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Canadian National Railway Rolls Along

By Greg Sushinsky

Tickers in this Article: BNI, UNP, NSC, CNI

Canadian National Railway’s (NYSE:CNI) stock has fallen from $58.50 down to $30.40 in the last year, despite recording robust earnings. Like other railways, Canadian National has been affected by the downturn in the North American economy. While its prospects for profitability may be slightly blunted in the near term, it looks to be a slowdown, not a reversal. There are still positive signs for this business and its stock.

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The Big Picture on Rails
Although meaningful passenger railways are a vanishing breed - at least on the large scale compared to 50 or 100 years ago - railway freight traffic continues to increase on a decade-over-decade basis. This is admittedly a very long-term measure, but should be kept in mind when assessing the most bedrock fundamentals in this industry, as rail traffic is expected to double in the next 30 years due to most industrial products needing to be shipped via rail. The economic slowdown of this past year and into the next should be measured against this necessity for gradual continued expansion. As Canadian National and other large railways, such as Norfolk Southern (NYSE:NSC), Union Pacific (NYSE:UNP) and Warren Buffett's favorite, Burlington Northern (NYSE:BNI), attest, this is a fundamental for growth.

Some Friction, Not A Smooth Ride
It's important to note the friction on the rail ride. While earnings projections need to be carefully considered, the economic downturn has been the most notable slowing down of the steady progress on the rails. The common refrain about the economic downturn hurting an industry has been universally experienced in the last few months - but what happens when all the industries the rails rely on for business are impacted?

Overall rail traffic has declined in the last few months, and it is expected to decline for the immediate future. Canadian National has been impacted by the slowdown in the auto, lumber and grain industries. With its industrial base of customers, most of whom are in manufacturing or commodity-based industries, naturally Canadian National will continue to feel the effects of the squeezed economy and industry slowdown.

Steel Still Strong
One of the key factors in Canadian National’s business is that even though there has been a volume decline in its shipping, it has been able to maintain pricing power. Also, it is still expected to report strong earnings for full-year 2008. Earnings per share (EPS) of $3.78 (compared against $3.40 for 2007) is one group of consensus estimates, and it comes with a projection of $3.97 next year. Even if you take ultra-conservative measures and knock these estimates down, given the “surprises” (read: bad news) that many industries and companies have been getting, these are healthy numbers. (For more on analyst expectations, read Analyst Forecasts Spell Disaster For Some Stocks.)

"I think I can, I think I can"
One of the more impressive results for Canadian National, along with its consistent bottomline growth, has been its topline, or revenue, growth. From 2004 through 2007, the company saw growth from $5.5 billion to nearly $8 billion per year. Earnings growth through the corresponding period more than doubled.

This 15% annualized revenue growth rate and spectacular income growth will not be sustained in 2008, nor can it be counted on for 2009, but even the most conservative projections will see Canadian National still doing well in the face of a difficult economy, particularly because the base of its business is so strong.

More Core Strengths
So what are Canadian National’s prospects? I think it will keep rolling along - steadily gaining ground. Canadian National has a strong balance sheet, a thriving business all over North America (with additional alliances forged with American railway partners) and has continued to shine despite the advent of economic hardships. I think it will continue to flourish, even though the continued difficulties in the economy at large may dampen revenue and earnings in the short term. The stock price has been taken down far beyond any reasonable fundamental measure. So, when a stock is unduly punished, despite strong fundamentals in a solid company, you might want to consider hopping onboard.

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By Greg Sushinsky

Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.

Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinky's literary work, see http://writing.gregsushinsky.com/.

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