Canadian National Railway (CNI)

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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. - PowerPoint PPT Presentation

Text of Canadian National Railway (CNI)

Canadian National Railway (CNI)

Canadian National Railway (CNI)BackgroundFounded in 1918 by the Canadian govtDeregulation of 1980Headquartered in Montreal, QuebecLargest railway in Canada Only Canadian transcontinental railroadADR (denominated in CAD)

Industry OverviewRailroads operate about 9% of overall U.S. Transportation MarketRails and trucks have gained market share in last 30 years for freight

Industry OverviewRailroads can be broken down by regionClass I railroads ship a mix of commodities which usually constitutes 50-60% of total carloadRest is intermodal

Business ModelTransport goods for profitMust pay for creation and maintenance of tracks and trainsGeographic monopolies are commonEfficiency is a big revenue driver

Commodity MixFreight MixIndustry PerformanceMarket cap weighted Rail performance vs. XLI and the S&P 500

Industry OverviewTied to demand of products that a railroad haulsHigh barriers to entryHigh debt ratiosVery asset-intensive

Industry OutlookGaining momentum over trucking on fuel prices and increases in efficiencyPricing gains outpacing inflationTied to recovery in economyHigh debt loads, can be affected by interest rates

Industry Competitive Advantages Incredibly asset-intensive (high barriers to entry)Low geographic competitionDiversified by economic demandMarket share gains by industry give increased pricing power to rail freight companies20-25x truckings fuel efficiency

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

CNI HighlightsMarket Cap: 38.53BnTrading around $89.30 (11/28)Beta: 0.99TTM EPS: 6.061.69% Dividend YieldP/E: 14.73CNI Freight mix9.3125. Performance

Performed about in line with its peers on the 1yOutperforming XLICNI Competitive AdvantagesBest in class operating ratio and average velocitySets the railroad standard for efficiencyHas implemented programs that encourages customers to operate more fluidly and charges customers for delays to improve efficiencyUsing its advantages to focus on top-line growth

Competitive AdvantagesIndustry-best RoA, RoE, TTM Sales Growth

Competitive AdvantagesTrading around the industry P/E ratio despite very strong competitive advantages and higher profitability

Current InitiativesMoving away from cyclical commoditiesThermal coal phased out (metallurgical coal => offshore markets/steel production)Moving crude oil by rail from pipeline constraintsPrecision Railroad, 7 days/weekPrince Rupert

Crude Oil Carloads2011 5,000 2012 (e) 30,000 2013 (e) 60,000 Growth opportunitiesLarger mix of forest products and metals than competition ties CNI more to housing marketIndustry EV/EBITDA multiples are trading at about a 15% discount to the S&POne of highest industry FCF (w/ positive momentum) allows CNI to grow faster and return profits to shareholdersHousing MarketCarloads tied to housing market represents 14% of revenues (down from 25% in 2006), significant upside potential

Growth opportunitiesManagement increasing less cyclical intermodal % of revenuesShare buyback program initiated Oct. 22 to buy 3.6% of o/s shares over next 12 monthsOne of highest credit rating among peers allows the company to take out debt more freely

RisksDenominated in CAD so a strong depreciation in the CAD could hurt actual returnsSome commodity markets unstable, underinvested in coalHeavy reinvestment requirementsInvestment ConditionsInvestment horizon 18 months - 2 yearsSell off @ 20% adjusted earnings (~$105 PT)Sell if housing starts dont break 1 million by December 2013 (assuming unchanged (+/-5%) revenue mix)Watch for disruptive weather in railroads areas