CNR - Stock Analysis

I view the Canadian National Railway Company (CNR) as a core long-term holding.

This article looks at CNR's valuation based on Q2 2019 results released July 23, 2019 and FY2019 guidance provided at the June 3 - 4 2019 Investor Day.

Summary

  • I view CNR as the premier Class 1 North American railroad in that it typically has the best Operating Ratio.
  • CNR employs ~6,400 people and operates ~20,500 route-miles of track spanning Canada and mid-America and connecting three coasts: the Atlantic Coast, the Pacific Coast, and the Gulf of Mexico.
  • CNR is targeting $1.3B to $2.4B of Incremental Revenue Opportunities in 2020 - 2022
  • CNR has a balanced portfolio with freight revenue diversified over 7 different commodity groups. No individual commodity group accounts for more than 23% of annual revenue.

NOTE: All figures are expressed in Canadian dollars.

Full Disclosure: CNR shares are held in the ‘Core’ and ‘Side’ accounts within the FFJ Portfolio.

Introduction

I like the rail industry from an investment standpoint because the entry barriers are high. When I initially decided to acquire exposure to the Class 1 railroads I opted to invest in Canadian National Railway Company (CNR) because it typically was the most efficient operator; other Class 1 railroads were undertaking efforts to narrow the gap between their respective operating ratio and that of CNR.

In my previous April 30th article I shared that I was of the opinion CNR shares were richly valued. I, therefore, decided to execute the option trades presented in that article.

How have those trades panned out?

I essentially broke even on the Bear Call Spread Option trade.

As far as the $125 September 2019 covered call trade goes, I generated $4.30/share. If I wished to close out these contracts today, I would need to lay out $2.13/share. I am currently ahead $2.17/share but anything can happen between now and the September 20th expiry. The fact I sold options means that I benefit from the evaporation of time and the rate at which the time value element of the option diminishes increases as we approach expiry.

I now take this opportunity to briefly review CNR given that it:

  • held its Investor Day on June 3 – 4 and provided investors with its outlook for 2020 – 2022;
  • released Q2 and YTD results following the July 23rd market close.

2019 Investor Day

CNR has an impressive North American rail network with potential for ongoing capacity expansion for years to come.

In fact, management has estimated the following incremental growth opportunity for 2020 – 2022:

Source: CN Rail 2019 Investor Day Presentation – June 3 – 4, 2019

Through a disciplined target selection process, CNR is pursuing Rail-Centric, Intermodal and Logistics, and Port Partnership strategic growth opportunities to help its customers get their products to market more efficiently, to extend its reach, and to increase network volume.

The March 2019 acquisition of Winnipeg-based The TransX Group of Companies, one of Canada’s largest and oldest transportation companies is an example of how CNR is deepening its supply chain focus.

CNR and TransX have been supply chain partners for several years and with the acquisition of TransX, CNR will continue to support the wholesale and beneficial cargo owner customers including the growing, service-sensitive, refrigerated transportation business.

In May 2019, CNR's joint bid for the largest container terminal in Eastern Canada hit a snag after Singapore-based port operator PSA International Pte Ltd. acquired the Halterm terminal at the Port of Halifax, scuttling CNR’s plans to create ‘a Prince Rupert of the East’ as part of the plan to acquire more non-rail assets. Recently, however, the Quebec Port Authority has signed a long-term commercial agreement with Hutchison Ports and CNR, to build and operate a new container terminal, known as project Laurentia (previously Beauport 2020).

CNR is also deploying advanced technologies to drive value. Further information on CNR’s initiatives to improve safety, reliability and predictability can be found here and on pages 75 – 80 of the CN Rail 2019 Investor Day Presentation for which a link has been provided above.

Management provided the following FY2019 Outlook at CNR’s Investor Day.

RTM = Revenue Ton-Miles

Source: CN Rail 2019 Investor Day Presentation – June 3 – 4, 2019

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Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

Disclosure: I am long CNR.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.