CANADIAN NATIONAL RAILWAY CO. $64 (Toronto symbol CNR; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 824.5 million; Market cap: $52.8 billion; Price-to-sales ratio: 5.0; Dividend yield: 1.6%; TSINetwork Rating: Above Average; www.cn.ca) operates Canada’s largest railway. Its 32,350-kilometre network stretches across the country and through the U.S. Midwest to the Gulf of Mexico.

Thanks to strong shipping volumes in the wake of the recession, CN’s revenue rose 43.5%, from $7.4 billion in 2009 to $10.6 billion in 2013.

Earnings jumped 68.4%, from $1.5 billion to $2.6 billion; while per-share earnings rose 88.9%, from $1.62 to $3.06, on fewer shares outstanding (all per-share amounts adjusted for a 2-for-1 stock split in November 2013).

Faster service fuels profits

CN’s improved efficiency is major reason for its earnings growth. Thanks to faster trains and reduced waiting times at transfer terminals, the company’s operating ratio improved from 66.7% in 2009 to 62.9% in 2012 (Operating ratio is calculated by dividing a company’s regular operating costs by its revenue. The lower the ratio, the better.) Operating ratio worsened to 63.4% in 2013 due to higher labour costs and weather-related delays.

The company is also benefiting as a lack of pipeline capacity forces more North American oil producers to ship crude by train. In 2013, CN’s revenue from hauling oil and related chemicals rose 18.2%.

In response to the July 2013 explosion of a train hauling crude oil in Lac-Mégantic, Quebec, Ottawa has announced plans to phase out older DOT-111 tanker cars over the next three years. It will also lower train speed limits in built-up areas.

Tanker ban will have little impact

Oil producers, not railways, own most tanker cars, so the new rules will have little impact on CN’s costs. The slower speeds may affect the company’s efficiency, but they will apply to all railways.

Meanwhile, CN continues to improve safety with better tracks and sensors. In 2014, it plans to spend $2.25 billion on new equipment, which includes $1.2 billion for safety-related upgrades. This year’s spending is also up 12.5% from the $2.0 billion CN spent upgrading its gear in 2013.

The company can comfortably afford these investments. As of March 31, 2014, its long-term debt was $7.3 billion, or a moderate 14% of its market cap. It also held cash of $198 million.

Lower dollar gives CN a boost

The company gets 80% of its revenue from the U.S., cross-border traffic and overseas clients, so it gains from the lower Canadian dollar. That should help increase its earnings to $3.46 a share in 2014. The stock trades at 18.5 times that forecast. That seems like a high multiple for a cyclical railway, but it’s still acceptable in light of CN’s strong market share. The $1.00 dividend yields 1.6%.

CN Rail is a buy.