Canadian National Railway (CNI), leading Canadian Freight railroad announced capital investment of C$1.9 billion in 2013. The investment plan will focus mostly on building infrastructure, equipment and technology that will drive safety and quality service for the rail. Over the long term, we believe these investments will support the company’s growth goal by enhancing productivity measures and network fluidity.
The company expects to spend approximately C$1 billion on developing railway track infrastructure to enhance business networks. Further, the company aims to direct C$700 million of its total investment on market expansion that includes increasing distribution centre, constructing intermodal terminals and investments in intermodal terminals.
Moreover, the company will spend approximately C$200 million on the purchase of locomotives, intermodal equipment and vehicles. In 2013, Canadian National expects to purchase 40 new and 37 second-hand high-horsepower locomotives.
Canadian National aims to maintain high railroading (velocity, reliability, lower cost and asset utilization) standards. In addition, it is continuously seeking productivity initiatives to reduce costs and leverage its assets. We believe Canadian National‘s ability to transport incremental volume at a low cost provides it with greater operating leverage.
In an effort to propel growth, the company seeks a 2–4 year capacity improvement plan. Likewise, the company is launching a new train service from Prince Rupert to Calgary and Edmonton to support the Calgary log park project slated to open in 2013.
However, the main drawback that these investments carry is their near-term implications over the company’s financials. Given the capital-intensive nature and industry-specific requirements of the rail industry, railroads have to resort to heavy capital expenditure for maintenance as well as expansion of their businesses. These capital expenditures draw out significant cash flows, impairing near-term profitability of the company. We see this as a significant headwind given the current economic condition.
Besides Canadian National, other companies that have announced their capital investment plans include Union Pacific Corporation (UNP) and CSX Corporation (CSX). In 2013, Union Pacific plans investment of approximately $3.6 billion, down from $3.7 billion in 2012 and CSX Corporation would spent approximately $2.3 billion, up from $2.2 invested last year.
Another stock worth considering within the sector is Genesee & Wyoming Inc. (GWR) that holds a Zacks Rank #1 (Strong Buy rating).
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