Canadian National Railway Company (TSX:CNR)(NYSE:CNI) holds an anchor position in many portfolios, and long-term investors have been handsomely rewarded over the years.
Right now, new investors are looking at the big gains and wondering if they have already missed the train.
Let’s take a look at CN to see if the company is still a smart pick for investors.
Earnings juggernaut
CN earned a cool billion in Q3 2015. That’s right, one billion dollars in net income for just three months of operations.
The results are even more impressive when you realize they are 18% higher than the same period last year. Diluted earnings per share jumped 21% to $1.26 and operating income rose 16% to $1.48 billion.
Regardless of how you look at the numbers, the performance is impressive, especially considering the economic headwinds facing the railways right now.
Diversified revenue stream
CN gets its revenue from a variety of business segments, and that diversification is a big reason for the standout results. The company also originates much of its earnings in the U.S., and the strong American dollar is having a significant impact on the profit numbers when converted to Canadian dollars.
The company saw strong year-over-year revenue gains in automotive and forest products, while the ongoing slump in energy markets hit freight revenues for crude oil, frac sand, and drilling pipe.
Is the oil business toast?
The crude-by-rail business skyrocketed in recent years and has taken CN’s profits and stock price up with it. A slowdown in production by some producers is certainly affecting energy-related shipments, but the oil transport opportunities remain in place, and CN should continue to see strong demand even as energy prices remain under pressure.
Why?
Oil sands producers have to keep the taps flowing because it is simply too expensive to shut the operations down. The pipeline bottlenecks that caused the oil-by-rail boom in the first place are still there and unlikely to be resolved anytime soon. In order to get the oil to higher-priced markets, producers will have to keep sending their product by train.
Efficient operations
CN’s Q3 operating ratio came in at 53.8%, down from an already low 58.8% recorded in the third quarter of 2014. A lower number is desirable because it indicates how much revenue is being used to operate the business.
Management continues to find ways to reduce costs, and that is translating into higher profits.
Cash flow
CN is a cash machine. The company delivered free cash flow of $690 million in Q3, and that is great news for investors who want to see the company pay higher dividends as well as buy back shares.
The company raised the dividend by 25% earlier this year. The quarterly payout is $0.3125 per share and yields about 1.6%. Investors should expect to see another dividend hike in 2016.
CN spent $417 million on share repurchases in Q3 and $1.25 billion in the first nine months of the year.
Should you buy?
CN is one of those companies you can simply buy and forget about for decades. The stock isn’t as cheap as it was in late August, but investors with a buy-and-hold strategy should be comfortable starting a position at the current price.
