Don’t look now, but CN Rail (TSX: CNR)(NYSE: CNI) stock is soaring, with shares now up a staggering 24% since bottoming out back in May. Undoubtedly, the diminished hopes of a deal with Kansas City Southern have triggered the incredible pop in shares.
But really, the pop should not have come as a surprise. As I’ve stated in numerous prior pieces, CN Rail was just too large and too dominant of a railway to get a thumbs-up by U.S. regulators. Would it have stifled competition in the transportation industry to allow CN Rail to have a rail that runs through Canada, the U.S., and Mexico? Probably. U.S. president Joe Biden has been pretty big about fostering competition, so those who sold CNR stock with the expectation that shares would stay depressed on its costly offer for KSU are now scratching their heads.
In prior pieces, I’ve stated that I thought CN’s pursuit of KSU was merely making life harder for its Canadian rail rival CP. Undoubtedly, CP’s managers expressed their frustration as the bidding war for KSU brewed in the earlier part of the year. I’d also stated that CN Rail stock would, in due time, correct very sharply to the upside once its offer for KSU was rejected by regulatory authorities. While there was some chance that a CN-KSU deal would go through, I’d pinned the odds as highly unlikely, touting CP as the favourite to acquire KSU, despite its lower offer.
It’s time for CN to put the bidding war behind it
CP played it well by staying patient and not looking to one-up CN’s very rich offer. At the end of the day, CP may very well get its prize at a price that’s somewhat desirable.
“Investors ought to be scooping up CN Rail stock because they could quickly surge back to all-time highs should CN be pressured to walk away,” I wrote in a prior piece urging investors to buy CN Rail after it got pummeled 10-15%. “I think far too many investors are discounting the odds of a regulatory roadblock that could allow CP Rail to win over Kansas City Southern.”
Undoubtedly, the big regulatory roadblock I was calling for actually hit. And now CN Rail stock is right back at all-time highs, as I’d predicted. If you’d bought CNR stock on the dip and profited from the pop, I’m very happy for you. But could even more upside be in the cards?
As investors move on from the CN-CP bidding war, I think CN has a heck of a lot more room to run, especially as activist investors start getting more involved.
Activists push for change at CN Rail
In response to the failed takeover of KSU, activist TCI Fund Management is looking to trigger a proxy fight with the goal of replacing CN Rail’s CEO J.J. Ruest.
Chris Hohn, TCI top boss, stated that CN’s directors “lacks all credibility” and is looking to get someone with more railroad experience at the helm.
Over the past year, CN Rail stock’s performance has been relatively meagre. I have no idea what will come of the rise in activism. In any case, I think CN Rail stock remains a bargain, as Hohn looks to shuffle CN for the better. Given Ruest’s track record, which isn’t anything to write home about, I’d argue that a CEO change could have a positive impact on the stock. Regardless, CNR stock is a buy here, as the drama moves from bidding war to activist investor involvement.
