Down 9.8% From Highs, CN Rail Stock Looks Like a Great Value Today

CN Rail (TSX:CNR) may not be a steal, but it appears like a great value, even as tides of recession approach for the second half of 2023.

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Canadian rail giant CN Rail (TSX:CNR) stock is fresh off a correction of around 11%. After a partial jump off lows, shares currently are down 9.8% from their all-time highs of $173 per share. Undoubtedly, the longer-term trend still seems intact. And though a recession could be coming to Canada in as little as a few months, I’d not be afraid to hang in for the ride with CNR shares.

CN Rail is one of those wide-moat companies that you really need not worry about if you’re committed to staying invested over the next five years or more. Indeed, the near term has been quite choppy, but in some way or another, the more than 100-year-old rail company finds a way to move forward.

CN Rail stock fresh off a run-of-the-mill correction

Buying CN Rail on a correction or dip has rewarded long-term investors in the past. My bet is that this dip will be just another buying opportunity, even as headwinds seem a tad on the strong side.

As economically sensitive as CN Rail is, I don’t think investors should brace themselves for a repeat of the events that unfolded back in 2008. The Bank of Canada will weigh its decision with further rate hikes. So long as inflation doesn’t make a resurgence, I don’t think Canada’s central bank will need to make a hawkish turn.

Of course, “sticky” inflation is not what anybody wants. And higher rates seem like a potent medicine whose negative side effects will not last nearly as long as letting the ailment of inflation run.

CN Rail’s Q1 beat seems a tad discounted by investors

Just a month ago, CN Rail revealed its latest quarterly results (Q1). The firm delivered a very respectable number, beating on the bottom line ($1.82 earnings per share vs. $1.72 consensus). In the face of so much macro uncertainty, I think the earnings beat should have been rewarded with a larger and more sustained rally in the stock.

The rails haven’t been too hot in recent weeks, though, with American mega-cap tech companies propping up the U.S. averages. Looking ahead, the market rally could broaden out going into the second half of the year, benefiting low-tech and value firms such as CN Rail. Even if it doesn’t, I don’t believe it’s ever a good idea to give up on a long-term outperformer like CN Rail after so much pessimism has already been factored in.

Looking beyond a hazy and potentially sluggish second half of 2023, I view considerable room for margin enhancement, all while volumes look to chug higher. Only time will tell if CN’s new chief executive officer, Tracy Robinson, can bring CN back on the growth track. I think shareholders can afford to give Robinson the benefit of the doubt.

CN Rail: A wonderful company at a pretty reasonable price

Now, CN Rail is by no means a deep-value play right here. However, whenever you can buy such a wonderful, wide-moat firm at a slight discount, you should strongly consider doing so. Further, CN Rail stock continues to look like a better value than its Canadian peer CP Rail. Even as CP’s competitive edge (and rail network) improves, I think it’s a mistake to count CN out of the game.

In any case, CN stands out to me as one of the more intriguing buy-the-dip candidates, regardless of what you think may lie on the track ahead.

Truly wonderful companies with high barriers protecting their cash flows seldom trade at excessive discounts. Arguably, CN Rail is a company I’d probably be willing to pay a 23-25 times trailing price-to-earnings (P/E) multiple for.

With shares trading at below 20 times trailing P/E, I view CN Rail as a fairly priced stock you won’t lose that much sleep over, even with a milder-than-average Canadian recession considered.

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 Joey Frenette has positions in Canadian National Railway. The Motley Fool recommends Canadian National Railway and Canadian Pacific Kansas City. The Motley Fool has a disclosure policy.

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