Canadian National Railway: Strong Fundamentals Amid Short-Term Challenges

Core Viewpoint - Canadian National Railway (CNI) remains a strong long-term investment opportunity despite recent share price declines, driven by its competitive advantages and growth prospects in the North American rail market [2][13]. Industry Overview - The North American railroad industry is characterized by limited competition, with only six major players, allowing companies like Canadian National to maintain high returns and margins [3][5]. - Railroads, particularly Canadian National, benefit from a duopoly in many areas, which reduces pricing pressure and enhances profitability [3]. Financial Performance - In Q2 2024, Canadian National reported freight revenues of C$4.33 billion, a 6.7% year-on-year increase, primarily due to growth in the Canadian grain sector and record volumes along the Vancouver rail corridor [6]. - Operating income for the same quarter was C$1.558 billion, down C$42 million from the previous year, attributed to higher operating expenses and labor costs [7]. - The operating ratio increased to 64%, reflecting a 3.4% rise compared to the previous year, indicating higher costs relative to revenues [7]. Growth Drivers - Canadian National is investing heavily in infrastructure, with a capital expenditure forecast of C$3.5 billion for the year, focusing on key growth areas such as the Vancouver and Prince Rupert corridors [9]. - The expansion of the Prince Rupert port, which offers shorter sailing times to Asia, is expected to significantly boost rail service demand and revenue [8][9]. Shareholder Returns - Canadian National has a strong track record of returning value to shareholders, with 28 years of continuous dividend growth, increasing from C$0.07 in 1995 to a forecast C$3.38 in 2024, representing a 15% cumulative annual growth rate [3]. - The company has also reduced its share count by over 11% in the past five years through significant share buybacks [4]. Valuation - An EV/EBIT valuation methodology suggests a stable EBIT margin of 42.5% for Canadian National, with a target market cap of $98.1 billion by the end of 2027, translating to a target share price of $173 [10][11].