Canadian National Railway Comp. (TSX: CNR) is a true backbone of the economy whose team of approximately 24,000 railroaders transports more than CAD 250 billion worth of goods annually for a wide range of business sectors, ranging from resource products to manufactured products to consumer goods, across a rail network of approximately 20,000 route-miles spanning Canada and mid-America.

Key highlights

• Reaffirming 2021 financial outlook: based on High single-digit volume growth in terms of RTMs and overall pricing above rail inflation at a minimum, the company is targeting double-digit adjusted diluted EPS growth versus 2020 adjusted diluted EPS of CAD 5.31 along a free cash flow in the range of CAD 3.0 – CAD 3.3 billion, is appreciable.

• Rising revenue ton miles (RTMs): RTMs, measuring the weight and distance of freight transported by the company, increased by 13% from the year-earlier period. Freight revenue per RTM increased by one per cent over the year-earlier period, mainly driven by freight rate increases; partly offset by the negative translation impact of a stronger Canadian dollar.

• Merger with Kansas City Southern to support future growth: The business has announced its desire to merge with Kansas City Southern for a price of CAD 33.6 billion. The business would gain an industry-leading growth profile by linking to North America's industrial corridor as a result of the aforementioned partnership. Furthermore, the above would open up new opportunities for shippers and assist the company's future growth possibilities.
  

Financial overview of Q2 2021

Source: Company

• In Q2 2021, the company posted revenue of CAD 3,598 million against CAD 3,209 million in the previous corresponding period. The increase in the revenue by 12% was mainly due to higher volumes across most commodity groups due to the continued economic recovery and freight rate increases.
• Even after the higher labor and fringe benefits and higher fuel cost the company marked the quarter with decrease in its total operating expenses at CAD 2,216 million compared to CAD 2,424 million in pcp.
• As a result of higher revenue and lower operating expenses, the company’s operating income stood at CAD 1,382 million, much higher compared to CAD 785 million in pcp.
• Net income in the reported period also inched up to CAD 1,034 million against CAD 545 million in pcp.
  

Risks associated with investment

The company's performance is affected by a number of factors, including the onset of the second wave of the COVID-19 epidemic, as well as general economic and commercial conditions. It's also vulnerable to changes in inflation, currency, and interest rates, as well as fuel prices which could impact its financials and cash flows. 

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

The company continued to deliver strong operating and financial performance in the second quarter, driven in 13% increase in revenue ton miles (RTMs) year-over-year and volume growth in virtually every business unit, with notable strength in industrial products, international and domestic intermodal, and propane. Moreover, the recent collaboration with Kansas would create an express route that connects the U.S., Mexico and Canada and would offer hassle-free services to the end consumers through single-operator service. Additionally, the company would retain access to all existing gateways, which would further boost the route choices and ensure robust price competition. Also, the company is targeting double-digit adjusted diluted EPS growth versus 2020 adjusted diluted EPS of CAD 5.31 along a free cash flow in the range of CAD 3.0 – CAD 3.3 billion, which is appreciable. Therefore, based on the above rationale and valuation, we recommend a “Hold” rating on the stock at the closing price of CAD 135.90 on August 09, 2021. We have considered Canadian Pacific Railway Ltd, Norfolk Southern Corp, Union Pacific Corp, etc. as the peer group for the comparison.

One-Year Technical Price Chart (as on August 09, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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