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Here's Why You Should Retain Canadian National (CNI) for Now

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Zacks Equity Research
·4 min read
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Despite coronavirus-induced freight softness, Canadian National Railway Company’s CNI Grain and Fertilizers segment has performed impressively. With the company having moved record volumes of Canadian grain, revenues from Grain and Fertilizers segment increased 5% year over year in the first nine months of 2020. Grain movement in October and November was robust as well, exceeding 3 million metric tonnes. Notably, the company has been transporting record volumes of grain for the past nine months. With gradually recovering freight volumes, Canadian National’s other segments are expected to benefit as well.

Additionally, we are optimistic about Canadian National’s buyout of The TransX Group of Companies, which has bolstered its supply chain and intermodal businesses across North America. Moreover, the company’s long-term deal with Teck Resources Ltd running from April 2021 through December 2026 is expected to drive growth. Under this pact, Canadian National will ship steelmaking coal from Teck’s four British Columbia operations between Kamloops and Neptune Terminals, and other West Coast ports. Further, the company’s new intermodal rail service between Moncton and Halifax (announced in May 2020) is expected to aid growth in the Atlantic region. Through this initiative, Canadian National aims to improve efficiency within supply chains.

While Canadian National has temporarily suspended share repurchases to address the coronavirus situation, the fact that it continues to reward shareholders through dividend payments is encouraging. The company has raised dividends consecutively for 24 years. The latest hike was announced in January 2020 when the company’s board of directors approved a 7% hike in its quarterly cash dividend to C$0.575 per share. Canadian National’s ability to generate strong free cash flow supports its shareholder friendly activities. The company generated free cash flow of C$2,087 million during the first nine months of 2020 compared with the year-ago period's figure of C$1,499 million. For 2020, it expects to achieve free cash flow of more than C$2.5 billion.

Canadian National has completed federal requirements to operate Positive Train Control (“PTC”) on its 35 subdivisions in the United States. The Federal Railroad Administration has approved and certified its PTC system, which is a safety overlay designed to prevent accidents caused by overspeed derailments and other such human errors. This safety milestone reached by the company further adds to the positive scenario.

Shares of Canadian National have gained 21% in a year’s time primarily owing to its robust performance with respect to grain movement and its commitment to reward shareholders despite odds. Another bullish factor is the upward revision of the Zacks Consensus Estimate for 2020 and 2021 earnings. The estimate for the company’s 2020 earnings has been revised upward by 1.7% in the last 90 days. The same for 2021 earnings has been revised northward by 1.9%.


 

In light of the above-mentioned positives, we believe investors should hold onto the Canadian National stock for now, as is suggested by its Zacks Rank #3 (Hold).

Key Picks

Some better-ranked stocks in the broader Transportation sector are ArcBest Corporation ARCB, Ryder System, Inc. R and Herc Holdings Inc. HRI. While Ryder carries a Zacks Rank #2 (Buy), ArcBest and Herc Holdings sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of ArcBest, Ryder and Herc Holdings have gained more than 54%, 15% and 34% in a year’s time, respectively.

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Canadian National Railway Company (CNI) : Free Stock Analysis Report
 
Ryder System, Inc. (R) : Free Stock Analysis Report
 
ArcBest Corporation (ARCB) : Free Stock Analysis Report
 
Herc Holdings Inc. (HRI) : Free Stock Analysis Report
 
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