Canadian National Railway (TSX:CNR): Don’t Miss the Ascent to $140. All Aboard!

Queue the analyst upgrades!

Canadian National Railway (TSX:CNR)(NYSE:CNI) clocked in a solid second quarter, which crushed analyst expectations on the earnings front with an adjusted EPS of $1.51, substantially higher than the Street consensus of $1.39.

While the beat is worthy of a round of applause in itself, investors should give the company a standing ovation, as it beefed up its forward-looking guidance as well as announced the promotion of Jean-Jacques Ruest to CEO. Ruest has done an impeccable job as interim CEO thus far since former CEO Luc Jobin got ousted for his sub-par performance.

CN Rail stock surged over 4% in a single trading session, and while it may seem impressive, I think there’s a lot more upside ahead, as there’s a tonne of evidence that’s suggestive of a turnaround after a slow start to the year, which saw bottlenecks and client complaints.

A fantastic Q2 2018 that could fuel a rally to higher levels

For Q2, the company clocked in $3.6 billion in revenue, up 9% year over year thanks mainly to a 7% increase in volumes. The company is solidifying its reputation as North America’s most efficient railroad after recording an astounding 58.2% operating ratio, which is tops for the entire industry!

While it looks like the company is running at full speed, there are still network constraints and room for further improvement. Investments in “double-track and yard expansions” are expected to bolster its infrastructure and improve capacity moving forward.

CN Rail appears to be turning things around a lot quicker than the Street (and management) initially expected. As such, management increased its guidance from 2-4% in RTM growth to 5-7%.

Also, Ruest noted that he sees no negative impact from a Trump trade war over the short term. That’s a breath of fresh air to investors who’ve been rattled by Trump’s protectionism.

The search for a “permanent” CEO is over

It came as a surprise to me that CN Rail ended up promoting Mr. Ruest, the former chief marketing officer and executive vice president, to the helm after having him fill in for what was supposed to be a temporary stint until a new CEO was found. Although it was likely never the plan to have Ruest permanently at the helm, he really showed that he’s capable of getting the company back on the right track.

Mr. Ruest earned it, and his performance speaks for itself.

I’d argue that the internal promotion is better news than the hiring of an outsider, who probably would have needed a considerable amount of time to get up to speed.

Foolish takeaway

It was an outstanding quarter for CN Rail, no doubt. Analysts have had set the bar low for Q2, and the company just pole vaulted right over it. In the coming weeks, I expect significant analyst price target upgrades across the board, as the company looks ready to make up for lost time as we head into the latter part of 2018.

I’d buy the stock because I think it’s heading much higher, possibly to $140 by year end, if Mr. Ruest can continue to exceed expectations.

Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette owns shares of Canadian National Railway. 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.

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