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Two Reasons Why You Should Buy Canadian National Railway (TSX:CNR)

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Canadian National Railway (TSX:CNR) is a stock that keeps chugging along, generating tremendous returns for its investors over the past several years.

Due to its sector outperformance, CNR trades at a higher multiple than its American and Canadian peers. With the stock having already returned 20% for the year, here are two reasons why CNR might still have room to steam forward — and one reason why you should be wary.

An outstanding quarter

First, CNR wrapped up a best ever first quarter despite unfavourable winter conditions. First-quarter 2019 saw revenues climb to $3.5 billion, up 11% from a year before led by volume increases in petroleum, grains and automotive.

On the other hand, while forestry, and metals volumes decreased year over year, actual segment revenues were higher due to better contract pricing.

Its forward outlook remains strong, with the company expecting to delivery low double-digit EPS growth versus a strong 2018, while revenue ton miles (RTM), a key measure of railway performance, are expected to grow in the high single-digit range.

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Crude by rail not expected to slow

Much of the aforementioned RTM guidance hinges on crude by rail volumes. Fortunately for CNR, Canada’s oil patch has no near-term solution to tackle the supply glut, as planned pipeline projects continue to face delays or regulatory burdens, as in the case of Enbridge’s Line 3 expansion.

Based on data from the National Energy Board, April saw an average volume of 236k barrels of crude per day, compared to 193k in 2018 and 149k in 2017, respectively.

With the supply glut expecting to worsen, we can anticipate CNR to deliver 2018’s +200k bbl/day volumes toward the second half of this year before the situation improves.

But not all is rosy

That said, CNR is one of the most expensive names in the sector due to its growth trajectory and low operating ratio. However, there are some apparent cracks in the armor.

Q1 filings also saw its lauded operating ratio tick up by 170 basis points compared to 2018, while car volumes across most segments declined or flattened, over the same period.

Furthermore, the Canadian and American economies are peaking, and with global trade issues lingering toward 2020, there appear to be major headwinds facing the company.

A preview of these issues can be apparent in the recent Q2 report for competitor CSX Corporation, which guided 2019 revenues downwards, following an EPS miss stemming from lower rail volumes and macro uncertainty.

On that note, CNR has demonstrate the ability to cut costs and maintain pricing power even in the face of an economic downturns, and although we might see a pullback following second-quarter numbers on Tuesday, any momentary dips in this outperformer should be bought up.

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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 VMatsepudra has no position in any of the stocks mentioned. The Motley Fool owns shares of Enbridge.

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