Canadian National Railway is a leading transportation and logistics company in North America and owns the country’s only transcontinental railroad. It is a fully integrated rail and transportation company providing intermodal, trucking, freight forwarding, warehouse and distribution services.
The Canadian National Railway handles over 50% of all Canadian chemical production and is the primary engine for aluminum, iron ore, and base metal ore in North America. It is the only rail company serving the three major petrochemical centers in North America. The company moves more than $ 250 billion worth of goods annually for a variety of businesses.
Canadian National’s product portfolio is well diversified. Intermodals account for 27% of sales in 2020, followed by petroleum and chemicals (~ 20%) and grain and fertilizers (19%). Forest products, metal, minerals, automobiles, coal, etc. make up the rest.
By geography, Canada accounted for nearly 68% of 2019 sales and the US for 32%. The company has an extensive presence across North America with access to all three major coastlines. Its networks span nearly 19,600 miles across Canada and Central America, connecting the three strategic coasts of the Atlantic, Pacific and Gulf of Mexico.
CNR processes much of the refined products that come from Alberta and over 90% of the greater Toronto area. As the leading supplier of supply chains in North America, the Canadian National Railway carries more than 300 million tons of freight annually.
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Sales growth and market presence
Canadian National is strengthening its network efficiency and presence by investing in its track infrastructure and expanding capacity. The company has good network coverage in Chicago, one of the largest freight hubs in North America. It is strongly represented in resource-rich and production-intensive regions.
Canadian National uses technology to further improve efficiency and productivity. The company’s commitment to future growth can be seen from the fact that it invests around 20% of its annual turnover in capital investments for the future.
Canadian National will benefit from a diverse pipeline of organic growth on some market gains. By combining the company with H&R Transport, the company can expand its presence in the transportation of customer goods by offering more end-to-end rail supply chain solutions to a wider range of customers. The acquisition of TransX positions CN to strengthen its intermodal business. It continues to benefit from its position in Prince Rupert’s ports and should benefit from its investments in that location.
New export facilities on the west coast combined with new builds and new track lifts in the country will help the company continue to bring record volumes into the new crop year. Canadian National’s crude oil capacity can support a total of around 300,000 barrels per day and generate more RTM growth than truckload growth due to its unique long-haul reach to Louisiana.
Canadian National’s 2020 sales were down 7% year-over-year due to lower volumes in most of its merchandise categories due to the pandemic and lower fuel surcharge rates. However, the company saw record shipments of Canadian grain and freight rate increases. Freight revenue per RTM decreased by 2%, mainly due to lower fuel surcharge rates. For 2020, the speed of the network train decreased by more than 4%, the speed of the wagon also by 1%, but the train length by ~ 1.7% year-on-year. Canadian National’s operating rate was ~ 61% for the most recent quarter.
Canadian National is well positioned to benefit from improved trends such as Canada’s record 2020-21 grain harvest quality, improvement in the renovation segment and housing market, opportunities for US coal exports, and strength in international intermodal and domestic markets. The company is also achieving cost efficiency through technology initiatives such as the Autonomous Track Inspection Program, train inspection portals and the digitization of train reporting.
Canadian National is a Canadian dividend aristocrat and has consistently increased dividends for 24 years in a row. The company also announced a 7% dividend hike for 2021, marking a 25-year track record of uninterrupted dividend growth.
Canadian National has increased its dividends every year since going public in 1995, increasing them by more than 15% CAGR for the past decade. It currently has an average annual dividend yield of 1.8% and a payout ratio of 51%. The EPS has also seen a low double-digit CAGR growth rate over the past decade.
The company has a solid track record of rewarding shareholders with constant dividend yields and should resume its share buyback program in the first quarter of up to 14 million common shares. Canadian National is also targeting free cash flow in the range of $ 3.0 billion to $ 3.3 billion in 2021.
The Canadian National Railway is poised to capitalize on strong exports of crude oil and natural resources, as well as growth in the consumer goods supply chain. Heavy traffic to Prince Rupert and Montreal should drive international intermodal growth. The company runs a disciplined capital program that balances investments with monetary returns for shareholders.
The company also actively markets sales for current rail services, certain non-core routes in Wisconsin, Michigan and Ontario, approximately 850 miles in length. With more than 100 years of experience, the Canadian National Railway is known for shipping goods in a timely and safe manner, which has resulted in sticky customer relationships for the company. Deep marketing alliances and interline agreements also help secure connections for consumers across North America.
Canadian National expects high-single-digit EPS growth in 2021, driven by volume growth (mid-single-digit relative to RTM) and price improvements. The company has also announced $ 3 billion in capital investments to keep ahead of demand. Industry-leading efficiency and long-term investments in people, inventory and track infrastructure should drive long-term growth.
The Canadian National Railway faces competition from rail and other transportation companies. The company competes with the Canadian Pacific Railway, another dominant player in the Canadian rail system, and operates in most of Canadian National’s industrial zones.
In addition, other major US rail systems compete with the company in numerous markets. The consolidation of rail systems in the US could result in larger and stronger players competing with Canadian National. The CN franchises have a very high barrier to entry. Additionally, Canadian National is the North American Class I rail operator for fuel efficiency, using almost 15% less fuel per GTM than the industry average.
The Canadian National Railway has a strong competitive edge over its competitors and is one of the most cost-effective and shareholder-friendly railroad companies today. Freight transport and railways are an essential part of an economy. As the leading transportation and logistics company in North America, Canadian National is well positioned to benefit from its position.
A company like the Canadian National Railway, with an oligopoly and a demand for moving products, should be part of a core portfolio.
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