Canadian National Railway Company

Company DescriptionCN logo
CN Rail is a leading North American railway company that operates a 19,600-mile network spanning Canada and Mid-America. CN’s network connects three coasts: the Atlantic, the Pacific and the Gulf of Mexico, making it the only transcontinental railway in North America. The company is a true supply chain enabler that offers integrated transportation services including rail, intermodal, trucking, freight forwarding, and warehousing and distribution services.

Investment Thesis
CN Rail is a best-in-class operator with an attractive asset base and a long track record of consistent earnings growth. In the years following the company’s 1998 acquisition of Illinois Central Railroad, CN drove strong productivity gains through the successful implementation of scheduled rail service and precision railroading innovations.

We believe the carriers’ networks have immense strategic asset value in that the permitting and significant capital investment to build the railway has already been made, creating almost insurmountable barriers to entry. CN faces limited competition from other railways, and weak competition from trucks, which tend to be much less efficient over longer hauls. As a result, CN enjoys pricing power while its volumes tend to grow with GDP at a minimum, with additional upside from the market share it continues to win from trucks.

CN’s goal is to be internationally regarded as one of the best-performing transportation companies. The company has a strong culture of operational and service excellence, continuous improvement, and innovation. CN’s operating metrics are best in class and the company has a strong track record of financial results.

Financial Performance
CN Rail’s share price appreciated by nearly 20% per year in the twenty years following the completion of its initial public offering, supported by strong earnings growth. During the 2010 – 2015 timeframe, CN grew adjusted diluted earnings-per-share at a compound annual growth rate of 16%.

We believe the company’s attractive business model positions it to generate sustainable earnings growth in the high single-digits or low double-digits, through a combination of volume and pricing gains, modest improvements in operating efficiency, and share buybacks. The company’s stated objective is to grow volumes (as measured by carloads) ahead of economic growth (as measured by North American industrial production), and on top of that CN typically implement price increases of 2 – 4% / year.

The company generates significant free cash flow which it uses to reinvest in its business, pay dividends and repurchase shares. In the twenty years following its IPO, CN increased its dividend in 19 consecutive years at an average compound annual growth rate of 17%. Additionally, during the 2000 – 2015 time period, the company repurchased over 560 million shares through normal course issuer bids for a total cash expense of more than $15 billion. We expect ongoing share repurchases will enhance annual EPS growth by approximately 4 – 5%.

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