Jump to content

CNR - CN Rail

ourkid8

By ourkid8
in Investment Ideas

 Share

Recommended Posts

ourkid8 Newbie

ourkid8

Posted
Posted

This is one of my core holdings in my portfolio and Cascade recently reinforced my thesis on this investment as they currently hold 11.98% of the shares outstanding  (CN Commercialization act only allows one entity to hold up to a maximum of 15% of the shares outstanding)

 

CNR operates Canada's largest railroad, linking customers in Canada, the U.S. and Mexico through approximately 20,600 route miles.

 

-Core pricing has averaged 4% for the year and I believe this will continue in the future (fuel surcharge will also increase with increase in fuel prices)  They are able to price above inflation and this is something I look for in all my investments

-ROIC over the last 10 years has averaged 14.2% versus 11.6% for the next leading Class I railroads.  Based on it's current network and focus on costs, CNRs long-term ROIC will remain above the industry average surpassing its cost of capital which is approximately 9.7%

-CN Rail is the most efficiently run of the major North American railroads by a variety of metrics -- a position it maintains by constantly seeking new ways to boost asset productivity. I think these factors support a valuation above the historical average. They currently have the best in class operating ratio of 60.6%  (Compared to competitors:  CP 74.1%,  CSX - 70% and UP 66.6%)

-Common shares outstanding: 435.2 ($1.4B has been authorized for repurchase in 2012 which represents 4.75% of the shares issued and outstanding)  CNR will continue to repurchase 3-5% of their outstanding stock a year well into the future

-Dividend is $1.50/share and will increase substantially over the next couple of years inline with competitors

-CN Rail is rolling out new locomotives equipped with distributed power which allows it to run much longer trains thus continuing squeeze out costs and improving their operating ratio

-2007, CN agreed to purchase EJ&E and the transaction provides CNR with 198 miles of mainline track near Chicago. Importantly for CNR, EJ&E's network goes around the metropolitan area, rather than through the center of Chicago, and should permit CNR to substantially improve transit times in the region as this is a bottleneck for everyone. (As of January 2012, it had reached agreements with 82% of the 33 communities to comply with the STB)

-approximately 9% FCF

-long-term volume growth rate of 3.5% (I believe US / Canada will continue to grow in population which would allow 3.5%+ long term growth)

-Over the last 10 years, intermodal volumes have grown at a compounded rate of 3.7% and car loads at 2.5% which have exceeded the industry (I know this is looking in the rear view mirror but should continue in the future)

-Railroads are over 4x more efficient then trucking and it is also better for the environment (For those who care)

-There will be no new competition as it is impossible to build another railway and we should see a bit more consolidation in the industry to continue to reduce costs. (it will be a challenge dealing with the STB as CNR had it's hurdles buying EJ&E)

-Prince Rupert is the closest port to Asia by up to 58 hours of sailing time compared to any other west coast port in North America giving CNR a huge advantage (This gives shippers approximately one extra round-trip voyage per year)

-Oil by rails - insufficient pipeline has prompted CNR to be the stop-gap for the time being- CNR in 2012 is expected to have 30,000 car loads (a car load holds 650 barrels) and 2013 they look to ramp up to 60,000 (This is a huge growth line which was recently added)

 

Thanks,

S

 

Eddits: Fixed a few errors

Link to comment
Share on other sites
ourkid8 Newbie

ourkid8

Posted
  • Author
Posted

It's not cheap compared to it's competitors; CNR currently trades inline with Union Pacific and a slight discount to CP rail. (HH is currently transforming CP thus the outrageous multiple)  The thing is, it should trade at a premium to Union Pacific as it is the most efficiently run railroad and growth prospects are superior. 

 

Would I add at this price, probably not as I currently have a large position which I paid $42.20 in 09'.  For those who are interested in initiating a position, if your horizon is long enough, you should be able to see a rate of return of 10-15% compounded yearly on your investment. 

 

S

 

Sorry if I missed it, how do you feel about the current valuation?

Link to comment
Share on other sites
ourkid8 Newbie

ourkid8

Posted
  • Author
Posted

http://finance.yahoo.com/news/cn-completes-intra-corporate-merger-150000455.html

 

CN continuing to focus on operational efficiencies by completing the merger of its three (WCL, WCTC and EJ&E) remaining US subsidaries into a single company on January 1, 2013.  This will greatly improve effieincies in and around the important Chicago terminal area and should help its best in class operating ratio!!!

Link to comment
Share on other sites
  • 3 months later...
jay21 Newbie

jay21

Posted
Posted

Thanks! I was asked by a board member to add CNR to the investment ideas section after Cascade added to it's position.

 

S 

 

Thank you ourkid8,

I always enjoy reading a very well exposed investment thesis!

 

giofranchi

 

Thanks for starting the thread.  I am still looking into rails and they look like they could be somewhat cheap as the economy begins to pick up to provide a little bit of a tailwind to earnings.

 

Three quick questions:

 

1. US rails seem to run more North to South and Canadians run East to West.  Is that a more attractive set up?  I think I read this helps efficiency.

2.  How do you calculate ROIC?  Will it increase industry wide as price and volume increase?

3.  Can more consolidation occur?  Are there any players that are small enough to be bought out by bigger rails?

Link to comment
Share on other sites
no_free_lunch Newbie

no_free_lunch

Posted
Posted

jay21,

 

1) The rail runs east/west because canada's cities basically run east/west.  Really, if you look at a map, most of the major cities are within 4 or 5 hundred kilometers of the border.  There wouldn't be much point in any other direction.

 

3) There is not much room for consolidation in Canada as there are really only 2 players now,  CP & CN.  It's an oligopoly.

Link to comment
Share on other sites
jay21 Newbie

jay21

Posted
Posted

jay21,

 

1) The rail runs east/west because canada's cities basically run east/west.  Really, if you look at a map, most of the major cities are within 4 or 5 hundred kilometers of the border.  There wouldn't be much point in any other direction.

 

3) There is not much room for consolidation in Canada as there are really only 2 players now,  CP & CN.  It's an oligopoly.

 

Thanks for the response. 

 

1. I understand why they do.  I was interested in the effect this had.  I thought I read that it was a more efficient set up.  E.g. they run in one straight line and that reduces the amount of loading/unloading, they average longer distances, etc.

 

3.  I wasn't looking solely at Canada. 

 

The way I am thinking about getting long rails is through BRK so that skews how I am looking at things.  I wasn't sure if it would be possible for BNSF to somehow connect their west coast rails to the east. 

Link to comment
Share on other sites
  • 4 years later...

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share
Go to topic listing
×
×
  • Create New...