Canadian National Railway Company

CN Propane Supply Chain Sets New Record: Canadian National Railway Company (TSX: CNR) spans Canada from coast to coast and extends through Chicago to the Gulf of Mexico. As on 19 June 2020, the market capitalization of the company stood at CAD84.61 billion. The company has announced that three vessels carrying Canadian propane for international markets have beaten the previous record by 50%. Despite delays in the wet weather, the company moved over 2.52 MMT of western Canadian grain, up from May record of 2.40 MMT.  

Solid First Quarter Results: During the first quarter ended 31 March 2020, the company demonstrated strength and overcame difficult situations. During the quarter, revenues of the company remained flat and stood at CAD3,545 million. In the same time span, operating ratio of the company stood at 65.7%, reflecting an improvement of 3.8 points on the pcp and operating income went up by 13% to CAD1,215 million. The company’s strong investment-grade credit rating has proven its strategic value, providing CNR with robust low-cost liquidity. Despite the significant headwinds, the company is committed to maintain its dividend increase of 7%.

Quarterly Financial Highlights (Source: Company Reports)

Future Expectations: CNR has a solid track record of resiliency in periods of economic weakness. Despite the significant headwinds from the outbreak of the COVID-19, the company is still working to generate a minimum of ~CAD2.5 billion of free cash flow. It plans to invest CAD2.9 billion in its capital program.

Key Risks: The performance of the company is subject to uncertainties, primarily from the outbreak of a 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 Valuation (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 has quickly recovered from the disruptions because of COVID-19 and is set to realize the benefits from the 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. The stock of CNR gave a return of 13.67% in the past three months and a return of 4.94% in the last one month. 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 single-digit (in percentage terms). For the said purposes, we have considered Canadian Pacific Railway Ltd, Union Pacific Corp and CH Robinson Worldwide Inc 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 CAD118.98, down by 1.5718% on 19 June 2020.

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

Canadian Pacific Railway Limited

CP completes acquisition of Central Maine & Quebec Railway: 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 19 June 2020, the market capitalization of the company stood at CAD47 billion. The company has acquired Central Maine & Quebec Railway Canada Inc., completing the entire CMQ network. With the acquisition, the company is now a 13,000-mile rail network.

Record First-Quarter Revenues and Record-Low Q1 Operating Ratio: During the first quarter, the company reported impressive results with an increase of 16% in revenues to record CAD2.04 billion. In the same time span, operating ratio improved 1,010 basis points to a record 59.2% and operating income increased 54% to CAD834 million. The company is in a strong position from both a balance sheet and liquidity perspective.

Quarterly Financial Highlights (Source: Company Reports)

What to Expect: CP remains well-positioned to weather the storm of the global pandemic. As a result of the ongoing impacts of the COVID-19 pandemic to business operations and the broader macroeconomy, CP expects a lower volume to be down mid-single digits and a flat EPS on a year over year basis. It is likely to incur capital expenditure of CAD1.6 billion.

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 Valuation (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 company is in a strong position to navigate through this extraordinary period. The stock of CP gave a return of 4.7% on the YTD basis and a return of 7.32% in the last one month. The stock is also trading close to its 52-weeks high level of CAD346.58 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 our investors to keep an eye on the business activities and suggest a watch stance on the stock at the closing market price of CAD346.58, down by 0.6792% on 19 June 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.