Shares of Canadian National Railway (TSX:CNR) are down close to 2% in the last month and trading 8.7% below all-time highs, valuing the TSX giant at a market cap of $112 billion. CNQ is among the largest companies in Canada and has generated game-changing wealth for long-term investors.
For instance, a $1,000 investment in the stock 20 years back would be worth $18,650 today after adjusting for dividends. So, let’s see if you should buy the dip in Canadian National Railway right now.
The bull case for Canadian National Railway stock
Canadian National Railway is a transportation leader and a trade enabler. It is essential to the Canadian economy, as the company transports 300 million tons of natural resources, manufactured products, and finished goods across North America annually.
Canadian National Railway connects the country’s Eastern and Western coasts with the United States via an 18,600-mile rail network.
Despite a challenging macro-economy, CNR increased revenue by 16.3% year over year to $4.3 billion in the first quarter (Q1) of 2023. Comparatively, its adjusted earnings per share were up 38% at $1.82 per share in the March quarter.
Despite elevated inflation levels in the last 12 months, its operating ratio moved lower by 515 basis points to 61.5%, showcasing the resiliency of CNR’s business model. The metric basically measures CNR’s operating expenses as a percentage of sales.
Canadian National Railway emphasized strong bulk shipments such as grain and coal drove top-line growth for the company in Q1. This was offset by weakness in consumer-driven markets such as lumber, chemicals, and plastics.
Moreover, the pricing on contract renewals remains above the rail inflation rate, allowing Canadian National Railway to increase operating income by 34% year over year in the March quarter. Its free cash flow also surged $22 million to $593 million in Q1, indicating a margin of almost 14%.
What’s next for CNR stock price and investors?
Canadian National Railways highlights that running a scheduled railroad provides it with opportunities to unlock additional capacity. It can also identify the required transportation corridors to increase capacity over time, resulting in higher cash flows and earnings.
Canadian National Railway expects to increase adjusted earnings per share by low-single-digit percentages in 2023. So, it suggests profit margins might narrow in the near term as North American industrial production is assumed to be negative this year.
Bay Street forecasts the company’s adjusted earnings to widen by 5% year over year to $7.83 per share in 2023. However, earnings are then expected to accelerate by close to 10% in the next four years.
This expansion in profit margins should support further dividend increases. CNR already increased quarterly dividends by 8% in Q1 to $0.79 per share, and these payouts have increased by 16% annually since June 2003. CNR stock currently offers shareholders a dividend yield of over 2%.
Priced at 20 times forward earnings, CNR stock might seem expensive, especially if the economy enters a recession. However, Canadian National Railway enjoys a wide economic moat and improving profit margins, making it a top TSX stock to buy and hold across market cycles.
