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Canadian National Railway: Stock Price Is Off The Rails

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Canadian National Railway freight train. Canadian Rockies, Jasper National Park.

CHENG FENG CHIANG

Intro

The obstruction manufacture is simply a captious constituent of world proscription networks, providing businesslike and cost-effective freight and rider carrier services. The obstruction manufacture has a agelong history, making love backmost to nan early 19th period arsenic immoderate group call it nan original tech industry. Though nan obstruction manufacture whitethorn look boring to some, nan manufacture has seen important technological advancements successful caller years, pinch nan improvement of high-speed trains, automated train power systems, and precocious information features.

One specified institution looking to capitalize connected these caller advancements is nan Canadian National Railway Company (NYSE:CNI), a awesome Canadian freight railway that operates an extended web of tracks crossed Canada and nan United States and is wide considered 1 of nan largest and astir successful obstruction companies successful North America. However, contempt these caller technological advancements, nan banal is currently trading astatine a premium valuation, making it costly to buy.

Overview

The Canadian National Railway Company is simply a publically traded institution that operates a freight railway strategy successful Canada and nan United States. The company's business model is based connected providing obstruction proscription services for a assortment of goods, including bulk commodities specified arsenic grain, coal, and minerals, arsenic good arsenic user equipment and manufactured products.

The institution operates a network of 20,000 miles of obstruction way spanning Canada and nan United States. The institution is responsible for transporting much than 300 cardinal tons of equipment passim North America each year. CNI besides offers intermodal services, which impact nan proscription of equipment successful containers that tin beryllium easy transferred betwixt different modes of transportation, specified arsenic ships, trucks, and trains.

CNI is much than 100 years aged arsenic it was formed successful 1919 done nan merger of 4 Canadian railway companies: nan Canadian Northern Railway, nan Intercolonial Railway of Canada, nan National Transcontinental Railway and nan Grand Trunk Pacific Railway. The recently formed institution was created to supply a single, businesslike nationalist obstruction strategy for Canada, and to thief to fortify nan country's economical and governmental unity. The institution has continued to turn and grow and coming is 1 of nan largest obstruction companies successful North America.

Performance

Over nan past decade, nan institution has seen dependable maturation successful revenue, pinch a reported $17.11 cardinal ('CAD') successful income successful nan astir caller fiscal year, which is simply a 61% summation complete nan past decade.

CNI Revenue Data

CNI Data by Stock Analysis

The institution has developed a way grounds of free rate maturation albeit pinch steep declines successful 2022. However, from 2013 to 2021, CNI saw free rate travel maturation complete 150%.

CNI Free Cash Flow Data

CNI Data by Stock Analysis

In summation to growth, CNI has been remarkably profitable complete nan years. Since 2013, nan institution has averaged a return connected equity of 24.44% without a azygous twelvemonth nether 18%.

CNI ROE Data

CNI Data by Stock Analysis

Investors will beryllium pleased to perceive that CNI has developed a estimation for returning superior to shareholders. In 2022, CNI reported a full shareholder return of 5.02%. The full shareholder return is really overmuch superior nan institution is returning to shareholders via dividends and banal buybacks combined. It's calculated by adding up nan dividend output and bargain backmost yield.

CNI Total Shareholder Return Data

CNI Data by Stock Analysis

The company's equilibrium expanse whitethorn beryllium a spot concerning pinch a existent ratio of 1.01. However, CNI has an liking sum ratio of 13.40 and a debt/equity ratio of 0.72. The institution besides maintains 1 of nan lowest debt/free rate ratios successful nan manufacture astatine 8.47.

Outlook

As nan institution looks to nan future, each eyes will beryllium connected CNI's new leader, Tracy Robinson, who was appointed President and Chief Executive Officer connected February 28, 2022. Robinson is now responsible for CNI strategical guidance moving forward. She has heavy knowing of nan railway manufacture having served astatine CNI for 27 years anterior to taking complete nan apical job. Robinson has held respective executive positions successful commercial, finance, and operations which see General Manager of Transportation Services, Vice President and Treasurer, and Vice President of Marketing and Sales.

Another caller summation to CNI's activity squad is Executive Vice-President and Chief Operating Officer Ed Harris who was appointed to this position connected November 28, 2022. Harris has complete 40 years of railroading acquisition and anterior to taking this position, he worked intimately pinch CNI's operations squad arsenic a consultant.

With a caller activity squad successful place, CNI's strategy is simple, it wants to get back-to-basics. It starts pinch information first and nan institution has performed good successful this regard. CNI has now gone 748 days without a fatality and 560 days without superior injury, each passing time is simply a caller record. Beyond information nan institution has focused connected stricter starting times, controlling train lengths, and getting backmost to nan 3 regions from nan 2 that antecedently existed. COO Ed Harris, had this to opportunity connected nan company's latest net telephone regarding nan company's committedness to keeping things simple.

Railroading needs to stay simple. I deliberation we sewage distant from that complete nan past fewer years. Velocity creates capacity, nan faster we are, nan much we tin handle. And nan much we instrumentality to nan plan, nan much reliable we are, which intends that I could supply a level of work that Doug (CNI's EVP & CMO) tin waste to his customers.

These initiatives person resulted successful an mean car velocity of 207 miles per hr while root train capacity averaged 85% past quarter, some metrics are up 10% from past year.

In 2023, CNI is investing successful modernizing its fleet of locomotives. These initiatives see adding camera exertion and power guidance systems to its trains, which will amended substance ratio and safety. The institution is besides investing successful continuous improvement and coaching its unit to create nan adjacent procreation of railroaders.

Valuation

Our attack to measure CNI's intrinsic worth involves 2 methods: comparative study and discounted rate travel ("DCF") analysis. Firstly, we will behaviour a comparative study by reviewing nan highest, lowest, and median price-to-earnings ratios that nan marketplace has paid for CNI successful nan past 5 years, on pinch nan assemblage median P/E ratio of 20.18. We will past use these ratios to CNI's statement 2023 EPS estimate of $5.77 per stock to find its value.

Scenario P/E Next Year Earnings Estimate Intrinsic Value Estimate % Change
Bear Case 11.67 $5.77 $67.34 -41.57%
5Y Median P/E 20.68 $5.77 $119.32 3.54%
Bull Case 31.52 $5.77 $181.87 57.82%
Sector Median Valuation 20.18 $5.77 $116.44 1.04%

Based connected nan results of nan comparative analysis, location are respective imaginable outcomes for CNI. In a bullish scenario, if nan marketplace applies nan 31.52 aggregate observed successful 2021 to nan mean net estimate of CNI for nan upcoming year, investors whitethorn recognize a important summation of 57.82% if those estimates are achieved. However, successful a bearish scenario, if CNI is weighted astatine nan debased P/E ratio seen successful 2018, investors whitethorn acquisition a important nonaccomplishment of only 41.57%.

The guidelines lawsuit script for CNI, which is nan astir apt result according to nan 5-year median P/E ratio, is regarded arsenic nan astir significant. If this script materializes, investors could perchance gain a mini return of conscionable 3.54%.

The last script is if CNI is weighted astatine nan assemblage median multiple. This script results successful a alternatively insignificant return of conscionable 1.04%. Altogether, nan comparative study suggests that CNI is presently reasonably valued, and investors tin expect a reasonable return aliases important nonaccomplishment only if nan marketplace becomes excessively optimistic aliases pessimistic astir CNI.

To statesman nan discounted rate flow, we'll commencement pinch CNI's mean free rate flows for nan past 5 years, which comes retired to beryllium $2.64B. Next, we'll use a maturation complaint of 7% complete nan adjacent 10 years, pursuing nan norm of 72, which indicates that a 7% maturation complaint will double nan starting worth successful a decade.

In our DCF analysis, we will usage norm of 72 arsenic a guideline since it tin beryllium difficult to make meticulous predictions astir free rate travel maturation rates that widen complete galore years. Nonetheless, I americium assured that CNI has nan imaginable to double its free rate travel complete nan adjacent 10 years, considering its way grounds of maturation and competitory advantages wrong nan industry.

Following nan 10th year, we'll usage a 2.5% maturation complaint to find nan terminal value. To discount nan rate flows, we'll usage a 10% discount rate, which is based connected my individual expected complaint of return. Using these inputs, nan DCF study shows an intrinsic worth of $53.73 aft converting to USD, resulting successful a imaginable nonaccomplishment of 37.14% for investors.

CNI DCF Data

Author's Work

Suppose you judge that a 7% maturation complaint for CNI complete nan adjacent decade is excessively cautious. In that case, it's basal to admit that nan institution would request to execute a 17.5% yearly maturation complaint complete nan aforesaid play for its intrinsic worth to lucifer its existent banal price. This suggests that location is nary separator of information successful CNI's existent marketplace price.

Takeaway

CNI's business exemplary revolves astir providing reliable and cost-effective proscription solutions to its clients while maintaining a sustainable and safe operation. The institution does this good and they besides person a divers customer guidelines crossed various industries, including energy, agriculture, automotive, and intermodal that has allowed them to execute awesome financial results.

Over nan years CNI has built robust way grounds of maturation and profitability, pinch accordant gross and free rate travel maturation complete nan past decade. The company's gross grown by 61% complete nan past 10 years. Additionally, CNI has achieved precocious rates of return connected equity averaging 24.44% complete nan aforesaid period.

Recently, CNI announced a alteration successful leadership, pinch Tracy Robinson taking complete arsenic CEO and Ed Harris assuming nan COO position. Robinson and Harris are some seasoned executives pinch astir 70 years of mixed acquisition successful nan obstruction industry, arsenic some person served successful various activity positions astatine CNI. The caller activity squad is expected to proceed CNI's maturation trajectory while focusing connected improving operational efficiency, customer satisfaction, and safety.

Despite CNI's beardown fundamentals and maturation prospects, nan banal is presently trading astatine a premium valuation, making it costly to buy. Investors whitethorn want to hold for a much charismatic introduction constituent earlier investing successful CNI's stock. However, semipermanent investors pinch a precocious tolerance for consequence whitethorn still find worth successful holding CNI's banal fixed its beardown business model, maturation prospects, and coagulated way grounds of profitability.

This article was written by

The Pineapple Investor floor plan picture

I activity to put successful companies pinch business models I understand and person a proven way grounds for maturation and profitability, small to nary debt, and trading for an charismatic valuation. I judge holding a concentrated portfolio of these types of businesses will make results, possibly not instantly but eventually. "Rule Number One: Never Lose Money. Rule Number Two: Never Forget Rule Number One" - Warren Buffett

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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