Canadian Railroads Stocks

Canadian National Railway Co Valuation – August 2018 $TSE:CNR

Company Profile (excerpt from Reuters): Canadian National Railway Company, incorporated on August 24, 1995, is engaged in the rail and related transportation business. The Company’s network of approximately 20,000 route miles of track spans Canada and mid-America, connecting approximately three coasts, including the Atlantic, the Pacific and the Gulf of Mexico and serving the cities and ports of Vancouver, Prince Rupert (British Columbia), Montreal, Halifax, New Orleans, and Mobile (Alabama), and the metropolitan areas of Toronto, Edmonton, Winnipeg, Calgary, Chicago, Memphis, Detroit, Duluth (Minnesota)/Superior (Wisconsin), and Jackson (Mississippi), with connections to all points in North America. The Company’s network and connections to all Class I railroads provide its customers access to the three North American Free Trade Agreement (NAFTA) nations. The Company carries over 300 million tons of cargo, serving exporters, importers, retailers, farmers and manufacturers. The Company’s freight includes seven commodity groups representing a portfolio of goods, including petroleum and chemicals, metals and minerals, forest products, coal, grain and fertilizers, intermodal and automotive.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of TSE-CNR – August 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $78,467,470,000 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.64 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 151.70% Pass
6. Moderate PEmg Ratio PEmg < 20 20.74 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 4.88 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 0.64 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -5.93 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $5.53
MG Growth Estimate 10.69%
MG Value $165.20
Opinion Undervalued
MG Grade C+
MG Value based on 3% Growth $80.19
MG Value based on 0% Growth $47.01
Market Implied Growth Rate 6.12%
Current Price $114.68
% of Intrinsic Value 69.42%

Canadian National Railway (USA) does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $3.23 in 2014 to an estimated $5.53 for 2018. This level of demonstrated earnings growth outpaces the market’s implied estimate of 6.12% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Canadian National Railway (USA) revealed the company was trading above its Graham Number of $52.54. The company pays a dividend of $1.65 per share, for a yield of 1.4% Its PEmg (price over earnings per share – ModernGraham) was 20.74, which was below the industry average of 21.35, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-26.51.

Canadian National Railway (USA) receives an average overall rating in the ModernGraham grading system, scoring a C+.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$26.51
Graham Number $52.54
PEmg 20.74
Current Ratio 0.64
PB Ratio 4.88
Current Dividend $1.65
Dividend Yield 1.44%
Number of Consecutive Years of Dividend Growth 20

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Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2018
Total Current Assets $2,842,000,000
Total Current Liabilities $4,430,000,000
Long-Term Debt $9,416,000,000
Total Assets $39,805,000,000
Intangible Assets $268,000,000
Total Liabilities $22,436,000,000
Shares Outstanding (Diluted Average) 739,100,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $5.47
Dec2017 $7.24
Dec2016 $4.67
Dec2015 $4.39
Dec2014 $3.85
Dec2013 $3.09
Dec2012 $3.06
Dec2011 $2.71
Dec2010 $2.24
Dec2009 $1.96
Dec2008 $1.98
Dec2007 $2.13
Dec2006 $1.96
Dec2005 $1.39
Dec2004 $1.09
Dec2003 $0.87
Dec2002 $0.66
Dec2001 $0.87
Dec2000 $0.78
Dec1999 $0.62
Dec1998 $0.24

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $5.53
Dec2017 $5.26
Dec2016 $4.11
Dec2015 $3.70
Dec2014 $3.23
Dec2013 $2.82
Dec2012 $2.58
Dec2011 $2.30
Dec2010 $2.08
Dec2009 $1.96
Dec2008 $1.87
Dec2007 $1.71
Dec2006 $1.40
Dec2005 $1.07
Dec2004 $0.90
Dec2003 $0.79
Dec2002 $0.71

Recommended Reading:

Other ModernGraham posts about the company

Canadian National Railway Co Valuation – Initial Valuation $TSE:CNR

Other ModernGraham posts about related companies

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Norfolk Southern Corp Valuation – April 2018-corrected
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Canadian Pacific Railway Ltd Valuation – Initial Coverage $TSE:CP
Canadian National Railway Co Valuation – Initial Valuation $TSE:CNR
Kansas City Southern Valuation – December 2016 $KSU
Norfolk Southern Corp Valuation – December 2016 $NSC
Norfolk Southern Corp Valuation – August 2016 $NSC

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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