7

    CSX

    18.0

    2.2

    2.4

    10.0

    1.8

    KSU

    37.4

    2.3

    1.8

    13.1

    0.0

    NSC

    19.6

    2.6

    2.0

    11.0

    2.3

    UPB

    18.3

    2.5

    2.2

    10.7

    1.8

    The railroad sector is in favor with investors, and PE ratios are on the higher side of their historic range.  CNI usually trades at a PE between 11 and 14. Most of the sector has rebounded nicely, and should not be considered undervalued.   Share price appreciation going forward will be from earnings growth and not PE expansion. 

    Railroads are very cyclical, and should be entering a time of improving business fundamentals. CNI has been knocked down with the recent overall market decline and offers a reasonable entry price.   With earnings potential of $5.00+ and maintaining its valuation range of 14 PE would produce a reasonable medium-term expectation for $70 a share, or a 25% capital gain. Including a 2.0% dividend yield, overall annual returns could be in the 13% to 15% range.   The risks are a slower economic growth footprint and reduced investor expectations leading to reduced PE ratios.  

    Many investors lack exposure to the transportation sector and overlook CNI.  Canadian National should be added to your research list. As always, investors should conduct their own due diligence, should develop their own understanding of these potential opportunities, and should determine how it may fit their current financial situation. 



    Disclosure: Long CNI and have been a shareholder since 2009
    Themes: Long, Railroads, Canada Stocks: CNI
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