Is Canadian National Railway Company Expecting Too Much Economic Growth?

Canadian National Railway Company (TSX:CNR)(NYSE:CNI) is gearing up for a growing economy. Is now the time to load up on the stock?

| More on:
The Motley Fool

Canadian National Railway Company (TSX:CNR)(NYSE:CNI) is banking on the economy’s continued growth, which could prove a dangerous gamble. The railway operator announced that it would be buying 200 locomotives over the next three years from General Electric Company.

CN Rail is anticipating continued demand, and by adding these locomotives, the company will be able to improve its efficiency while accommodating greater loads on its tracks.

Earlier this year, CN Rail announced a “hiring spree” to meet the rising demand that it had been witnessing recently. With the TSX reaching record highs and CN Rail experiencing lots of activity on its railways and a very healthy economy, it’s hardly a surprise that the company is preparing itself in anticipation of further growth.

Is the company getting too big, too fast?

The Canadian economy has certainly done well in 2017, which has resulted in a few rate hikes this year. There could still be more on the way in 2018. However, rising home prices and debt levels combined with a higher rate of interest could have a net negative impact on the economy next year.

If that happens, we may not see as much growth as CN Rail is banking on to justify these locomotives. There may not be enough activity to keep all of its new workers busy, which could mean some idle time and inefficiency resulting in a softer bottom line.

The company is doubling down on its bet that the economy will keep growing at a time when I’m not sure that’s the best bet to make.

Railways are often kept busy by a strong economy

Many of the goods that are transported by rail are consumer products, raw materials, commodities, and other components used by various  industries. When railways are busy, it is a good sign that the economy is keeping busy as well.

This is also why I suggested that CN Rail could have a great Q4 after the company announced it was going to hire more workers. However, while staff is easy to cut if the work is not there; it’s more difficult to get rid of locomotives that aren’t needed anymore, and that’s what has me concerned about this purchase.

What does this mean for investors?

CN Rail is seeing a robust economy, and it is certainly projecting that to continue in the near and medium term. In its most recent quarter, the company showed solid top-line growth of 7% year-over-year, and all signs are certainly pointing to Q4 producing another strong result.

After a disappointing 2016 during which sales dropped 5%, CN Rail aims to turn that figure around with its 2017 results. The company has consistently finished north of $12 billion in each of the past three years, posting an equally strong bottom line with profits of at least $3 billion during that period.

CN Rail is a great long-term buy, but I’m not sure my optimism extends to the economy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor David Jagielski 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

Aircraft wing plane
Coronavirus

Air Canada (TSX:AC) Stock: Ready to Take Off?

While Air Canada is handling what it can control really well, there are many worsening macro headwinds that will likely…

Read more »

stock analysis
Stocks for Beginners

2 Simple Strategies That Canadian Investors Can Use to Start Investing in Stocks

Here are two of the simplest and best investing strategies for Canadians to start investing in stocks today.

Read more »

A miner down a mine shaft
Metals and Mining Stocks

3 Mining Stocks to Buy Amid Rising Inflation

The Canadian inflation rate came in at 6.8% for April — the highest in 31 years. The prices of petroleum…

Read more »

edit Four girl friends withdrawing money from credit card at ATM
Bank Stocks

Bank Earnings: Did TD Stock or Royal Bank Come Out on Top?

TD (TSX:TD)(NYSE:TD) stock and Royal Bank (TSX:RY)(NYSE:RY) stock both reported earnings on Thursday, beating earnings estimates.

Read more »

investment research
Bank Stocks

Royal Bank (TSX:RY) Raises Dividend: Time to Buy the Stock?

Royal Bank is giving investors another raise. Is the stock too cheap to ignore?

Read more »

Dividend Stocks

2 Canadian REITs on Sale: A Passive Landlord’s Dream Come True!

It's time for investors to explore Canadian REITs that are discounted and become passive landlords!

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

Retirees: Top TSX Stocks to Earn Worry-Free Passive Income

These TSX stocks have consistently returned cash to their shareholders irrespective of the volatility and market conditions.

Read more »

Man making notes on graphs and charts
Dividend Stocks

Recession Stocks for Beginners

Recession-proof opportunities like Shaw Communications (TSX:SJR.B)(NYSE:SJR) should be on your watch list.

Read more »