Canadian National Railway (TSX:CNR) is down 23% in the past 12 months. Contrarian investors are wondering if CNR stock is now oversold and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on total returns.
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CNR share price
Canadian National Railway trades for $136 per share at the time of writing compared to $180 at one point in 2024. The steady decline over the past year is due to a variety of external challenges that impacted volumes along CN’s rail network.
Labour disputes at both CN and Canadian ports interrupted supply chains and forced shippers to reroute cargo to the United States. Wildfires in Alberta also disrupted CN’s services last summer.
CN earnings
The interruptions drove up expenses last year while eating into anticipated growth in volumes across the rail network. Revenue ton-miles rose just 1% in 2024 compared to 2023. Revenue increased just 1%, as well. Operating income slipped 5% as a result of higher costs. This put pressure on the operating ratio, which is a measure of railroad efficiency. CN’s operating ratio increased by 2.6 points in 2024. A higher operating ratio means the business is less efficient.
Adjusted diluted earnings per share (EPS) dipped 2%, and adjusted return on invested capital fell by 1.4 points but still came in at a decent 13.1%.
Outlook
In the fourth-quarter (Q4) 2024 report released on January 30 this year, CN painted an optimistic picture for 2025. The company said it expects to deliver 10% to 15% adjusted diluted EPS growth compared to 2024 and will spend $3.4 billion on capital projects. Compound annual adjusted diluted EPS growth is expected to be in the high single digits for 2024 to 2026.
CN bumped up the dividend by 5% for 2025. This is the 29th consecutive annual dividend increase. The board also plans to buy back up to 20 million common shares under the latest normal course issuer bid. Fewer outstanding shares mean the remaining shareholders get a larger slice of the profits pie.
Risks?
An extended global trade war could derail CN’s rosy outlook for this year. The company is a vital link in the smooth operation of the Canadian and U.S. economies. CN moves grain, coal, crude oil, fertilizer, forestry products, cars, car parts, and finished goods between the two countries, as well as connecting domestic and international buyers and sellers.
Punitive tariffs could lead to a recession in both the United States and Canada. If businesses and consumers stop buying goods, there will be a negative impact on demand for CN’s services. Trade with China is also important, both for Canada and the United States.
Weather events are increasingly a threat to CN in Canada. It is impossible to predict whether wildfires or floods will interrupt the business this year, but investors need to keep the risk in mind when evaluating the stock.
Opportunity
A quick resolution to the trade challenges would spur market optimism and could avoid a lengthy recession. In that scenario, CN is probably oversold at this point and could soar on positive trade-agreement news.
Time to buy CNR stock?
Near-term volatility is expected, and it is possible that the stock could retest the recent lows. That being said, contrarian investors might want to start nibbling at this level and look to add on further downside. Buying CN on meaningful dips has historically proven to be a savvy move for patient investors.
