Canadian National Railway

Resilient Business, Soft Near-term Outlook: Canadian National Railway Co (TSX: CNR) is engaged in the rail and related transportation business. The company has a network of approximately 20,000 route miles spread across Canada and mid-America, uniquely connecting three coasts: the Atlantic, the Pacific and the Gulf of Mexico.

On March 20, CNR acquired Manitoba based TransX Group of Companies, which is likely to strengthen its intermodal business.

On April 27, CNR announced a second quarter dividend of CAD 0.5750 per share to be paid on June 30.

Outlook: COVID-19 outbreak has led to the softening of demand for freight transportation services. Management expects the softness in demand to persist and affect the second quarter result. The demand has slowed down in most of the commodities which CNR transports including automotive, petroleum products, industrial products, and paper products. The company is looking for cost-cutting initiatives in order to preserve liquidity. Further, CNR has temporarily suspended its share buy-backs and rolled back its FY20 guidance due to an uncertain economic scenario.

Q1FY20 Financial Highlights: CNR declared its quarterly results, wherein the company reported revenues of CAD 3,545 million, which remained flat when compared to the prior year period. Revenues benefitted from the acquisition of TransX within the domestic segment of the intermodal commodity group. Moreover, increase in freight rate, higher volumes of petroleum crude and higher shipments of Canadian grain further supported top line. However, lower volumes across all other commodities in March owing to the COVID-19 pandemic and illegal blockades in February remained a drag. Operating income stood at CAD 1,215 million, improved drastically from CAD 1,080 million in the previous corresponding quarter, thanks to lower labor costs. Besides, decline in depreciation and fuel expenses supported operating income further. Net income soared to CAD 1,011 million, from CAD 786 million in Q1FY19.Freight revenue per RTM stood higher at 5.87 cents, as compared to 5.78 cents in pcp. Freight revenue per carload was at CAD 2,565, higher than CAD 2,407 in Q1FY19. The company reported a higher free cash flow of CAD 573 million, as compared to CAD 286 million in Q2FY19.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: CNR stock has increased by ~10% in the last one month. The company has healthy first quarter financials despite challenges from illegal blockades and COVID-19 outbreak. CNR is focusing on reducing costs as the near-term outlook remains challenged. The company has a strong liquidity position and a relatively resilient business. Notably, CNR stock is trading at a higher valuation multiple when compared to peers.  However, the CNR’s premium valuation is justified as we believe, the company being an essential service provider and a leading player within the logistics segment is likely to gain significantly as and when demand picks up pace.  Hence, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 113.91 as on April 27, 2020.

CNR Daily Price Chart (Source: Thomson Reuters)

FirstService Corporation

Demand Slowdown to hit Top-line and Margins: FirstService Corporation (TSX: FSV) operates in the essential outsourced property services sector, serving its customers through two industry-leading service platforms, namely FirstService Residential and FirstService Brands. The Company caters to the North American market and manages thousands of residential communities, including high, medium and low-rise condominiums and co-operatives.

The group paid a quarterly dividend of US$ 0.165 per share, higher than US$ 0.15 per share on pcp. Meanwhile, the Company made a dividend distribution of US$ 6.22 million in FY19, higher than US$ 4.86 million in FY18.

Q1FY20 Financial Highlights: FirstService disclose its quarterly results, wherein the group reported stellar revenue growth at US$ 633.83 million, as compared to US$ 485.65 million in the prior year quarter. The increase was driven by solid organic growth coupled with a positive contribution from the Global Restoration acquisition. Operating earnings stood higher at US$ 15.98 million, grew from US$ 12.93 million in Q1FY19, thanks to the revenue growth. The Company reported a slump in its net earnings to US$ 5.78 million from US$ 8.14 million in Q1FY19 due to an abrupt increase in interest expense. The Company reported a stiff increase in its current portion of long-term debt at US$ 51.15 million, from US$ 5.54 million in FY19. Higher debt led to higher interest expenses, which adversely impacted the company’s bottom line. The Company exited the quarter with cash and cash equivalents of US$ 118.22 million while total assets stood at US$ 1,922.29 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The FSV stock corrected ~13% in the last nine months and currently trading at CAD 120.59 with a market capitalization of CAD 4.99 billion on 27 April 2020 market close. The company reported strong revenue growth in Q1FY20. However, weak short-term outlook played spoil sport. The company expects its sales and margins to take a hit and will remain low on count of COVID-19 outbreak. FSV’s Brands segment is likely to take a major hit with considerable decline in top and bottom line. Though the company is taking steps to reduce the impact of the pandemic on its financials, we believe it won’t be enough to safeguard the profitability. The stock is trading at a higher valuation multiple when compared to the industry average. We believe weak outlook exacerbated by increase in unemployment rate and high valuation could limit the upside in FSV stock. We recommend a ‘Watch’ stance on the stock at the current market price of CAD 120.59 as on April 27, 2020.

FSV One Year Price Performance (Source: Thomson Reuters)

Disclaimer

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