Every now and then, you’ll find a stock that stands the test of time. A stock that keeps delivering, year in and year out. Such stocks are rare, but when found, they can make great portfolio holdings. The challenge is identifying which “long-term performers” have a real shot at keeping the long-term performance going forward. In this article, I will explore one stock that has stood the test of time, and could keep the good results going into the future.
CN Railway
The Canadian National Railway (TSX:CNR) is a Canadian railroad stock that has risen 2,200% in the markets over the last 24 years. It has paid a dividend the entire time, so its total return has been far greater than what its stock chart would indicate.
How has CNR managed to keep up such strong performance over such a long period of time?
It comes down to a few different factors:
- A strong competitive position. CN Railway only has one major competitor, and it has cost advantages compared to indirect alternatives like trucking companies. These advantages give the company a lot of pricing power.
- Consistent growth and profitability (albeit with some setbacks in the last two years).
- Economic indispensability to North America’s economy (it ships over $250 billion worth of goods each year, about 0.8% of the continent’s GDP).
These advantages combined have delivered good results for CN Railway’s customers, as well as its investors.
Solid profitability
CN Railway’s superior competitive position has visible effects on the company’s financial results. Put simply, CN Railway is a very profitable company, with sky-high margins and returns on equity. Below, you can see some of CNR’s profitability metrics for the trailing 12-month period:
- A 33% net income margin (“profit margin“).
- A 15% free cash flow margin (a kind of modified profit margin using a purely cash-based metric in place of net income).
- A 27% return on equity (a measure of how efficiently the business turns shareholder investment into profit).
Overall, these profitability metrics are far above average. That is an undeniably good thing in itself, and it furthermore corroborates what I wrote earlier about CN Railway’s strong competitive position.
A reasonable valuation
Despite its high margins, CN Railway stock is relatively cheap. At today’s prices, it trades at 18 times earnings, 5 times sales, 5 times book value, and 14 times cash flow. The sales and book value multiples are a little high, but the earnings and cash flow multiples are below average for the markets these days. CNR is certainly not “deep value,” but it’s a comparatively good value compared to much of what’s out there in the markets today.
Growth starting to recover
A final factor that CN Railway has going for it, this year especially, is its growth rebound. In 2023, CN Railway’s revenue declined, partially due to a weaker oil and gas market compared to the red-hot 2022 base period. In the most recent quarter, revenue increased 7%, showing a rebound in the company’s fortunes. The company’s earnings were still down slightly in the quarter, but the acceleration on the top line indicated that things could improve going forward if the company manages its costs well.
