MacroHint

Stock Analysis: Canadian National Railway (NYSE: CNI)

About Canadian National Railway

There has been a lot of recent speculation regarding rail strikes, which is by all means a pretty scary thought if we had to suffer the consequences.

Given that the men and women tasked with operating mile-long freight trains, transporting essential goods and services across the United States (and of course, other parts of the world, including Canada) have recently threatened to go on strike, this could shortly develop into a new negative supply chain shock that will be felt and reverberated across the globe, to say the least.

It’s clear that these employees are engaged in some very important, specialized work that directly impacts small and big businesses everywhere.

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Regardless of one’s views or general opinions on unions or striking, we are all ultimately consumers that rely on the goods and services that are either flown in by cargo aircraft, driven by 18-wheelers and/or rolled across states via manganese steel, otherwise known as train tracks.

Given the timeliness of the matter and that we’ve previously written articles on publicly traded railroad companies and that this railroad operator happens to reportedly hold a solid chunk of real estate in Bill Gates’ stock portfolio, we figured that it was an appropriate opportunity to dive deeper into one of Canada’s (headquartered in Montreal) premier freight-haulers (although the company also serves certain regions of the United States), Canadian National (CN) Railway.

Canadian National Railway’s stock financials

For starters, the company’s stock is currently trading at around $116, has a market capitalization of $79.5 billion, a price-to-earnings (P/E) ratio of 21.50 and pays its shareholders an annual dividend of $2.23.

One of the primary initial markers we look at is a common indicator of whether or not a company’s stock is under, over or fairly valued. 

This is the P/E ratio.

It appears as though CN’s (NYSE: CNI) stock is slightly overvalued since it’s generally accepted that a P/E ratio of 20 indicates fair value and anything above implies that a stock is overvalued, or that if you were to pick up shares today, you would technically be overpaying compared to what the stock is actually worth.

However, as long as the P/E isn’t outlandishly high, we have a natural inkling to learn more about the company’s financials. In the case of CN, although one might be taking the risk of paying slightly more than what the stock is currently worth, we think it’s by an immaterial amount and if other core financials are compelling, then the company is worth further investigating.

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On that note, the company currently holds around $48.5 billion in total assets matched with nearly $25.8 billion in total liabilities.

Buying, operating and maintaining an extensive rail network (or any railroad for that matter) such as CN’s and its necessary equipment is expensive.

Keeping this in the back of our minds, we were ready to accept the fact that the company’s total liabilities would be uncomfortably close to its total assets. 

Thankfully, it doesn’t appear we have to worry about that with regards to Canadian National Railway, as its total assets are nearly double the amount of its total liabilities.

Furthermore, from a revenue standpoint (according to the company’s income statement), CN’s total revenue over the past five years has been, as expected, flat and consistent.

However, in an industry as sensitive to supply chain disturbances and commodity costs across the board, we think it should by no means be viewed as a mark of shame, but one of stability and dependability.

As a means of reference, CN’s total revenue has generally stayed between $13 and $14 billion, which is confidence invoking given that these past five years were far from normal from a business and operations standpoint.

Additionally, the company’s net income according to its cash flow statement has been positive and consistent as well over the last five years, ranging between around $3.5 billion and nearly $5.5 billion.

We were pleasantly surprised to find that Canadian National is a seemingly cash flow generative and growing railway, which isn’t necessarily the status quo among other players in the industry.

Canadian National Railway’s stock fundamentals

While it’s a major positive that CN can produce strong, consistent net income, the company also touts quite a strong industry-beating trailing twelve month (TTM) net profit margin, which is difficult to achieve in itself in an industry as competitive as the freight, logistics and railway sector(s).

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Specifically, CN’s TTM net profit margin stands at 33.3% to the industry’s average of -8.38%, according to TD Ameritrade’s platform.

Canadian National Railway is doing something right.

Additionally, the company’s TTM returns on equity, assets and investment are all higher than the industry average. 

We’re starting to understand why Bill Gates likes this company’s stock as much as he does, reserving nearly 7% of his stock portfolio for the company.

Should you buy Canadian National Railway’s stock?

While we never think it’s a good idea to blindly invest your money in a certain stock just because some billionaire owns some shares, it seems as though we could’ve saved you some time on this one.

The company’s executive team has done nothing short of an excellent job in terms of keeping revenues consistent, producing a sizable net profit margin compared to its peers and most importantly providing for consumers across Canada and the United States.

Barring any major negative developments stemming from the aforementioned rail strikes, we think this company’s stock is worth paying a small premium for (the level it’s currently trading at) and ultimately worth holding for decades to come.

We give CN a “buy” rating.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.

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