Writing about Canadian National RailwaySome one asked me to write why I like CNI, also I don't like the other idea I wrote about the company, I felt like I could do a lot better. I am in the mood to write tonight and feel like this is a great time for me to explain why I like CNI. First and foremost, I like undervalued companies on a technical and fundamental level CNI is significantly undervalued at the time of this writing. As you can see by the technical analysis we are sitting at an area of support characterized by the trendline, and to reinforce the technical analysis I have measured a move using the Fibonacci retracement tool.
Talking about the fundamentals, I have calculated both the discounted cash flow, and the dividend discount models of intrinsic value. According to my calculations the price of the stock right now at $93 is undervalued based on the future revenues the company will be expected to generate. The dividend discount model also suggests undervaluation based on the expected dividend payments over the next 5 years. I always calculate a minimum of 5 years into the future. According to my calculations it is reasonable to assume the intrinsic value for CNI to be somewhere near the $115 mark. This leaves me a substantial margin of safety to buy shares at these levels.
Some more reasons I like the company goes beyond the actual price of the stock. One reason I like the company is because it is a very capital intensive business model with a wide economic moat. The massive investment for building tracks, bridges and tunnels creates an almost impossible barrier for new competitors to overcome. These high costs mean there are very few major railroads, often leaving each with a monopoly or duopoly in certain regions, which gives them pricing power.
When I was building my portfolio at first, I didn't really care about the environmental impact companies had on our planet, but eventually as I learned more it started to become important to me to invest in companies I think were good for the planet. Railroads are significantly more fuel-efficient than trucking, especially when hauling heavy goods long distances. This efficiency leads to lower greenhouse gas emissions, which benefits society as a whole.
The company is the largest rail network in Canada and the only North American railway connecting the Atlantic, Pacific, and Gulf Coasts, giving it a dominant position on the continent. Finally, Canadian National has consistently increased its dividend for 20 consecutive years and currently yields nearly 2.7%. Its relatively low payout ratio of 48% suggests its track record of payout increases will likely continue. I think CNI is a great company and I have been using the stock as a defensive/safe haven type of position in my portfolio.
