Canadian National Railway CompanyCNI

Morningstar Rating

Stock Research and Analysis

by Keith Schoonmaker

Canadian National generates the highest margins of any railroad in North America, and we don't see this changing anytime soon. During the last decade CN improved its operating ratio, or operating expense/revenue, to 63.6% from 89.9%, and in 2007 crushed Read more

Bulls Say

Canadian National's operating ratios, customer service, and free cash flow are the envy of the industry.

CN and its peers are in a strong competitive position, owning unmatchable railroad assets, comparing favorably to trucking in fuel efficiency, and offering attractive value to shippers.

Despite operating a business that requires a high level of reinvestment, CN's 10-year average free cash flow exceeds 13% of revenue. During several recent years, free cash flow exceeded 20% of sales.

In 2007, the company initiated its CN World-Wide transportation logistics service to provide freight forwarding, warehousing, and other services to supplement and funnel traffic to its rail operations. Read more

Bears Say

CN is highly exposed to the forestry market, from which it derives 19.7% of total revenue. Aspects of this market are cyclical (residential construction) or in secular decline (pulp and paper).

CN's performance during 2007 slid a bit from record levels in 2006 because of severe weather and a work stoppage by one of its unions, revealing two major risks railroads face.

CN is exposed to risks of profit-constraining regulation in two nations.

Heavy reinvestment requirements persist. Unlike trucking firms, railroads must purchase and maintain their road. Capital expenditures consumed more than 16% of CN's revenue during 2008.

Compared with other railroads, we believe CN has less room for improvement in its rates because its shorter-duration contracts enabled earlier rail-favorable contract negotiations, many of which have already occurred. Read more

Strategy

CN's primary strategy is to execute its high-margin precision scheduled railroading operation. Following the opening of the Prince Rupert Port, CN is looking to fill capacity, particularly hauling freight Read more

Management

It's tough to overstate the success CEO Hunter Harrison and his team have realized at Canadian National. During their tenure, the firm developed into today's industry-leading precision machine. Top CN executives enjoy generous compensation, but it's Read more

Profile

Canadian National's railway spans Canada from coast to coast and extends through Chicago to the Gulf of Mexico. In 2008, CN delivered 4.6 million carloads over its 20,961 Read more

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