Key Takeaways for CN Rail Stock:
- Retail volumes are down and imports are sluggish
- Industrial side of CN’s business remains positive
- Keep an eye out for economic risks ahead as CN is intertwined with many sectors
Andrew Willis: Over one year ago, we were remarking that with the demand for consumer goods and inflation, CN Rail stock (CNR) still did well as the company simply passed along price increases to customers. All while remaining the cheapest way to ship something by land.
But we also worried that these advantages might mean less for CN investors when volume falls. And after two months of inflation subsiding in Canada, we’re starting to see less being shipped at CN Rail – and less cash from fuel surcharges to help cover rising diesel costs.
CN Rail Stock Revenue Down
With 2nd quarter revenue down 9% year over year, senior equity analyst Matthew Young says volume declines were greater than expected and rooted in retailers moving more slowly these days to restock their inventory. Import levels are also down, and headwinds also include network disruptions from Canadian wildfires and strikes at Canadian ports.
For CN Rail stock investors, it may seem like you’re about to experience the downside of holding a wide-moat stock with exposure from coast to coast. And that may be true if we enter a recession and there’s less being shipped. But in that case, it’s worth looking at the big picture as being intertwined with the state of an economy isn’t necessarily a bad thing.
In addition to retail demand, consider the industrial sector. We note that this quarter several bulk categories remained positive, including metals and minerals, coal, Canadian grain and even automotive as new vehicle production ramps up. We’ll be tempering our 2023 revenue projections, but we don’t expect to materially alter our fair value estimate as CN Rail is still managing to find shippers to pay a fare.
For Morningstar, I’m Andrew Willis
CN Rail Bulls Say
- Under the guidance of railroading veteran and new COO Ed Harris, we suspect CN will reinvigorate its precision railroading roots in the year ahead.
- CN's exclusive access to the port of Prince Rupert should continue to support long-term growth opportunities for international intermodal business.
- Compared with trucking, shipping by rail is less expensive for long distances, is 4-5 times more fuel-efficient per ton-mile shipped, and generally has ample capacity.
CN Rail Bears Say
- Muted volume growth, wage inflation, and normalizing yields will make OR improvement more challenging in 2023, despite hiring progress and better network fluidity.
- Terminal congestion has diminished, but normalizing rates in the competing truckload sector and sluggish retail-sector restocking will temper intermodal demand in 2023.
- The STB oversees railroads’ pricing in the U.S., so there will always be underlying risk of reregulation in terms of a policy shift to a more heavy-handed approach.
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