canadian national railway (cni). background founded in 1918 by the canadian gov’t deregulation of...
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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 • Only Canadian transcontinental railroad• ADR (denominated in CAD)
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
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
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
Commodity Mix
North American Railroads
Agriculture (%)
Chemicals (%)
Coal (%)
Forest Products (%)
Metals (%)
Automotive (%)
Minerals (%)
Other (%)
Freight Mix
North American Railroads
Total Commodity Carloads (%)Total Intermodal Unit Volume (%)
Industry Performance
• Market cap weighted Rail performance vs. XLI and the S&P 500
Industry Overview• Tied to demand of products that a railroad hauls• High barriers to entry• High debt ratios• Very asset-intensive
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
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
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)
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
CNI Freight mix
Agriculture (%)
Chemicals (%)
Coal (%)
Forest Products (%)
Metals (%)
Automotive (%)
Minerals (%)
Other (%)
Intermodal Containers (%)
Intermodal Trailers (%)
9.3
12
5.1
8.2
18.6
4.1
4.6
1.1
36
0.9
CNI Performance• Performed about in line with its peers on the 1y• Outperforming XLI
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
Competitive Advantages• Industry-best RoA, RoE, TTM Sales Growth
Competitive Advantages• Trading around the industry P/E ratio despite very strong
competitive advantages and higher profitability
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 Crude Oil Carloads
2011 5,000
2012 (e) 30,000
2013 (e) 60,000
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
Housing Market• Carloads tied to housing market represents 14% of revenues
(down from 25% in 2006), significant upside potential
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
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
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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