CANADIAN NATIONAL RAILWAY CO. $84(Toronto symbol CNR; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 438.7 million; Market cap: $36.9 billion; Price-to-sales ratio: 4.1; Dividend yield: 1.8%; TSINetwork Rating: Above Average; www.cn.ca) operates the largest freight-rail network in Canada, with access to major ports such as Vancouver, Montreal and Halifax. It also serves 16 U.S. states, including ports in New Orleans and Mobile, Alabama.
Ottawa nationalized CN in 1922 because of the vital role the company played in Canada’s early growth. CN became a publicly traded company in 1995.
CN hauls consumer and industrial goods (22% of 2011 revenue), grain and fertilizers (19%), petroleum products (17%), forest products (16%), metals and minerals (12%), coal (8%) and automotive products (6%).
CN has expanded rapidly since it became a public company, mainly by purchasing smaller railways. For example, in 2009 it paid $373 million for the Elgin, Joliet & Eastern Railway Co., which operates 319 kilometres of track near Chicago. The purchase has helped CN speed up its shipments in the Chicago area.
CN’s revenue rose 7.4%, from $7.9 billion in 2007 to $8.5 billion in 2008. The recession cut revenue by 13.2%, to $7.4 billion, in 2009. However, revenue recovered to $8.3 billion in 2010, and rose to $9.0 billion in 2011.
Earnings rose 3.1%, from $1.7 billion in 2007 to $1.8 billion in 2008. CN is an aggressive buyer of its own shares. Due to fewer shares outstanding, earnings per share rose 9.1%, from $3.40 to $3.71. Earnings fell to $3.24 a share (or a total of $1.5 billion) in 2009, but rebounded strongly to $4.20 a share (or $2.0 billion) in 2010, and to $4.84 a share (or $2.2 billion) in 2011.
Focus on efficiency keeps paying off
CN is the originating carrier for 85% of the goods it ships. This helps the company improve its efficiency and speed up its delivery times, because it has more control over when cargo is transferred from ships and trucks to its trains.
That’s one of the reasons why CN has become one of North America’s most efficient railways: In the first quarter of 2012, its operating ratio improved to 66.2% from 69.0% a year earlier. (Operating ratio is calculated by dividing a company’s regular operating costs by its revenue. The lower the ratio, the better.)
CN continues to upgrade its rail networks so it can run longer trains at faster speeds. In 2012, it will spend $1.75 billion on capital upgrades, including $1 billion to replace older tracks. The company is also investing in new locomotives that are 15% to 20% more fuel efficient than current models.
Besides replacing older tracks, CN is adding capacity with new tracks that run parallel to existing lines near Edmonton. This expansion will help the company take advantage of rising demand for building materials at new oil sands projects.
West coast port is an overlooked asset
The company continues to expand its containerhandling terminal in Prince Rupert, B.C., which is the closest North American port to Asia. CN is the only railway that serves Prince Rupert.
In the first five months of 2012, shipping volumes at Prince Rupert rose 87.1% from the same period in 2011. Traffic should continue to rise, particularly as Canada pursues new free trade deals with Japan, India and other Asian countries.
CN is also increasing its ability to handle intermodal containers, which can be shipped by rail, ship or truck and typically contain industrial and consumer goods. These improvements include a new, $200-million intermodal terminal near Calgary that should open in January 2013.
In addition, the company recently signed a deal with U.S. railway CSX Corp. (New York symbol CSX) that will let it ship intermodal containers from Vancouver and Prince Rupert over CSX’s tracks to terminals in Ohio.
CN can easily afford these investments. Its long-term debt of $5.9 billion is a low 16% of its market cap. The company is also selling smaller assets to raise cash. For example, it recently sold two railway lines near Toronto for $310.5 million.
The company continues to use its strong earnings to buy back its shares. In the first quarter of 2012, it repurchased 4.7 million common shares at a total cost of $353 million.
CN will probably earn $5.48 a share in 2012. The stock trades at 15.3 times that estimate. Earnings could reach $6.13 a share in 2013. That would give the stock a p/e ratio of 13.7.
16 years of rising dividends
Moreover, CN has raised its dividend each year since 1996. The current annual rate of $1.50 a share yields 1.8%.
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