Canadian National Railway (CNI)

Canadian National Railway (CNI) (also known as CN) is a titan of the tracks, one of North America's leading transportation and logistics companies. As a Class I freight railway, its primary business is moving the raw materials, intermediate goods, and finished products that power the continent's economy. Imagine a vast steel artery system, and you're thinking of CN. Its sprawling network of nearly 20,000 route-miles is unique, as it's the only railway connecting the Pacific and Atlantic oceans in Canada with the Gulf of Mexico in the United States. This strategic footprint allows it to transport a highly diversified mix of cargo, from grain and coal to cars and consumer goods. For investors, CN represents more than just a train company; it's a proxy for the health of the North American economy and a classic example of a business with formidable, long-lasting competitive advantages.

CN's story is a fascinating journey from a government-owned “Crown corporation” to a publicly traded, profit-driven powerhouse following its privatization in 1995. This transformation unleashed a culture of efficiency and customer focus that continues today. The company's true crown jewel is its network. Think of it as irreplaceable real estate. This network isn't just about connecting Point A to Point B; it's about providing exclusive access to key ports, industrial centers, and resource-rich regions across the continent.

For value investors, the most compelling aspect of CN is its deep and wide economic moat—a term popularized by Warren Buffett to describe a company's sustainable competitive advantages. CN's moat is built on two massive pillars:

• High Barriers to Entry: Could you build a new 20,000-mile railway across North America today? The answer is a resounding no. The cost of acquiring the land, navigating environmental regulations, and laying the track would be astronomical, making it virtually impossible for a new competitor to emerge. This creates a natural duopoly or oligopoly in most of the markets it serves, with its primary rival being Canadian Pacific Kansas City (CPKC).
• Efficient Scale and Network Effects: CN's extensive network provides it with an advantage of scale. As the sole railway connecting three coasts, it offers a seamless, single-line service that competitors cannot easily replicate. This creates a powerful network effect: the more customers and destinations on the network, the more valuable the network becomes to every user.

Understanding CN's moat is key, but why does it translate into a potentially great long-term investment? It boils down to the fundamental characteristics of the business.

Railways are the workhorses of the economy. They move the essential stuff—the grain for our food, the lumber for our homes, and the chemicals for our industries. While freight volumes can dip during a recession, the fundamental need for these goods doesn't disappear. This makes CN's revenue streams remarkably resilient over the long term compared to companies that sell discretionary, or “want-to-have,” products.

Thanks to its limited competition and the essential nature of its service, CN enjoys significant pricing power. It can regularly increase prices, often above the rate of inflation, helping to protect its profit margins from rising costs like labor and fuel. Management's relentless focus is on operational efficiency, which is a key metric in the rail industry. This is measured by the operating ratio (OR), which is simply operating expenses divided by revenue. A lower OR means the company is more profitable. For decades, CN has been a leader in maintaining a low and industry-leading OR, demonstrating its ability to run a tight ship.

A mature, profitable business like CN generates a mountain of cash. How it uses that cash is critical for shareholders. CN's management has a long track record of smart capital allocation. This includes:

1. Reinvesting in the business: A significant portion of cash is used for capital expenditures (CapEx) to maintain and upgrade tracks, locomotives, and technology to keep the network safe and efficient.
2. Rewarding shareholders: The remaining cash is consistently returned to owners through a combination of steadily growing dividends and opportunistic share buybacks, which reduce the number of shares outstanding and increase the value of the remaining ones.

No investment is without risk, and it's crucial to see both sides of the track. For CN, investors should keep an eye on a few key areas:

• Economic Sensitivity: While resilient, CN is not immune to the business cycle. A deep and prolonged recession would lead to lower shipping volumes and impact earnings.
• Regulatory and Political Risk: As a critical piece of national infrastructure, railways operate under the watchful eye of governments in both the U.S. and Canada. New safety regulations, environmental laws, or tax policies could increase costs.
• Competition: While direct rail competition is limited, CN still competes with the trucking industry, especially for shorter distances and higher-value goods. It also faces intense competition from its main rival, CPKC.
• Input Costs: The price of diesel fuel is a major operating expense. While the company uses fuel surcharges to pass most of these costs on to customers, there can be a time lag that temporarily squeezes margins.