Why Now Is the Time to Buy Canadian National Railway Company

The economic headwinds impacting revenues of railways such as Canadian National Railway Company (TSX:CNR)(NYSE:CNI), Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP), and Union Pacific Corporation (NYSE:UNP) can’t last forever, making now the time to add railways to your portfolio.

| More on:
The Motley Fool

North American railway stocks remain under considerable pressure because of declining shipments amid weak industrial activity and low commodity prices. This can be primarily attributed to an increasingly volatile economic outlook and the deterioration in the demand for oil, coal, and other key commodities that form a large portion of the bulk goods transported by rail.

As a result, North America’s largest railway company Union Pacific Corporation’s (NYSE: UNP) share price has plunged 19% over the last year.

Even Canada’s railways have not been immune to the downturn.

Canadian National Railway Company’s (TSX: CNR)(NYSE: CNI) share price remains relatively flat, while Canadian Pacific Railway Limited’s (TSX: CP)(NYSE: CP) share price has plunged by a whopping 26%.

Nonetheless, the economic headwinds that are creating this situation can’t last forever. The recent decline in stock prices makes now the time for investors to consider adding railway stocks to their portfolios.

Now what?

One of the advantages of investing in railway companies is that the industry possesses an exceptionally wide economic moat because of the strict regulatory requirements and the tremendous amounts of capital required to establish the necessary infrastructure. This helps to protect them from competition and, along with rail being the only cost-effective means to transport bulk freight, virtually guarantees their earnings.

Despite both of Canada’s major railway’s appearing considerably attractive at this time, I believe that the standout investment opportunity is Canadian National.

Not only does it operate North America’s only transcontinental rail network, further reinforcing its economic moat, but it has been consistently more profitable than Canadian Pacific or even Union Pacific. Over the last 10 years Canadian National has reported an impressive average annual return on equity of 21%, far higher than Canadian Pacific’s 16% and Union Pacific’s 17%.

Canadian National is also a superior investment because it proportionally derives less of its revenue from coal than other North American railways. This is especially important because coal is caught in an intractable long-term slump.

You see, not only is the outlook for steel-making coal poor (demand for steel from the world’s largest consumer, China, continues to fall), but thermal coal is facing a range of secular headwinds that will eventually remove it from the global energy mix. This means that as demand declines, so too will the volumes transported and the revenues that rail companies can earn.

In the case of Canadian National, it only earns 5% of its revenue from coal, whereas Canadian Pacific earns double that figure and Union Pacific earns almost 12%.

Another point worthy of consideration is Canadian National’s ongoing focus on controlling costs.

While the protracted slump in crude, which has pushed diesel prices sharply lower, is benefiting the railway industry as a whole, Canadian National was able to cut operating expenses by a greater amount than its peers. For the first quarter 2016 its operating expenses dropped by an impressive 14% compared to Canadian Pacific’s 11%, highlighting that it has been able to create far greater operational efficiencies.

This continues to pay dividends for Canadian National through higher margins that can only lead to a healthy bump in its bottom line when the current headwinds subside.

So what?

Canadian National can only be described as one of the best growth stocks available to investors. Not only is it highly profitable and rewarding investors with a handy 1.7% dividend yield, but with rail being the only viable way of transporting a range of bulk goods, demand for its services is unlikely to wane any time soon. This ensures that its earnings will grow once commodities bounce back and there is an upturn in the economy.

Fool contributor Matt Smith 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.

More on Investing

Stacked gold bars
Metals and Mining Stocks

IAMGold Stock Is up 854%: Buy, Sell, or Hold at Today’s Prices?

IAMGold (TSX:IMG) stock looks way too cheap to ignore despite euphoric five-year gains in the books.

Read more »

young adult uses credit card to shop online
Investing

5 Canadian Stocks I’d Buy Right Now

These Canadian stocks offer strong growth potential, with a few pulling back from their highs and now presenting attractive entry…

Read more »

nugget gold
Metals and Mining Stocks

Gold Stocks Are Dominating the TSX30, and Investors Are Piling In

Uncover the best-performing gold stocks from the 2026 TSX30. Find out which gold mining companies have shown impressive returns.

Read more »

AI investing could have upward trajectory
Stocks for Beginners

AI’s Biggest Bottleneck Isn’t Chips: These TSX Stocks Could Power the Next Boom

AI chips are impressive, but the real investing opportunity may be the power and fuel infrastructure needed to run data…

Read more »

slow sloth in Costa Rica
Investing

5N Plus Stock: The Sleeper Materials Company That Gained 1,357%

With solid financial performance, compelling growth prospects, and a more attractive valuation, 5N Plus could be a compelling long-term investment…

Read more »

arrows hit bullseye on target
Dividend Stocks

Buy the Dip: This Dividend Giant Might Be Oversold

This company has increased its dividend in each of the past 26 years.

Read more »

Dividend Stocks

Why This Unglamorous Stock Has Paid Investors for Decades

Canada’s first Dividend Knight that has paid investors for decades is anything but unglamorous.

Read more »

worry concern
Retirement

Wealthy Investors Love Private Credit: Should it Be Anywhere Near Your RRSP?

Private credit looks calm and high-yield, but the extra return often reflects real credit risk and limited liquidity, which can…

Read more »