The Motley Fool

Should You Buy CN Rail (TSX:CNR) After its Q2 Beat?

Image source: Getty Images

CN Rail (TSX:CNR)(NYSE:CNI) clocked in an earnings beat to go with an improved operating ratio on Wednesday, sparking shares to bounce over 3% in the subsequent trading session. The impressive bottom-line beat was commendable, but it was the improved operating ratio that had me most excited.

An efficient quarter indeed

The railway posted a solid 57.5% operating ratio, an improvement of 70 bps on a year-over-year basis, further solidifying CN Rail’s position as North America’s most efficient railway. TransX was a slight drag on efficiencies, but nevertheless, the railway managed to improve its operating ratio by a meaningful amount.

Forest products aside, carloads increased across the board, particularly with petroleum and chemicals. Hats off to management who saw the increase and reacted in an abrupt fashion without compromising too much on the efficiency front.

Car velocity was up 9% year over year thanks to prior infrastructure investments with fuel efficiency also improving by 2% year over year.

Looking ahead, management sees U.S. volumes to really pick up in the latter part of the year, and with track expansion efforts slated to finish in the third quarter, CN Rail looks ready for the increased business.

Should you buy now?

Several analysts upgraded the name across the board, and although there may be little, if any, room to improve upon its industry-leading operating ratio in the second half, I think the management team led by CEO J.J. Ruest has the ability to surprise us again on the efficiency front.

With low double-digit EPS numbers now expected for the year, I think the stock is fairly valued at around 20 times next year’s expected earnings.

That said, Ruest and company seemed cautiously optimistic about guiding for the second half and given the firm’s somewhat conservative guidance track record, I’d say there’s still considerable upside, even at today’s slightly expensive levels.

Although CN Rail isn’t a bargain after the 3% post-earnings bounce, I think it’s an appropriate time to initiate a position if you’re looking for long-term capital appreciation and dividend growth. In this market, you’ve got to pay a premium for quality, and few other firms are able to stack up against CN Rail in this category.

Stay hungry. Stay Foolish.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

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.

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.