Canadian National Railway Company (TSX:CNR)(NYSE:CNI) has rallied 15% in the past two months, and investors are wondering if this is the right time to buy the stock.

Let’s take a look at the current situation to see if Canada’s largest railway deserves to be a top holding.

Competitive advantage

CN is the only railway in North America that can offer customers access to three coasts. That is a huge advantage when intermodal shippers are looking for options to move their goods across Canada and into the United States.

The company is leveraging this benefit by investing in intermodal hubs along its network. In doing so, CN can offer customers more flexibility in their shipping options. A client who might normally choose a trucking company to ship goods from the port to the end user has the option to use the railway for a large part of the journey and then hire a truck to complete the final leg of the trip.

Earnings strength

CN delivered Q4 2015 net income of $941 million, up 11% compared with the same period the previous year. Diluted earnings per share rose 15% to $1.18 and operating income increased 7% to more than $1.35 billion.

The numbers are pretty good considering the company had lower sales compared with Q4 2014.

In fact, year-over-year revenue slid 1% and carloads decreased by 8% as weakness in the commodity sectors hit demand. Total metals and minerals carloads dropped 37%, coal fell 17%, grain and fertilizers dipped 7%, and petroleum and chemical shipments came in 5% lower than Q4 2014. This was partially offset by stronger performances from the intermodal and automotive segments.

How did CN deliver such strong results?

The company generates a significant amount of its earnings in the United States, so big moves in the currency spread can have a large impact on results when converted to Canadian dollars.

How big?

The Q4 2015 net income would have been $87 million, or $0.11 per share lower on a constant-currency basis.

The U.S. operations provide a nice hedge against weakness in the commodity segments because the Canadian dollar tends to tank when oil and metals prices falter.

CN is also very good at reducing costs. The company lowered its operating ratio to 57.4% in Q4 2015 compared to 60.7% in Q4 of the previous year. The metric is important because it shows how much revenue the company is using to run the business.


CN just raised its quarterly dividend by 20% to $0.3125 per share. The company has increased the distribution every year for the past two decades with an average annual jump of 17%. That’s an impressive track record.

Should you buy?

The stock isn’t as cheap as it was in January, but CN remains a top pick for buy-and-hold investors.

The company is very efficient and enjoys a leadership position in an industry with limited competition and huge barriers to entry. That combination is hard to find, and investors should feel comfortable owning the stock, even at the current price.

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Fool contributor Andrew Walker has no position in any stocks mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. Canadian National Railway is a recommendation of Stock Advisor Canada.