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CN moves ahead with improved efficiency, lower Canadian dollar

Canadian stocks

CANADIAN NATIONAL RAILWAY CO. (Toronto symbol CNR; operates Canada’s largest railway. Its 32,350-kilometre network stretches across the country and through the U.S. Midwest to the Gulf of Mexico.

Thanks to strong shipping volumes in the wake of the recession, CN’s revenue rose 43.5%, from $7.4 billion in 2009 to $10.6 billion in 2013.

Earnings jumped 68.4%, from $1.5 billion to $2.6 billion; while per-share earnings rose 88.9%, from $1.62 to $3.06, on fewer shares outstanding (all per-share amounts adjusted for a 2-for-1 stock split in November 2013).

CN’s improved efficiency is a major reason for its earnings growth. Thanks to faster trains and reduced waiting times at transfer terminals, the company’s operating ratio improved from 66.7% in 2009 to 62.9% in 2012 (Operating ratio is calculated by dividing a company’s regular operating costs by its revenue. The lower the ratio, the better.) Its operating ratio worsened to 63.4% in 2013 due to higher labour costs and weather-related delays.

The company is also benefiting as a lack of pipeline capacity forces more North American oil producers to ship crude by train. In 2013, CN’s revenue from hauling oil and related chemicals rose 18.2%.

In response to the July 2013 explosion of a train hauling crude oil in Lac-Mégantic, Quebec, Ottawa has announced plans to phase out older DOT-111 tanker cars over the next three years. It will also lower train speed limits in built-up areas.

Canadian stocks: New safety rules to have little impact on CN’s costs

Oil producers, not railways, own most tanker cars, so the new rules will have little impact on CN’s costs. The slower speeds may affect the company’s efficiency, but they will apply to all railways.

Meanwhile, CN continues to improve safety with better tracks and sensors. In 2014, it plans to spend $2.25 billion on new equipment, which includes $1.2 billion for safety-related upgrades. This year’s spending is also up 12.5% from the $2.0 billion CN spent upgrading its gear in 2013.

As of March 31, 2014, the company’s long-term debt was $7.3 billion, or 14% of its market cap. It also held cash of $198 million.

The company gets 80% of its revenue from the U.S., cross-border traffic and overseas clients, so it gains from the lower Canadian dollar. The $1.00 dividend yields 1.6%.

In the latest edition of The Successful Investor, we look at CN’s earnings outlook and see if higher shipping revenue and the lower Canadian dollar can offset higher spending on safety and equipment. We conclude with our clear buy-sell-hold advice on the stock.

(Note: If you are a current subscriber to The Successful Investor, please click here to view Pat’s recommendation in the latest issue. Be sure to log in first.)

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COMMENTS PLEASE—Share your investment knowledge and opinions with fellow members

Between Canada’s two railway giants, do you have a preference between Canadian Pacific and Canadian National? Or do you own both stocks? What is the main advantage you get from CN and CP as an investor? Do you see any big drawbacks with these railway stocks?


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