GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Gurus Lose Faith in This Under-Pressure Railway

April 07, 2014 | About:

Across history, bread has been the reason for many revolts. For example, the price of bread rose to about a month’s pay before the French Revolution of 1789. Before then, Roman emperors used bread to appease the masses and buy their loyalty. Today, a rapidly growing world population is far from a massive revolt, but the phenomena places additional pressure to those involved in the process of delivering the goods. In other words, what value is there in a greater production if the goods never reach the consumer?

It is in that sense that railroad companies have turned into a key link in the wheat production chain. Hence, Canada National Railway (CNI) is under heavy pressure to deliver, under a context aggravated by additional successes. Most importantly, gurus seem to have lost faith on the company, and those with the largest position continue to reduce their holdings.

Growing Through Absorption of Market Trends

The 2013 annual report’s title, “Becoming a True Supply Chain Enabler: Making Connections,” by Canada National Railway, says a lot about where management is aiming to take the company. The strategy is three-pronged: a fresh approach to the transborder food supply chain, connecting energy partners and suppliers, and intermodal. Such business strategies aim at absorbing current long-term market synergies unleashed by the food and energy industries, and the transportation industry as a whole.

First, Canada National Railway is one of the main transporters of harvested crops in Canada. Most recently, the company is offering a Fleet Integration Program for grain, oilseed and special crop shippers who wish to enter agreements to supply privately owned, covered hopper cars for integration to the Western Canadian common fleet. The program was strengthened by the need to move a record wheat harvest, reporting to have moved an excess of 4,000 hopper cars weekly.

The transported volume has given Canada National Railway an additional incentive to deepen the communication with grain elevator companies. In line with this, Claude Mongeau, CN president and chief executive officer, said: “We are continuing to make significant progress toward our goal of transporting close to 5,500 grain cars per week to meet the Canadian government’s Order in Council of March 7, 2014. But CN can only meet its commitment if all other key players in the supply chain are equally held to account for their performance.” Hence, the Canadian government began talks with grain elevator companies to improve transportation integration.

Last, the boom of unconventional exploration and production in the oil & gas industry has prompted a greater demand for shipping. Canada National Railway became particularly concerned with the trend due to its unique access to the Wisconsin sand deposits and direct reach to Western Canada oil and gas and other key North American shale plays through Class I railroad connections. Throughout 2013, the firm moved over 55,000 carloads in 2013 generating $200M in revenue, a 50% increase versus 2012.

Prospects for Growth

Canada National Railway made sure to close an agreement with union representatives to avoid strikes, while at the same time taking significant steps to strengthen the railway’s Safety Management System. Safety improvements will focus on accident prevention, car robustness and emergency response. For that purpose, management has allocated C$2.1 billion in capital investments for 2014. Such steps will secure the company an effective absorption of developed market synergies in the long-term.

Lower coal shipments have negatively affected overall performance of Canada National Railway. Additional risks derived from high competition, unionized workers, fuel volatility prices and higher depreciation expenses. Nonetheless, the company remains well positioned in the market, and has successfully negotiated with unions. Most importantly, the company’s stock trades at 20 times its trailing earnings, carrying a very small premium to the industry average. Also, revenue and net income has increased year-over-year since 2009, and has seen a small decline during 2013 due to abnormal weather conditions.

It is recommendable to acquire Canada National Railway for a long-term investment, given the current trends developed in the grain and oil and gas industries. These trends will have a long-term impact on overall performance, helping to overturn current small difficulties.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


Rating: 5.0/5 (1 vote)

Voters:

Comments

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Email Hide