Canadian National Railway (TSX:CNR) stock is widely owned by “in the know” investors. It is one of the top holdings of Cascade Investments and other important family offices as well as hedge funds and pension funds. It should come as no surprise that this stock is well liked. The company underlying it is practically an institution, shipping $250 billion worth of goods each year all across North America. In this article, I’ll explore the three things about Canadian National Railway that all smart investors know.
#1. It has high margins
Perhaps the first thing that strikes you about the Canadian National Railway when you look at its financial statements is its high margins. The company has a 56% gross margin, a 46% earnings before interest and taxes (EBIT) margin, and a 29% net income margin. These numbers all say that the company produces very high levels of profit for each dollar of revenue it brings in.
“Gross profit,” “EBIT,” and “net income” are all different ways of calculating profit. Whichever one you use to calculate Canadian National Railway’s profit margin, it ends up being above average. So, it is a very profitable company.
#2. It has only one real competitor
Another big advantage that CN Railway has is the fact that it has only one real competitor, at least in Canada. The company is Canadian Pacific Kansas City Railway, and it is not even that direct of a competitor. As a Canadian railway company, Canadian Pacific does compete with CN Railway in shipping goods by rail.
However, the competition is limited by the fact that its railroads don’t overlap with CN’s railroads perfectly. For example, if you look at CP’s map, you’ll see that it does not go as far north into British Columbia as CN but goes much further south — all the way into Mexico.
So, not every company wanting to transport goods by rail will realistically be able to choose between Canadian National Railway and Canadian Pacific Kansas City Railway. There are certain destinations for which only one company’s railroads will work.
CN Railway does have more competitors in the United States. However, a big part of CNR’s business is shipping things like oil and lumber out of Canada and into the U.S., an activity in which Canadian Pacific is its only real competitor. This fact gives CNR a lot of pricing power, which can be seen in its high margins.
#3. Rail is the cheapest and fastest way to ship goods by land
Last but not least, an advantage that CN Railway has over trucking companies is the fact that rail is the fastest and cheapest way to ship goods by land. Trains are often formed with dozens and dozens of connected cars, the result being that one single train can pull over a mile worth of goods. The result is a more efficient use of fuel than trucks can manage.
Canadian National Railway: Foolish takeaway
The big takeaway on CN Railway is that it’s one of Canada’s most beloved stocks for a reason. Its track record speaks for itself. Although the company experiences cyclical downturns from time to time, it tends to grow over the long run. On the whole, it’s one you can count on.
