Monday, Jefferies initiated coverage on Canadian National Railway (TSX:CNR) (NYSE:CNI) with a Hold rating and a price target of $130.00. The firm highlighted that Canadian National Railway, as the fifth largest Class 1 railroad in North America by volume and revenue, has been a leader in operational efficiency, particularly since implementing Precision Scheduled Railroading (PSR) in 1998.
The analyst noted that Canadian National Railway's operating ratio (OR) has been best-in-class compared to its peers, achieving a 61% OR in 2023. This is a slight advantage over competitors such as CP, CSX (NASDAQ:CSX), and UNP, which reported ORs of 62%. However, the margin gap has narrowed as other major railroads have also adopted PSR.
Despite Canadian National Railway's strong performance, Jefferies pointed out that expectations for near-term volume growth are high, projecting a mid-single digit percentage increase compared to a low-single digit average among peers. Additionally, the firm expressed skepticism about the company's ability to significantly improve its OR beyond the current 55%-60% range, which is considered a sustainable floor.
Furthermore, the analyst remarked on the stock's valuation, suggesting that it is on the higher end of its historical range. The current share price is thought to fully reflect an 11% compound annual growth rate (CAGR) in earnings per share over the next two years, based on the expected volume growth and margin expansion.
The report concludes with a caution about the potential for multiple contraction as the market adjusts to the limited opportunities for further margin improvement.
InvestingPro Insights
In light of Jefferies' recent analysis of Canadian National Railway (CNI), it is beneficial to consider additional insights provided by InvestingPro. CNI's management has been actively engaging in share buybacks, which is often a sign of confidence in the company's future prospects. This aligns with the company's impressive track record of raising its dividend for 29 consecutive years, underscoring its commitment to shareholder returns. Furthermore, CNI's gross profit margins have remained robust, with the last twelve months as of Q4 2023 reporting a solid 56.14%, reflecting the firm's operational efficiency.
However, investors should note that CNI is trading at a high price-to-earnings (P/E) ratio of 20.58, which may suggest a premium valuation relative to near-term earnings growth. The company's stock is also trading near its 52-week high, with a price that is 96.81% of this peak, potentially indicating a lower margin of safety for new investors. For those looking to dig deeper into CNI's financial health and future prospects, InvestingPro offers several additional tips and a fair value estimate to guide investment decisions. Use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, and explore the 14 additional InvestingPro Tips for Canadian National Railway at https://www.investing.com/pro/CNI.
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