Good Opportunity To Initiate a Position in CNR

CNR - Canadian National Railway

Canadian National Railway is a leading transportation and logistics company in North America owning the only transcontinental railway line in the nation. It is a fully integrated rail and transportation services company, providing intermodal, trucking, freight forwarding, warehousing and distribution services.

Canadian National Railway handles over 50% of all Canadian chemical production and is the top mover of aluminum, iron ore and base metal ore in North America. It is the only rail carrier servicing the three major petrochemical centres in North America. The company transports goods worth more than $250 billion annually for a wide range of business sectors. Canadian National’s product portfolio is well diversified with intermodal accounting for 25% of 2019 revenues, followed by petroleum & chemicals (~20%), and grains & fertilizers (16%). Forest products, metal, minerals, automotive, coal etc. constitute the remainder.

By geography, Canada accounted for nearly 68% of 2019 revenues and the US comprised the balance 32%. The company has an extensive footprint extending all over North America with access to all the three major coasts. Its networks span nearly 20,000 miles across Canada and Mid-America, connecting the three strategic coasts of the Atlantic, the Pacific and the Gulf of Mexico. CNR handles a significant majority of refined products that originate in Alberta and over 90% of Greater Toronto Area. As North America’s leading supply chain player, Canadian National Railway carries more than 300 million tons of cargo annually.

Investment Data

Revenue Growth & Market Exposure

Canadian National is strengthening its network efficiency and footprint through investments in its track infrastructure and capacity additions. The company has a good network coverage in Chicago which is one of the biggest freight hubs in North America. It has a large presence in resource-rich and manufacturing-intensive regions. Canadian National is leveraging technology to further improve efficiency and productivity. The company’s commitment to future growth can be gauged from the fact that it invests approximately 20% of its annual revenues back into the company to build for the future. Canadian National’s operating ratio continues to sequentially improve every quarter and stands at a solid 65.2% currently. For 2019, network train speed improved by 3%, car velocity improved by 5% and train productivity also increased by 2%. Given its strong customer focus, the company continues to successfully renew several of its longstanding customer contracts including those with Hapag-Lloyd and Evergreen in the last year. The company continues to focus on costs, PSR operation, and growth.

Canadian National’s Intermodal revenue also increased by 15% reflecting the addition of TransX’s intermodal product into its suite of products. The company also entered into a purchase agreement for a CSX rail property and is starting a new joint service that will connect the U.S. East Coast port with the consumer distribution center located in Greater Toronto and Greater Montreal. New export facilities on the West Coast combined with newbuilds, new track elevators in the country will help the company continue to move record volumes into new crop year. Canadian National’s crude capacity can support a total of about 300,000 barrels a day with the ability to generate more RTM growth than carload growth because of its unique long haul reach into Louisiana.

Canadian National is set to gain from a diverse pipeline of organic growth in some market wins. It continues to benefit from its position in Prince Rupert ports. Between propane, coal, plastic resin and wood pellets, carloads to Rupert grew by 11% in 2019 and Canadian National expects another solid performance in 2020. The company should also benefit from the Pembina project in the Prince Rupert area, which is scheduled to start up in the second half of 2020.

Canadian National remains committed to continue growing the international intermodal segment and is looking forward to working on cross polymerization opportunities between CN and TransX. These efforts have also resulted in new business such as signing of a deal to handle all of the domestic intermodal business of the Hudson Bay Company, a major retailer in Canada. Canadian National is also exploring opportunities in new markets such as the West Coast transload model, full partnership in the E&P program, the new intermodal terminal in Regina, as well as continued growth in the cargo coal segment.

CNR - Market Coverage
Source: CNR Investor Presentation

Dividends

Canadian National is a Canadian Dividend Aristocrat and has consistently increased dividends for 23 years in a row. The company returned almost 80% of its adjusted net income to shareholders through dividends and share repurchases in 2019. Its free cash flow was ~$2 billion last year. The company has also announced a 7% dividend increase for 2020.

Canadian National has raised its dividends each year since its IPO in 1995, growing them at nearly 15% CAGR over the last decade. It last raised its payout by 26% and sports an annual average dividend yield of 2% currently. Canadian National has a payout ratio of 39% and is targeting a future payout ratio of 35%. Its EPS has also registered a low double digit CAGR growth rate in the past decade. The company has a sound track record of rewarding shareholders with consistent dividend returns and is on track with its current share buyback program of up to 22 million shares. It also approved a share buyback program of up to 16 million shares through January 2021.

Canadian National Railway is poised to benefit from strong exports of crude and natural resources, and consumer product supply chain growth. Strong traffic into Prince Rupert and Montreal should drive international intermodal growth. The company exercises a disciplined capital program balancing investments with monetary returns for shareholders. The company is expecting 2020 capital expenditure to normalize to historical levels given that capacity investments are completed. This will also support improved free cash flow conversion.

With more than 100 years of experience under its belt, Canadian National Railway is known for shipping cargoes in a timely and safe manner, which has resulted in sticky customer relations for the company. Deep marketing alliances and interline agreements further aid Canadian National to secure connections for consumers across North America. Canadian National also has a solid track record of accretive inorganic growth through acquisitions. The latest ones being those of TransX, H&R and Massena Rail. Canadian National is expecting high-single digit EPS growth, driven by volume growth (low single digit in terms of RTM) and pricing improvement. Industry leading efficiency and long haul investments in people, stock and track infrastructure should drive long term growth.

Competition

Canadian National Railway faces competition from the rail as well as other transportation carriers. The company competes with Canadian Pacific Railway which is another dominant player in the Canadian rail system and has a presence in most of the industrial areas served by Canadian National. In addition, other large rail systems in the U.S. also compete with the company in numerous markets. Consolidation in the rail systems in the U.S. could lead to the emergence of larger and stronger players competing with Canadian National. The CN franchises have a very high barrier to entry. Moreover, Canadian National is the North American Class I railroad leader in fuel efficiency, consuming almost 15% less fuel per GTM than the industry average.

TickerCompanySectorIndustryScoreQuoteMarketCapPEFPEEPSYieldPayoutRatioPaymentsDividendChowderAmbassadorAchieverAristocratKingGraph
CNRCanadian National RailwayIndustrialsTransportation & Logistics61107.7954.3818.4918.495.832.1339.4542.3015.47YESYESYESNO1
CPCanadian Pacific RailwayIndustrialsTransportation & Logistics46304.6041.9017.5217.5217.521.0918.9543.3210.85NONONONO1
TFIITFI International IncIndustrialsTransportation & Logistics5730.302.677.967.963.803.4327.3741.043.43NONOYESNO1

Bottom Line

The North American rail industry is facing a challenging economic environment and railroad companies are managing their cost very closely. Canadian National Railway has some strong competitive advantages over its peers and is one of the most cost-effective and shareholder friendly railroad companies today. Freight services and railways are an essential component of an economy and as a leading transportation and logistics company in North America, Canadian National is favourably placed to benefit from its position. The company should benefit from its large network, organic growth and strategic acquisitions opportunities at hand, to drive future growth.

A company like Canadian National Railway with an oligopoly and demand for moving products should be part of a core portfolio. The dividend growth makes up for the lower dividend yield. The recent drop can be seen as an opportunity to get a position. Use limit orders and start with a small position and average in.

CNR vs Indexes - 2020

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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