Canadian National Railway (CN)

Canadian National Railway (CN) is a cornerstone of the North American economy, a transportation and logistics titan whose rail network acts as the continent's circulatory system. Its vast, 20,000-mile track network is unique, being the only one connecting the Atlantic, Pacific, and Gulf of Mexico coasts. Think of CN not just as a train company, but as a vital economic artery, shipping a highly diversified mix of goods essential for daily life and industry. This includes everything from the grain in your bread and the lumber for new homes to consumer goods packed in Intermodal containers and the petroleum that fuels our cars. For an investor, CN represents a business that is deeply embedded in the fabric of modern commerce. Its operations are critical, its scale is immense, and its services are indispensable for countless businesses, making it a classic example of a wide-moat enterprise.

From a value investing perspective, CN checks many of the most important boxes. Its business model is built on long-term, durable competitive advantages that are exceptionally difficult for any competitor to replicate.

The most compelling feature of CN is its massive Economic Moat. Building a competing transcontinental railroad today is practically impossible. The sheer cost, the nightmare of acquiring the necessary land, and the labyrinth of regulatory hurdles create Barriers to Entry that are, for all intents and purposes, absolute. This has resulted in a natural duopoly in Canada, with CN's primary rival being Canadian Pacific Kansas City (CPKC). This lack of intense competition grants CN significant operational stability and predictability. Furthermore, its exclusive access to certain ports and industrial regions creates a powerful network effect—the more places the railway connects, the more valuable it becomes to its customers, reinforcing its dominant market position.

CN has a long-standing reputation for being one of the most efficient railroads in the industry. A key metric for measuring this efficiency is the Operating Ratio (OR), which calculates operating expenses as a percentage of revenue. A lower OR is better, as it signals that a company is keeping a larger portion of each dollar it earns. CN has consistently maintained one of the best ORs in the sector, a legacy of its pioneering focus on “precision scheduled railroading.” This operational philosophy, which optimizes train schedules, asset utilization, and network fluidity, was championed by legendary railroad executive Hunter Harrison. For investors, this relentless focus on efficiency translates directly into higher Profit Margins and a resilient business that can weather economic downturns more effectively than its less-efficient peers.

CN's powerful moat and essential role in the supply chain give it significant Pricing Power. A farmer in Western Canada or a chemical manufacturer in the U.S. Midwest often has no cost-effective alternative for shipping bulk goods over long distances. This allows CN to implement annual price increases that typically meet or exceed the rate of Inflation. This makes the company an excellent long-term hedge against the corrosive effects of rising prices, as its revenues and profits can grow in lockstep with the general price level in the economy.

No investment is without risk, and even a fortress-like business like CN has its vulnerabilities.

• Economic Sensitivity: As a shipper of goods, CN's fortunes are tied to the health of the broader economy. During a Recession, manufacturing slows, consumer demand wanes, and construction projects are delayed, all of which lead to lower shipping volumes and reduced revenue.
• Commodity Exposure: A significant portion of CN's revenue comes from hauling bulk commodities like grain, coal, potash, and oil. Sharp declines in the price or demand for these materials can negatively impact specific segments of its business.
• Regulatory & Labor Risks: Railroads are heavily regulated and highly unionized industries. The potential for new, costly safety regulations or disruptive labor disputes resulting in strikes is a constant risk factor that can impact operations and profitability.

When analyzing CN, a prudent investor should focus on the following key areas:

1. Profitability and Returns: Look for a history of strong and consistent Return on Invested Capital (ROIC). This metric shows how effectively management is deploying its capital to generate profits. A high and stable ROIC is the hallmark of a superior business.
2. Capital Allocation: Examine how the company uses its free cash flow. A healthy balance of reinvesting in the business (capital expenditures), paying sustainable Dividends, and executing disciplined Share Buybacks is a sign of a shareholder-friendly management team.
3. Valuation: The golden rule of value investing is: “Price is what you pay; value is what you get.” Even the world's best company can be a poor investment if you overpay. A great business like CN rarely goes on sale, but market panics and economic downturns can create attractive entry points. Use valuation metrics like the Price-to-Earnings (P/E) Ratio or a Discounted Cash Flow (DCF) model to estimate the company's Intrinsic Value and wait for an opportunity to buy at a reasonable price.