A CN engine and railcars with containers sit near the Roberts bank Super Port, in Delta, B.C., August, 2024.DON MACKINNON/AFP/Getty Images
Investors who have been clinging to Canadian National Railway Co. have endured a nerve-rattling ride over the past two years, as brief rallies fail to lift the share price out of a demoralizing funk.
The best approach from here: Check those nerves and hold on.
I know I am. Full disclosure: I bought shares a year ago, then doubled down on the premise that a beaten-up railway stock was a good railway stock.
Does Wednesday’s 6-per-cent slump, which followed disappointing first quarter financial results, change that approach?
As any fan of the rails will tell you, there aren’t many of them. Railways can compete effectively against other haulers, such as trucks. And they offer a fine bet on economic activity and trade, illustrated by their strong performance over the long term.
Warren Buffett made the case for rails in 2009, after Berkshire Hathaway Inc. – the company he led until retiring at the end of last year – announced a deal to buy full control of Burlington Northern Santa Fe Corp., now BNSF Railway.
Okay, that deal pivoted partly on Mr. Buffett’s belief that the U.S. economy would recover from the financial crisis that walloped it in 2008.
Today, the challenges facing CNR are considerably different.
Its growth prospects have appeared blunted ever since rival Canadian Pacific acquired Kansas City Southern in 2023 to form Canadian Pacific Kansas City – offering customers one expansive network through Canada, the United States and Mexico.
Union Pacific Corp. and Norfolk Southern Corp. have also agreed to merge, pending regulatory approval, leaving CNR that rare rail stock without the support of a takeover premium.
What’s more, CNR is sensitive to economic activity and consumer spending, where confidence has been faltering over the past couple of years.
Under U.S. President Donald Trump’s protectionist policies and high tariffs, trade is no longer a sure thing. His war against Iran this year has contributed to soaring oil prices and further economic dislocation, which has made it difficult for corporate executives to make accurate forecasts.
“If you can give me a high confidence level about how long the Middle East situation is going to last and how long oil prices are going to be high, I might be able to give you a better sense of volume,” Janet Drysdale, CNR’s chief commercial officer, said during a conference call with analysts this week.
No wonder CNR’s share price has been bouncing around.
For a stock that has been widely embraced as a stand-out bargain, CNR hasn’t delivered. Though off its lows last summer, the share price is down 17 per cent over the past two years, as of Thursday.
The stock has trailed the S&P/TSX Composite Index by about 22 percentage points over the past 12 months.
But Warren Buffett wannabes should not despair: CNR still stands out as an attractive opportunity with a lot of upside.
It remains inexpensive next to peers, with a price-to-earnings ratio of 18 (based on estimated earnings from analysts), according to S&P Global Market Intelligence. Canadian Pacific Kansas City, or CPKC, trades at 22-times earnings, and CSX Corp. at 23-times earnings.
This discount is unusual, given that CNR has historically traded at a slight premium next to peers.
Patient investors should be rewarded with a rising valuation, as headwinds related to the weaker U.S. dollar, rising fuel prices and a renegotiated North American trade agreement give way to improving performance.
“Capital intensity is resetting lower, while benefits from recent investments are beginning to emerge,” Will Guy, an analyst at Veritas Investment Research, said in an e-mail.
Railway-specific performance metrics, such as car velocity and gross ton-miles per train and engine, moved in the right direction in the first quarter. They point to better productivity and a smoother-running network, underscoring a turnaround story that has plenty of room to run.
“Our thesis” – CNR is his top pick among industrial stocks – “rests on evidence of underlying operational and commercial momentum, even if near-term noise challenges headline figures,” Mr. Guy said.
The geopolitical backdrop isn’t great. Escalating tensions in the Middle East, high energy prices and a continuing trade conflict with the United States could weigh on CNR in the near term.
But you don’t have to be a crazy optimist to bet that these threats could subside this year. A lot of bad news is already priced into CNR’s share price. The volatile share price suggests that the good news isn’t.