The Motley Fool

Is Canadian National Railway Company on Sale?

After a five-year run of positive returns and seeing the stock appreciate by over 100%, shares of Canadian National Railway Company (TSX:CNR)(NYSE:CNI) are in a bit of a rut. Shares are down 7% in the past 90 days and have been relatively flat since early 2014.

While the company has shown an ability to outperform the market over the long term, is the recent dip a buying opportunity or an indication of troubles to come?

Industry in transition

Canadian National Railway isn’t the only rail operator facing headwinds. Norfolk Southern Corp., CSX Corporation, and Union Pacific Corporation are all down more than 30% in the past 12 months. One of the biggest factors contributing to the industry’s decline is the collapse in oil prices.

When the price of oil was over $100 a barrel, oil and gas companies were scrambling to get supply online despite the lack of infrastructure necessary to transport the additional volumes. The explosion of shale drilling just exacerbated this issue. Without enough pipelines in place (which take years to plan, permit, and build), oil and gas companies were forced to use rail cars to ship huge volumes of fuel. Almost overnight, crude by rail became one of the biggest drivers of profitability growth for most railroad operators.

Crude by rail was helpful for two reasons.

First, it gave railroads an unexpected revenue boost. Historically, sales were only influenced by the health of the overall economy and the price of substitute shipping methods such as trucking. Getting a sizable revenue boost independent of those two factors caused the market to place a higher valuation on rail stocks.

Secondly, shipping oil is often more profitable than transporting other items. While a toy manufacturer has dozens of options for transportation, an oil field may have only one (a nearby railroad). Pricing power was exceptional.

Not immune to widespread struggles

Like its peers, Canadian National Railway was a major benefactor of crude by rail. In 2010 the company shipped only 216 rail cars of oil. By 2014, that had risen to an astounding 128,000 carloads. Shipments of fracking sand also followed suit, rising nearly four-fold over the same time span.

For 2015, shipments of oil are only expected to be around 100,000 carloads, a decline of over 20%. While energy only represents a minority of sales, its higher profitability hits the bottom line at a time when the Canadian economy is slowing and investor sentiment is hitting new lows.

What’s next for shares?

If oil prices remain depressed, Canadian National Railway’s business has very few tailwinds behind it. While its impact varies by province, the Canadian economy as a whole still fluctuates in tune with oil. Lower oil prices for longer means a continued decline in crude-by-rail shipments (which would have a long time to go before bottoming) as well as continued pressure on the economy. Plus, lower fuel prices make substitute forms of shipping more attractive.

If you’re tempted to bite on railroad shares, you better believe higher oil prices are around the corner. If not, profits still have plenty of room to continue compressing.

The 10 Best Stocks to Buy This Month

Renowned Canadian investor Iain Butler just named 10 stocks for Canadians to buy TODAY. So if you’re tired of reading about other people getting rich in the stock market, this might be a good day for you. Because Motley Fool Canada is offering a full 65% off the list price of their top stock-picking service, plus a complete membership fee back guarantee on what you pay for the service. Simply click here to discover how you can take advantage of this.

Click Here to Learn More Today!

Fool contributor Ryan Vanzo 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.