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Canadian National Railway (CNI)

Canadian National Railway (CNI). Background. Founded in 1918 by the Canadian gov’t Deregulation of 1980 Headquartered in Montreal, Quebec Largest railway in Canada O nly Canadian transcontinental railroad ADR (denominated in CAD). Industry Overview.

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Canadian National Railway (CNI)

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  1. Canadian National Railway (CNI)

  2. Background • Founded in 1918 by the Canadian gov’t • Deregulation of 1980 • Headquartered in Montreal, Quebec • Largest railway in Canada • Only Canadian transcontinental railroad • ADR (denominated in CAD)

  3. Industry Overview • Railroads operate about 9% of overall U.S. Transportation Market • Rails and trucks have gained market share in last 30 years for freight

  4. Industry Overview • Railroads can be broken down by region • Class I railroads ship a mix of commodities which usually constitutes 50-60% of total carload • Rest is intermodal

  5. Business Model • Transport goods for profit • Must pay for creation and maintenance of tracks and trains • Geographic monopolies are common • Efficiency is a big revenue driver

  6. Commodity Mix

  7. Freight Mix

  8. Industry Performance • Market cap weighted Rail performance vs. XLI and the S&P 500

  9. Industry Overview • Tied to demand of products that a railroad hauls • High barriers to entry • High debt ratios • Very asset-intensive

  10. Industry Outlook • Gaining momentum over trucking on fuel prices and increases in efficiency • Pricing gains outpacing inflation • Tied to recovery in economy • High debt loads, can be affected by interest rates

  11. Industry Competitive Advantages • Incredibly asset-intensive (high barriers to entry) • Low geographic competition • Diversified by economic demand • Market share gains by industry give increased pricing power to rail freight companies • 20-25x trucking’s fuel efficiency

  12. Industry Competitive Disadvantages • Geographic limitations (U.S. map, overseas growth difficult) • Capital structure makes it difficult to generate free cash flows • Low scalability (50-60% of CapEx goes to maintenance of tracks and rail cars)

  13. CNI Highlights • Market Cap: 38.53Bn • Trading around $89.30 (11/28) • Beta: 0.99 • TTM EPS: 6.06 • 1.69% Dividend Yield • P/E: 14.73

  14. CNI Freight mix

  15. CNI Performance • Performed about in line with its peers on the 1y • Outperforming XLI

  16. CNI Competitive Advantages • Best in class operating ratio and average velocity • Sets the railroad standard for efficiency • Has implemented programs that encourages customers to operate more fluidly and charges customers for delays to improve efficiency • Using its advantages to focus on top-line growth

  17. Competitive Advantages • Industry-best RoA, RoE, TTM Sales Growth

  18. Competitive Advantages • Trading around the industry P/E ratio despite very strong competitive advantages and higher profitability

  19. Current Initiatives • Moving away from cyclical commodities • Thermal coal phased out (metallurgical coal => offshore markets/steel production) • Moving crude oil by rail from pipeline constraints • “Precision” Railroad, 7 days/week • Prince Rupert

  20. Growth opportunities • Larger mix of forest products and metals than competition ties CNI more to housing market • Industry EV/EBITDA multiples are trading at about a 15% discount to the S&P • One of highest industry FCF (w/ positive momentum) allows CNI to grow faster and return profits to shareholders

  21. Housing Market • Carloads tied to housing market represents 14% of revenues (down from 25% in 2006), significant upside potential

  22. Growth opportunities • Management increasing less cyclical intermodal % of revenues • Share buyback program initiated Oct. 22 to buy 3.6% of o/s shares over next 12 months • One of highest credit rating among peers allows the company to take out debt more freely

  23. Risks • Denominated in CAD so a strong depreciation in the CAD could hurt actual returns • Some commodity markets unstable, underinvested in coal • Heavy reinvestment requirements

  24. Investment Conditions • Investment horizon 18 months - 2 years • Sell off @ 20% adjusted earnings (~$105 PT) • Sell if housing starts don’t break 1 million by December 2013 (assuming unchanged (+/-5%) revenue mix) • Watch for disruptive weather in railroad’s areas

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