A Core Holding Candidate…

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 centers 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 27% of 2020 revenues, followed by petroleum & chemicals (~20%), and grains & fertilizers (19%). 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 three major coasts. Its networks span nearly 19,600 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 the Greater Toronto Area. As North America’s leading supply chain player, Canadian National Railway carries more than 300 million tons of cargo annually.

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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 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 towards capital investments for the future. 

Canadian National is set to gain from a diverse pipeline of organic growth in some market wins. The company’s combination with H&R Transport positions it to expand its presence in moving customer goods by offering more end-to-end rail supply chain solutions to a wider range of customers, while the  acquisition of TransX positions CN to strengthen its intermodal business. It continues to benefit from its position in Prince Rupert ports and should gain from its investments at this site.

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 the 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‘s 2020 revenue declined by 7% YoY, as a result of lower volumes across most of its commodity groups due to the pandemic and lower fuel surcharge rates. The company, however, witnessed record shipments of Canadian grain and freight rate increases. Freight revenue per RTM decreased by 2%, mainly driven by lower fuel surcharge rates. For 2020, network train speed declined by more than 4%, car velocity also declined by 1% but train length increased by ~1.7% YoY. Canadian National’s operating ratio stood at ~61% in the latest quarter. 

Canadian National is well-positioned to gain from improving trends such as record high-quality 2020-21 grain crop in Canada, improving home renovation segment and housing market, opportunities for U.S. coal exports, strength in the international intermodal and domestic markets. The company is also delivering cost efficiencies through technology initiatives such as the Autonomous Track Inspection Program, Train inspection portals, and digitization of train reporting.

Dividends

Canadian National is a Canadian Dividend Aristocrat and has consistently increased dividends for 24 years in a row. The company has also announced a 7% dividend increase for 2021, marking a 25-year track record of uninterrupted dividend growth. 

Canadian National has raised its dividends each year since its IPO in 1995, growing them at more than 15% CAGR over the last decade. It sports an annual average dividend yield of 1.8% currently and has a payout ratio of 51%. Its EPS has also registered a low double-digit CAGR growth rate over the past decade.

The company has a sound track record of rewarding shareholders with consistent dividend returns and should resume its share buyback program in Q1 consisting of up to 14 million common shares. Canadian National is also targeting free cash flow in the range of $3.0-$3.3 billion in 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.

It is also actively marketing for sale for on-going rail operations, certain non-core lines in Wisconsin, Michigan, and Ontario representing ~850 miles.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 help to secure connections for consumers across North America.

Canadian National is expecting high-single-digit EPS growth in 2021, driven by volume growth (mid-single-digit in terms of RTM) and pricing improvement. The company has also announced $3 billion in capital investments to stay ahead of the demand. 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.

Bottom Line

Canadian National Railway has 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 favorably placed to benefit from its position.

A company like Canadian National Railway with an oligopoly and demand for moving products should be part of a core portfolio.