Canadian National Railway Company

CN to Purchase 1,500 New Hopper Railcars in North America: Canadian National Railway Company (TSX: CNR) spans Canada from coast to coast and extends through Chicago to the Gulf of Mexico. As on 28 July 2020, the market capitalization of the company stood at ~CAD 91.30 billion. The company plans to acquire 1,500 new generation, high-capacity, grain hopper cars with delivery starting in January of 2021. These new railcars will encourage economic recovery through job creation in the North American manufacturing sector and help CN continue to meet the growing needs of grain farmers and grain customers.

CN Investing USD 165 Million in Illinois: The company has recently announced that it is planning to invest ~USD 165 million across Illinois in 2020. The investments will focus on the renewal of Chicago St Charles Airline Bridge and the replacement of rail and ties and maintenance of bridges, level crossings, culverts, signal systems and other track infrastructure.

Quarterly Performance (For the Period Ended 30 June 2020): During the second quarter ended 30 June 2020, the company reported a decrease of 19% in revenue to CAD 3,209 million and a significant decline of 59% in diluted EPS to CAD 0.77. The decrease in results was mainly due to lower volumes across most commodity groups caused by the COVID-19 pandemic and lower applicable fuel surcharge rates. In the same time span, the company reported an increase of 18 points in the operating ratio of 75.5% but a decrease in operating income by 53% to CAD 785 million. During the quarter, the company reported a substantial increase of CAD 495 million in free cash flows to CAD 1,008 million. The company retains a stable outlook as evident by the credit rating of A2 from Moody’s.

Quarterly Financial Highlights (Source: Company Reports)

Key Risks: The performance of the company is subject to uncertainties, primarily from the outbreak of contagious illness, general economic and business conditions. It is also exposed to inflation, currency and interest rate fluctuations and changes in fuel prices.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Approach (Illustrative)

Price to Cash Flow Multiple Based Relative Approach (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company is recovering from the disruptions caused by COVID-19 and is on track to benefit from the upcoming growth opportunities. CNR has been at the forefront of innovation and is identifying new supply chains with the expansion of the country’s trade with international markets. We have valued the stock using the price to cash flow multiple based illustrative relative valuation and have arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have considered Canadian Pacific Railway Ltd, Union Pacific Corp, Norfolk Southern Corp, etc., as peers. The stock is moving close to its 52-weeks’ high level but holds the potential for growth. Considering the current trading levels, decent returns in the past one month, and track record of the business’s resilience during economic weakness, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 128.38, down by 0.8266% on 28 July 2020.

CNR Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Canadian Pacific Railway Limited

Resilience of PSR Operating Model: Canadian Pacific Railway Limited (TSX: CP) is a railroad company operating on 12,500 miles of track across Canada and into parts of the Midwestern and Northeastern United States. As on 28 July 2020, the market capitalization of the company stood at ~CAD 49.73 billion.

Quarterly Performance (For the Period Ended 30 June 2020): During the second quarter ended 30 June 2020, the company showed resilience in performance and has risen to the occasion despite the uncertainty surrounding the COVID-19 pandemic. During the quarter, revenues of the company stood at CAD 1.98 billion, reflecting a decline of 9% on the pcp and diluted EPS was CAD 4.66. In the same time span, operating ratio reported an increase of 140 basis points and a second-quarter record of 57%. Additionally, CP announced an increase in the quarterly dividend to shareholders to CAD 0.95 per share on its outstanding common shares, reflecting an increase of ~15% to the previous quarterly dividend of CAD 0.83 per share.

Quarterly Performance (Source: Company Reports)

What to Expect: CP seems to be well-positioned to weather the storm of the global pandemic. Based on the strength of the company's performance to date, CP expects growth in adjusted diluted EPS. It also anticipates capital expenditures of ~CAD 1.6 billion and a mid-single-digit decline in revenue ton-miles.

Key Risks: The company inherent certain risks and uncertainties that could cause actual results to differ from the forecasted results. These include risks associated with agricultural production, such as weather conditions and insect populations; the availability and price of energy commodities; and the effects of competition and pricing pressures.

Valuation Methodology: Price to Earnings Multiple Based Relative Approach (Illustrative)

Price to Earnings Multiple Based Relative Approach (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Despite the current market condition, CP continues to benefit from exemplary leadership and support long-term shareholder returns. The stock of CP gave a return of 10.85% on the YTD basis and a return of 8.02% in the last one month. The stock is also trading close to its 52-weeks high level of CAD 376 and thus seems overvalued. We have valued the stock using the price to earnings multiple based illustrative relative valuation and have arrived at a downside of lower single-digit (in percentage terms). Considering the current trading levels, returns in the past three months, risks from the global pandemic and expected decline in volumes, we recommend investors to keep an eye on the business activities and suggest a watch stance on the stock at the closing market price of CAD 366.96, down by 0.8216% on 28 July 2020.

CP Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.