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Canadian National Railway (CNR) released Q4 and FY2018 results and FY2019 guidance on January 29, 2019.

Under new leadership, CNR has staged a remarkable turnaround from late 2017 and early 2018.

Shares currently appear to be fairly valued based on FY2019 guidance. I am of the opinion, however, that we will experience further market pullbacks similar to that experienced in December 2018 which will provide investors with an even more attractive valuation.

Summary

  • CNR has just released its Q4 and FY2018 results which reflect remarkable turnaround from early 2018.
  • A ~18% increase in CNR’s quarterly dividend has just been announced together with details of a new normal course issuer bid.
  • While CNR is already one of my largest holdings I am open to acquiring additional shares in this well run company.
  • I view shares as being fairly valued but am of the opinion another broad market pullback similar to that in December 2018 is not out of the realm of possibility. I will patiently bide my time for an even more favorable valuation.

NOTE: All figures are expressed in Canadian dollars.

Introduction

What a difference from a year ago! On January 29, 2018 I wrote that Canadian National Railway Company (TSX: CNR), a core holding within the FFJ Portfolio, was attractively valued. At the time of that article CNR’s stock price had retraced from a high of ~$106 set early January 2018 and it had just announced a 10% increase to its quarterly dividend; the new quarterly dividend had just been increased to $0.455 from $0.4125.

When I wrote that article CNR’s relationship with certain segments of its customer base had taken a severe hit in late 2017 and early 2018 which ultimately led to the ousting of CNR’s CEO.

Heeding Warren Buffett’s advice that

The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.”

I informed subscribers in my January 29, 2018 article that I would be adding to my CNR holdings; I acquired another 400 shares at $98.20. While CNR was out of favor with the investment community I was of the opinion that its challenges were temporary.

By the time I wrote my follow-up July 25, 2018 article, CNR had taken significant steps to repair these relationships; this included the hiring of engineers and significant investments in infrastructure. These changes were well received by the investment community and CNR’s share price had risen to $116.80.

I concluded that article with:

‘Now, while I like the direction CNR is headed, I think the current stock price is just a tad rich. It is not excessively expensive but the shares are no longer ‘on sale’ as they were when I added to my position in late January.

CNR is certainly a great long-term investment so if you are inclined to take a position in the company, I would ease in and periodically acquire additional shares on pullbacks.’

I then wrote a follow up article on October 24, 2018 in which I concluded with:

‘CNR’s shares have since pulled back ~$10 from early October when they were trading at ~$117 – ~$118 and are now valued just a shade above their 5 year average.

I currently have a full position and do not intend to acquire additional shares other than through the automatic reinvestment of dividends.’

CNR’s shares were ultimately caught up in the broad market pullback in December and its share price plunged to the mid $90s…just in time for the end of December dividends to be automatically reinvested at an attractive level.

In just over a month, however, CNR’s share price has bounced back to ~$109.70.

The company has just announced its FY2019 Outlook and has increased its quarterly dividend by ~18.1% to $0.5375 from $0.455 payable on March 29, 2019 to shareholders of record at the close of business on March 8, 2019.

Now that CNR has released FY2019 guidance I am taking this opportunity to revisit CNR to determine whether the current price presents investors with an attractive buying opportunity based on guidance or whether a wait and see approach is preferable.

Q4 and FY2018 Financial Results

CNR’s Q4 and FY2018 results released January 29, 2019 can be found here and its non-GAAP Measures commentary can be accessed here.

As evidenced from the following results we see the extent to which CNR has turned around its performance within 2018. While I was of the opinion that CNR’s problems were temporary and could be fixed if the proper measures were taken I certainly did not expect results to improve to this extent and so quickly.

CNR - Turnaround Story Started in Q2 2018

CNR - FY2018 Results Turnaround Story Financial Results

Source: CNR Q4 and FY2018 Earnings Presentation – January 29, 2019

While diluted EPS of $5.87 decreased 19% from the $7.24 reported in FY2017, included in the 2017 diluted EPS was a deferred income tax recovery of $2.33 per diluted share. (cont’d.)

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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.