Canadian National Railway Stock Analysis | No. 1 Railway in Canada




Canadian National Railway Stock Analysis | No. 1 Railway in Canada

The Canadian National Railway Company is a major player in the North American transport and logistics sector. As one of the leading Class I railway companies, Canadian National Railway has an extensive rail network that extends across Canada and into the United States, serving major urban centres and various industries.

This stock analysis has a closer look at various aspects of Canadian National Railway's financial performance, its market position and the factors influencing its share value.

Quick Overview - Canadian National Railway Stock Analysis

  • Ticker: TSX: CNR; NYSE: CNI
  • Sector: Industrials
  • Industry: Railroads
  • Revenue (CA$M): 17,107
  • Net Margin: 29.9%
  • P/E: 22.84
  • P/B: 4.88
  • Equity per Share: CA$33.02
  • Return on Equity: 23.67%
  • ROIC: 15.9%
  • Dividend Yield: 1.89%
  • Market Capitalisation (CA$B): 81.6

Investment Thesis

An industry that is crucial for trade and the economy of the North American continent: In North America, railways play an important role in transport, both for freight and passenger traffic. Freight trains transport a variety of goods, including raw materials, agricultural products, finished goods, containers and more. Rail is often a cost-effective and efficient way to transport large quantities of goods over long distances.

Canadian National Railway, the No. 1 railway in Canada: The Canadian National Railway undoubtedly stands as a leading railway company in Canada and is among the most significant players in North America. With its extensive rail network spanning Canada and the United States, CN holds a key position in rail transportation. Particularly in freight transport, the Canadian National Railway is renowned for its comprehensive infrastructure and high transport capacity. CN plays a crucial role in promoting economic activities in Canada and the United States by facilitating efficient and reliable freight transportation.

Is Canadian National Railway stock undervalued? Canadian National Railway is the better railway company in terms of stability. It has the best revenue growth, good margins, an excellent return on equity, an impressive dividend and a solid balance sheet. Is there still more strength in the Canadian stock, or should investors wait to buy in despite the fair valuation?

Where is the fair value, and how much potential is actually still in the stock? That's what I want to work out step by step in the following company analysis. Let's get started!

Company - Canadian National Railway


The first fully rail-bound vehicles were constructed at the beginning of the 17th century. At that time, wooden wagons were used in mines to transport heavy raw materials to the surface and ultimately to barges. Over the years, this system was constantly improved and expanded. However, the real boom did not occur until the 19th century, when the industrial revolution was in full swing. The demand for raw materials increased rapidly, and horse-drawn carts quickly reached their capacity limits. A new, more efficient transportation vehicle was therefore needed.

This is where George Stephenson comes in. He grew up in the north of England in a poor family and had to work in a coal mine from the age of 14. When his father went blind in an accident with a steam engine, George became more intensively involved with these devices. In 1814, he developed his first steam locomotive. Although it was not the very first locomotive, it was definitely the first to be used industrially. Under his leadership, the world's first railway line was opened in 1825. The 39-kilometre line ran from Stockton in England to Darlington and could be travelled at a speed of 16 to 17 kilometres per hour. Of the 36 carriages on the train, twelve were loaded with coal and flour, while the others carried passengers. Shortly afterwards, railway fever spread to the rest of the world, including Canada in 1836.

The Railway Comes To Canada

Canadian National Railway Stock Analysis | Grand Trunk Railway

Grand Trunk Railway | Source - Toronto History | Photo by Arthur Goss

In the early days, England remained the driving force behind rail transport. With the expertise of English engineers, the first railway companies were founded in the USA and Canada. These included the Grand Trunk Railway Company of Canada, which was founded on 10 November 1852. Initially, a railway line was to be built between Montreal and Toronto, but this was quickly extended in both directions. Further lines were built in eastern Canada and in the north of the USA, so that by 1867 the company was operating the largest railway system in the world at the time, with 2,000 kilometres of track. When the colonies united that year (Canadian Confederation), the leading Canadian railway company was asked to build a line to the Pacific coast.

The Canadian government was forced to found the Canadian Pacific Railway and build the line itself. At the beginning of the 20th century, however, GTR also wanted to operate a transcontinental railway network and ultimately had to come to an agreement with the government. When the president of the railway company, Charles M. Hays, died on the maiden voyage of the Titanic, the management of GTR deteriorated. And the construction costs for the new railway line eventually led to the company's insolvency.

The Canadian government founded Canadian National Railways on 20 December 1918 to prevent the collapse of transport networks in Canada due to the insolvency of several railway companies. By 1923, several railway companies, including the Grand Trunk Railway, had been taken over and united under a new state umbrella. Until the 1980s, business was rather poor. This was largely due to the fact that political decisions were made in the company instead of economic ones. With the recapitalisation in 1978, the Canadian National Railway Company began its reorientation. This was followed by a full IPO in 1995. Since then, the company has mainly been active in the following business areas: Rail (transport business with 32,000 km of track - from the Pacific across the Atlantic to the Gulf of Mexico), Intermodal (container business on rail, road and water), Trucking (truck forwarding company), Supply Chain Services (logistics services) and Business Development (working with customers to plan and implement new locations).


The North American rail network is an integral part of the continent's economy and logistics. It comprises various railway companies serving different areas and transporting a variety of goods. With a total length of 202,137.7 km, the rail network spans all three countries of the continent, Canada (43,473.69 km), the USA (142,371 km) and Mexico (16,329.01 km).

The North American railway industry is highly fragmented and dominated by several large Class I railway companies, each covering specific geographic areas. Shown here on the chart are some of the major Class I railway companies in North America:

Leading North American railroad companies in 2022 | Canadian National Railway

Source - Statista | Industry Report 2022 | Rail freight industry in North America

The areas served by these railway companies overlap at certain points, and there are also regional and local railway companies that operate within specific regions and often work in collaboration with the Class I companies. These railway companies transport a wide range of goods, including coal, oil, agricultural products, cars, chemicals and more.

The infrastructure and operations of railway companies in North America are critical to the continent's trade and economy, as they provide an efficient and cost-effective way to transport goods over long distances.

BNSF Railway (Berkshire Hathaway)

The BNSF Railway, also known as the Burlington Northern Santa Fe Railway, is one of the largest Class I railway companies in the United States. It was formed in 1996 through the merger of the Burlington Northern Railroad and the Santa Fe Railway.

BNSF Railway

Source - Wikimedia Commons

The BNSF Railway's network extends primarily across the western United States, with a focus on the western Great Plains and the Pacific Northwest. BNSF operates an extensive rail network serving major trade routes from the Pacific Coast to the borders of Canada and Mexico.

BNSF transports a variety of commodities, including coal, petroleum and refined products, agricultural products, intermodal (containers and trailers), automobiles, chemicals and more. The company plays a major role in transporting commodities, agricultural products and finished goods across the Midwest and Pacific Coast of the United States.

BNSF Railway has been part of Berkshire Hathaway Inc. since 2009. Berkshire Hathaway is the 100% owner of BNSF and acquired the company to take advantage of the long-term opportunities and potential of the rail freight business. Warren Buffett has repeatedly emphasised that he is invested in the rail industry and the economic strength of the United States for the long term, and sees BNSF as a major freight carrier.

Union Pacific

The Union Pacific Railroad is one of the oldest and largest Class I railway companies in the United States. Founded in 1862 as part of the transcontinental railway project that opened up the west of the USA, the Union Pacific plays a key role in freight transport and rail traffic in the country.

Union Pacific Railway

Source - Wikimedia Commons

Union Pacific's rail network spans the central and western parts of the USA. Union Pacific operates an extensive network that stretches from the Great Plains to the Rocky Mountains and beyond. It includes important trade routes that enable the transport of goods between the ports on the West Coast, such as Los Angeles and Long Beach, and numerous economic centres in the interior of the country.

Union Pacific transports a wide range of goods, including agricultural products such as grain and livestock, chemical products, coal, crude oil and refined petroleum products, building materials, automobiles and intermodal transport such as containers and trailers.


CSX Transportation is a major Class I railway company in the United States, with a route network that primarily serves the eastern part of the country.

CSX Railway

Source - Wikimedia Commons

CSX's network spans several regions on the East Coast and extends into the Midwestern United States. CSX's rail lines extend from major hubs such as Chicago, Illinois, through the Appalachian Mountains to coastal states such as Florida, New York and the Gulf Coast states.

CSX transports a variety of commodities, including coal, agricultural products, chemical products, automobiles and auto parts, intermodal (containers and trailers), construction materials and other commodities. The range of commodities transported reflects the diverse role CSX plays in freight transport in the eastern and central regions of the United States.

Norfolk Southern Railway

Norfolk Southern Railway is a Class I railway company in the United States, operating mainly in the eastern part of the country. It was formed in 1982 from the merger of the Southern Railway and the Norfolk and Western Railway.

Norfolk Southern

Source - Norfolk Southern Fact Sheet 2022

Norfolk Southern's network spans the eastern United States and includes major regions along the East Coast, the Appalachian Mountains, the Midwest, and the Southeast of the country. Norfolk Southern's rail lines stretch from Virginia to Florida and extend west into the Midwest, serving major trade routes.

Norfolk Southern transports a variety of commodities, including coal, agricultural products such as grain, chemicals, crude oil and refined products, building materials, automobiles and intermodal traffic such as containers and trailers. Like the other major Class I railways, Norfolk Southern plays a significant role in the United States' freight transportation system and provides an important transportation route for various industries and sectors.

Canadian Pacific Kansas City

The Canadian Pacific Kansas City (CPKC) Railway is a joint venture between the Canadian Pacific Railway (CP) and the Kansas City Southern Railway (KCS). The two companies have joined forces to form a new transcontinental railway company linking the USA, Canada and Mexico. CPKC was created through the acquisition of Kansas City Southern by Canadian Pacific Railway, a deal that was finalised in 2021.

Canadian Pacific Kansas City Southern Railway

Source - Wikimedia Commons | Photo by Gary Todd

Since the Fusion, the Canadian Pacific Kansas City Railway's network has included a transcontinental connection from the Canadian Pacific coast to the Gulf of Mexico via the USA. The creation of the Canadian Pacific Kansas City Railway through the merger of Canadian Pacific and Kansas City Southern aims to create an integrated transcontinental rail network that serves various trade routes in North America and improves freight transport between Canada, the USA and Mexico.

In terms of freight, the Canadian Pacific Kansas City Railway transports a wide range of freight, similar to the participating companies Canadian Pacific and Kansas City Southern. These include agricultural products, energy products such as coal and oil, chemical products, automobiles, intermodal traffic such as containers and trailers, and other types of freight.

Business Model

Let's have a closer look at the business model of the Canadian National Railway. It is the only railway company that covers 3 coasts of the North American continent: the Atlantic, the Pacific and the Gulf of Mexico.

As briefly mentioned earlier, the business model consists of 5 supporting segments:

  • Rail: Rail bundles the classic transport business.
  • Intermodal: Intermodal covers the entire container business.
  • Trucking: In addition to the original business segments, CNI offers a truck fleet through its subsidiary CNTL.
  • Supply Chain Services: Under Supply Chain Services, the company works with its customers to improve the supply chain and drive innovation.
  • Business Development: This branch of the company deals with how companies can best find a connection to the route network or how the surrounding infrastructure can be created.

Which goods are being transported?

The Canadian National Railway plays a crucial role in the transport of various goods, except for passenger transport. The three main commodities transported over its rail network include intermodal shipments (such as containers), petroleum and chemicals, and grain and fertilisers.

Intermodal transport, which includes containers and their contents, is crucial for moving goods from ports to consumers. Crude oil and chemicals are mainly transported from oil-rich provinces to industrialised cities, where they are further processed into fuels or chemicals in refineries or by chemical companies.

Which goods are being transported - Canadian National Railway

Which goods are being transported - Canadian National Railway | Source - CN 2023 Investor Fact Book

Most grain comes from the Midwest of the USA and the prairie provinces of Canada. After harvesting, it has to be transported from the vast fields for further processing.

The company therefore plays a crucial role in the transport of these goods, supporting the economy and supply chain both in Canada and the US, as well as internationally.

Who are the customers?

Canadian National Railway's customers include a variety of companies from different industries that use its services to transport freight and materials. Some of the customers could be:

  • Large retailers such as Walmart, who transport goods across the rail network.
  • Automotive manufacturers such as Ford Motor Company that ship parts and vehicles.
  • Mining and resource companies such as Teck Coal that ship ores, minerals or other raw materials.
  • Chemical and agricultural companies such as Cargill, which transport chemical products or agricultural produce.
  • Energy companies such as Cenovus Energy Inc. that ship oil, gas or other energy commodities.

These are just a few examples of Canadian National Railway's potential customers, as its services can be used by a wide range of companies in various industries.

How is the income realised?

Canadian National Railway currently generates its income exclusively through the operation of its rail network and the associated transport services.

Summary of the business model

Canadian National Railway has a business model that is simple to understand. There is a rail network and trains run on it. That is the core business that we understand. It mainly transports goods, which means that companies pay money to transport goods. As the map showing the Canadian National Railway's route network already shows well, the company primarily connects two oceans (Atlantic and Pacific) with each other and the Gulf of Mexico.

Canadian National Railway Network

Canadian National Railway Network | Source -

I have always liked the railroad business because it has multiple moats. Each railroad company has its own operating territory, which creates an almost impenetrable barrier to entry by others. Once you build a rail line, you own it, and you can operate it without fear of a new entrant replicating it. The upfront cost of infrastructure would be very high, and creating excess transportation capacity when demand growth is limited would destroy value for existing operators and new rail companies. Existing railroads have an economy of scale because most customers and busy corridors are already served by one or two railroads, so there is no need for additional railroads. In addition, rail is the best and most cost-effective option for moving bulk commodities when origin and destination are not connected by waterways. Fuel efficiency combined with the greater capacity of rail cars and length of trains provide cost advantages over trucking. This also applies to intermodal container traffic, which mainly involves consumer goods.

Furthermore, CNI owns almost 50% of the Canadian rail network and its direct Canadian competitor Canadian Pacific Railway only just under 25%, with the rest falling to smaller railway companies. Thus, one more argument is that the Canadian National Railway has a moat.

Company Strategy

Canadian National Railway has long been a nation builder and trade enabler and is essential to the North American economy. The company's strengths are multi-faceted: it has a network along three coasts, offers geographical diversity and a wide range of customers and products. Its proven innovation is also reflected in the operation of a reliable railway system. Canadian National Railway’s business strategy is based on a vision of sustainable growth for customers, employees, and the communities in which it operates. Canadian National Railway’s strategic plan focuses on achieving operational excellence on a daily basis, building strong customer relationships, expanding geographic and product reach, and continuous innovation effortsCanadian National Railway strives for sustainable and profitable growth by providing outstanding customer service, growing faster than the economy, pricing above rail and continuously improving operational efficiency. This strategy is based on Canadian National Railway’s strong commitment to responsible delivery, ensuring the safe and efficient transport of its customers' goods to minimise environmental impact. Canadian National Railway attracts and retains top talent, promotes the development of safer and more resilient communities, and adheres to the highest standards of governance.


The top 10 shareholders of Canadian National Railway collectively own nearly 38% of the company's shares. Among them, the Bill & Melinda Gates Foundation Trust stands out as the largest shareholder with 8.49%, followed by financial entities like Vanguard and banks such as Royal Bank of Canada. The Bill & Melinda Gates Foundation Trust follows a similar investment approach to Warren Buffett's Berkshire Hathaway, focusing on companies with sustainable competitive advantages. It's worth noting the close friendship between Bill Gates and Warren Buffett.

Canadian National Railway

Top 10 Shareholders of Canadian National Railway | Source - Yahoo Finance

Management / Salary

After more than 25 years of dedicated service to the Canadian National Railway, Jean-Jacques Ruest deservedly retired in January 2022. As CEO, he provided the company and all our stakeholders with strong and inspiring leadership. He had been CEO of CNI since 2018. He deferred discussions about his retirement plans to navigate the company through the potential merger with KCS and the completion of the transaction, as well as the implementation of the strategic plan announced on September 17, 2021, which is starting to yield results.

Tracy Robinson - CEO Canadian National Railway

Tracy Robinson - CEO of Canadian National Railway | Source - Canadian National Railway

Tracy Robinson, who joined CNI as the new CEO from TC Energy and previously spent nearly three decades at Canadian Pacific, is a respected and experienced public company executive. She brings over 35 years of operational management, strategy development, and project execution experience to drive growth and profitability at CN. She has a proven track record as an exceptionally effective leader, highly regarded in the Canadian natural gas industry at federal, provincial levels, and beyond.

Robinson's close ties to the Calgary business community will give her a head start at CN, as she already knows the employees of the railway's biggest customers in Western Canada by name.

Robinson is already familiar with the rail industry but brings an additional perspective to CNI: experience as a shipper. That should prove invaluable if CN aims to continue growing.

In my opinion, it is particularly important for the CEO to be very familiar with the business they are in. As evident with Tracy Robinson, she understands the business and has even worked as a shipper. Furthermore, her in-depth knowledge of customers will aid CNI in increasing shareholder value.

Turning to the CEO's compensation, the annual total remuneration is CA$13.73 million, comprising 7.1% salary and 92.9% bonuses, including company shares and options. She directly owns 0.001% of the company's shares, valued at CA$547.37 thousand. The average tenure of the management team and the board is 1.6 years and 2.7 years, respectively, which is not very long. However, this is likely due to recent leadership changes.

After nearly 2 years in service, I consider her a suitable successor to Jean-Jacques Ruest. But only time will reveal where her journey leads.

Historical Financial Performance

Share Price

Canadian National Railway's share price performance over the past ten years has reflected a remarkable increase, as it has more than doubled. With an average annual growth rate of around 10 %, this development paralleled the performance of the S&P 500.

During this period, there were attractive entry points for investors, including during the outbreak of the COVID-19 pandemic between March and April 2020. During this time, the importance of stable infrastructure for regions became evident, potentially strengthening interest in companies like Canadian National Railway. Similarly, investors might have seen opportunities to enter the company at more favourable prices during the onset of the Ukraine war.

Share Price - Canadian National Railway by Yahoo Finance

Share Price in CA$ - Canadian National Railway | Source - Yahoo Finance

In my first blog post, I emphasized the impact of continuous focus on stock prices, which often creates unrest and leads to emotional reactions such as fear and greed. It is therefore crucial not only to analyse a company's business model, as we have already done, but also to have a closer look at its financial indicators. This allows us to better estimate and understand the potential value of the company.

Financial Statements

Income Statement

Canadian National Railway's income statement in 2022 and the last 12 months (Q4 2022—Q3 2023) shows remarkable trends. Over the last 10 years, Canadian National Railway has seen an average annual revenue increase of 5.78%, while total operating costs have only increased by 5.23% per year over the same period. These figures indicate the efficient cost control and successful revenue growth that the company has been able to achieve.

Another important aspect is the ratio of interest expenses to operating income. The ratio of interest payments to operating income over the last ten years is 9.27%. This indicates that Canadian National Railway manages debt effectively and has a low dependence on long-term debt financing. This low interest expense ratio of 9.27 % compared to the benchmark of 15 % indicates that the company has a solid financial health and a conservative financing strategy.

Income Statement Q4 2022 - Canadian National Railway

Income Statement Q4 2022 - Canadian National Railway | Source - CN 2022 Quarterly Review - Fourth Quarter

Over the past 10 years, Canadian National Railway has maintained a consistently high average net margin of 29.9%, which is extremely impressive. This consistency suggests that the company must have had a sustainable competitive advantage over a long period of time to generate such high average net margins of over 20%.

Income Statement - Canadian National Railway

Income Statement Q3 & nine months ended September 30, 2023 - Canadian National Railway | Source - CN 2023 Quarterly Review - Third Quarter

In the quarters from Q4 2022 to Q3 2023, the positive trend continued and manifested itself in a sustained positive development. This period reflected constant growth and underlined the company's continued strength. The ongoing positive performance continued throughout the past year until the third quarter of 2023.

Balance Sheet

Canadian National Railway's balance sheet as at 30. September 2023 shows many assets, including various plant and property and equipment such as rails, trains, real estate and other long-term investments. At the same time, the company has liabilities to banks, suppliers and other creditors.

The current ratio, which measures the ratio of current assets to current liabilities, is largely below the industry average of 1. From a traditional perspective, this could indicate financial risks. However, the company's earning power is exceptionally strong. It enables the company to easily cover its current liabilities. In addition, the company is able to raise additional short-term funding through the market for favourable commercial paper if required without getting into difficulties.

The ability of the company to service its current liabilities while leveraging its profitability to generate additional financial resources represents solid financial stability. Although the current ratio falls below the usual benchmark, the company is well positioned due to its strong earnings to meet its short-term liabilities and raise additional funds if necessary.

Income Statement Q3 & nine months ended September 30, 2023 - Canadian National Railway | Source - CN 2023 Quarterly Review - Third Quarter

Income Statement Q3 & nine months ended September 30, 2023 - Canadian National Railway | Source - CN 2023 Quarterly Review - Third Quarter

Over the past decade, Canadian National Railway has maintained a consistent equity ratio of approximately 43%, indicating a solid balance sheet and capital structure. While investors typically prefer an equity ratio exceeding 50%, the company has used the favourable debt capital to make profitable investments, which has proven to be a wise decision. 

The company's return on equity is particularly impressive, averaging at 23.67%, well above the benchmark value of at least 10%. This high return on equity demonstrates that the company efficiently utilizes retained earnings. 

For shareholders of Canadian National Railway, it's crucial that management effectively allocates invested capital to maximize profit. Evidently, the company is capable of doing so, thereby strengthening shareholder confidence.

Cash Flow Statement

Let's have a look at how money moves within the Canadian National Railway. The cash flow statement is an extremely useful source of information to determine if the company has a sustainable competitive advantage (Moat). Particularly revealing is the analysis of capital allocation that can be derived from the cash flow statement.

Cash Flow Statement Q4 2022 - Canadian National Railway

Cash Flow Statement Q4 2022 - Canadian National Railway | Source - CN 2022 Quarterly Review - Fourth Quarter

Cash Flow Statement - Canadian National Railway

Cash Flow Statement Q3 & nine months ended September 30, 2023 - Canadian National Railway | Source - CN 2023 Quarterly Review - Third Quarter

Capital Allocation

In the long-term return on an equity investment, the efficient use of the operating cash flow generated plays a decisive role. This is determined by capital allocation, which refers to the strategic distribution of cash flow to different areas. There are three main areas that I pay particular attention to: CapEx, dividends and share buybacks.

Investing activities & Capital expenditures (CapEx)

Canadian National Railway has launched major investments since 2022 to promote sustainable growth and build a state-of-the-art railway infrastructure for the 21st century. These investments are part of a capital programme that accounts for approximately 17% of annual revenue. Key projects include major track expansion projects that will increase capacity and enable Canadian National Railway to serve its ever-growing customer base more efficiently.

Investing Activities & Capital Expenditures (CapEx) Annual Report 2022 - Canadian National Railway

Investing Activities & Capital Expenditures (CapEx) Annual Report 2022 - Canadian National Railway | Source - CN Annual Report 2022

The Canadian National Railway has dedicated a significant portion of its profits in recent years towards improving and expanding its infrastructure, as well as investments within its capital expenditure (CapEx) to ensure smooth freight transportation across its rail network. The shares of these investments in net income were 59% in 2021, 54% in 2022, and 64% in the first three quarters of 2023. These percentages are below the average of 71% over the last 10 years.

This strategy reflects Canadian National Railway ambition to continuously improve and expand its infrastructure in order to increase the efficiency of freight transport while meeting the company's future needs. The recent investment rates may be below the historical average, but demonstrate the company's continued focus on strengthening its operational performance and providing world-class rail freight services.

Investing Activities & Capital Expenditures (CapEx) Q3 & nine months ended September 30, 2023 - Canadian National Railway

Investing Activities & Capital Expenditures (CapEx) Q3 & nine months ended September 30, 2023 - Canadian National Railway | Source - CN 2023 Quarterly Review - Third Quarter

Canadian National Railway plans to acquire Iowa Northern Railway (IANR), a short line railway company with a network of approximately 275 miles (approximately 443 km) in Iowa. This acquisition will help Canadian National Railway to strengthen its presence in the region.


Canadian National Railway pays a dividend 4 times a year. Distribution months are March, June, September, and December. With 26 straight years of dividend increases, Canadian National Railway is a so-called dividend aristocrat. The dividend yield is 1.89%. This means that CNI pays out a good dividend of CA$3.16 to its shareholders.

Share Buybacks & Shares Outstanding 

The railway industry is known for aggressive share buyback programmes. The Canadian National Railway is doing the same. CNI has launched a CA$4 billion share buyback program during 2023 until January 2024. This allows CNI to purchase up to 32 million common shares over a 12-month period, representing 4.8% of its 671,253,977 common shares.

Shares Outstanding - Canadian National Railway

Canadian National Railway Shares Outstanding: 649.80M for Sept. 30, 2023 | Source - YCharts Inc

Return On Invested Capital

I personally attach great importance to a company's return on invested capital (or ROIC). It tells you how well a company is able to generate higher cash flows from the capital reinvested in the company.

ROIC 2022 - Canadian National Railway

ROIC 2022 - Canadian National Railway | In comparison with the other listed companies (without BNSF Railway) | by my own calculation

The consistently remarkable aspect is that, except for CPKS (Canadian Pacific Railway), all railway companies have a return on invested capital (ROIC) that is consistently above the 10% benchmark. This means that they generate a consistently higher cash flow with the reinvested capital. This is an extremely positive feature and emphasises the efficiency and profitability of these companies in managing their capital resources.


After a thorough analysis of the financial statements, we would like to gain a comprehensive insight into the true value of Canadian National Railway. Given the variety of valuation methods and models available, it is my decision to use three different valuation methods: the discounted cash flow model, the owner earnings method and the equity bond method.

However, to get a rough idea of the valuation first, let's have a look at the traditional stock metrics of Canadian National Railway over the last 10 years. This data will give us an initial indication of how the company has performed in terms of traditional valuation metrics.

Valuation multiples September 30, 2023 - Canadian National Railway

Valuation multiples, September 30, 2023 - Canadian National Railway | by my own calculation

It is clearly evident that the financial metrics suggest the stock was more or less fairly valued to slightly overvalued during this period. Particularly noteworthy is the trailing twelve months (TTM) period, where all indicators unmistakably point towards a potential overvaluation. A Price-to-Earnings Ratio (P/E) above 25 and a Price-to-Book Ratio (P/B) close to 5 signal a comparatively high valuation. These metrics indicate that the current market price of the stock is considered high in relation to the company's earnings and book value per share.

Discounted Cash Flow Model

With the Discounted Cash Flow model, I intend to determine the present value of the Canadian National Railway by discounting its future cash flows. The following diagram illustrates the Discounted Cash Flow model for the Canadian National Railway.

Discounted Cash Flow Model - Canadian National Railway

Discounted Cash Flow Model - Canadian National Railway | by my own calculation

Following the analysis, an impressive calculation emerges: The estimated intrinsic value per share for the Canadian National Railway stands at a proud CA$270.56, based on the Discounted Cash Flow model at the time of this report. Interestingly, it is evident that even with a current stock price of approximately CA$166.55, Canadian National Railway shares seem to be significantly undervalued according to the DCF model.

Let's check what the two other methods will tell us.

Owner Earnings Method

The traditional use of net income for valuing companies is often hampered by different accounting practices. Free cash flow provides a better basis, but short-term investments in individual years cannot adequately represent the future development (as already calculated in the DCF model above).

Owner earnings provide a logical solution by adjusting the free cash flow. Long-term averages for capital expenditure and working capital are used to eliminate elements not attributable to shareholders. The logic behind this concept is compelling, as it provides a more realistic assessment of a company's financial performance.

The accurate determination of owner earnings and the translation into an intrinsic value using perpetuity are hence a central task in a thorough stock analysis. This approach provides a well-founded assessment of the true value of a company, independent of short-term fluctuations and accounting influences.

Owner earnings - Canadian National Railway

Owner earnings - Canadian National Railway | by my own calculation

Integrating owner earnings instead of free cash flow into the discounted cash flow model shows an estimated intrinsic value per share for Canadian National Railway of an impressive CA$254.24. Interestingly, even at a current share price of approximately CA$166.55, Canadian National Railway shares also appear to be significantly undervalued.

A final, last method to be sure.

Equity Bond Method

The Equity Bond Method is a less well-known but utilized by investors like Warren Buffett to estimate the intrinsic value of a stock. This method requires just five key values: Equity per Share, Earnings per Share, Dividend Payout Ratio, the current stock price, and the average P/E ratio of the last 10 years (as indicated in the box with the blue numbers).

With this information, the actual value of the stocks can be determined, along with the calculation of the average annual return.

Equity Bond Method - Canadian National Railway

Equity Bond Method - Canadian National Railway | by my own calculation

By applying the Equity Bond method, I was able to determine the estimated intrinsic value per share for Canadian National Railway to be an impressive CA$296.49. This analysis suggests that the company's stocks may be significantly undervalued, especially when considering the current market price of approximately CA$166.55.

Expected Return

The Canadian National Railway demonstrates an impressive return outlook based on various valuation methods. The Return on Invested Capital (ROIC) stands at a robust 15.9%, while the Equity Bond Method forecasts an annual return of 14.5%. Considering these promising figures, I personally aim for an annual return between 12% and 15%, which seems quite achievable, if not surpassed.

The proven ability of Canadian National Railway to deliver such returns enhances my confidence in its strong positioning and long-term stability. This positive outlook, compared to an ETF that can offer an average return of 10%, underscores the attractiveness of the Canadian National Railway as an investment option. The well-founded financial data and solid market positioning of Canadian National Railway make it a promising choice for investors seeking sustainable and growing returns.

SWOT Analysis

  • A comprehensive network spanning across both Canada and the USA.
  • Remarkable year-over-year operational performance enhancements.
  • A broad customer base spread across diverse geographies, coupled with a varied product portfolio.
  • Dominant market position with majority ownership, holding 50.8% of the entire rail network in Canada.
  • Excessive reliance on freight as a primary revenue stream.
  • Repeated worker strikes indicating management problems.
  • Embracing the surging wave of urban rail transit expansion in Canada.
  • Leveraging cutting-edge digital technologies to enhance operational efficiency.
  • Partnering with Google Cloud to pioneer innovative customer experiences.
  • Strategic acquisition propels Canadian National to broaden capacity and diversify supply offerings.
  • Intense competition in the industry may directly affect its topline and bottom-line.
  • High fuel prices are directly affecting Canadian National's profitability.
  • The possibility of labour strikes poses a substantial risk to the smooth functioning of the company's daily activities.
  • The global economic downturn triggered by ongoing conflicts has the potential to adversely affect Canadian National's revenue streams.

When To Buy?

Why I invest in CN

I believe that Canadian National Railway is the most stable railway stock on the market.

Alexander Kelm
Founder of Wall St. Nerd

The CN pursues a clearly structured business model, which is based on the efficient operation of a comprehensive railway network in Canada and the United States. Through this network, the company facilitates the reliable transportation of freight goods. The fundamental principles of this business model are transparent and easily understandable, making it simple for us to understand.


The CN operates one of the most extensive railway networks in North America. This extensive coverage allows the company to transport freight efficiently and reliably over long distances. The large railway network is the CN's true moat.


Canadian National Railway has a consistently stable equity ratio of around 43%, which indicates a robust financial and capital structure. This establishes the company as a conservatively financed player within the North American railway industry.


The company's return on equity is impressively high, averaging 23.67%, which is well above the benchmark value of at least 10%. This high return on equity shows that the company efficiently utilises the retained earnings.


CN is investing in its existing infrastructure and has purchased strategic railway lines in North America. This will allow it to increase capacity and enable it to serve its ever-growing customer base more efficiently. The bottom line is also generating more cash and value for its shareholders.


The management is very familiar with the industry and possesses substantial knowledge. This will contribute to increasing shareholder value. The new CEO also has the expertise and reputation to keep the company on a good course.


CN has the ability to make price adjustments in line with inflation, thereby protecting its profitability.


In my opinion, Canadian National Railway has the necessary characteristics such as solid financials, a strong competitive position, skilled management and promising long-term prospects. Based on these factors, I see significant potential for the creation of long-term and sustainable shareholder value.

Fair price

Warren Buffett once emphasised the importance of buying an excellent company at a fair price rather than an average company at a fantastic price. CN is recognised as an excellent company with a strong balance sheet and effective management. The valuation of the company seems fair to me, and I intend to add to my position in the event of any stock price corrections.

Final Thoughts

The railway business has several moats that allow railway companies to operate at high profit margins and return a lot of capital to shareholders. Based on several metrics, I believe that Canadian National Railway is the most stable railway stock on the market.

Furthermore, I believe that all railway stocks will continue to perform well in the future and could be a good buy at the right price. However, I believe that Canadian National is the better railway company in terms of stability. It has the best revenue growth, good margins, an excellent return on capital, an impressive dividend and a solid balance sheet.

I am concerned about the stagnant operating margin. However, the improvement in the operating ratio in the last second quarter under new CEO Tracy Robinson seems promising for future margin expansion. In addition, Canadian National is dependent on the health of the Canadian and US economies, including retail and industrial end markets. The downside risk to freight demand is currently elevated due to inflation and lower consumer spending. I think these risks will abate in the medium term.

In summary, Canadian National Railway is a company with a wide moat and is now available at an attractive price, considering historical valuations. In my opinion, investors should be cautious when looking at historical valuations as the macroeconomic outlook changes. Therefore, Canadian National Railway is a company worth keeping an eye on. Especially since it pays to buy quality companies in difficult times, as they tend to perform quite well in the long run.


Holdings Disclosure
I hold a position in CNI.
This article is not intended to be a solicitation for you, the reader, to buy or sell the stock. I wrote this article myself, and it reflects my personal views and opinions. I do not receive any remuneration nor do I have any business relationship with any company whose shares are mentioned in this article.

Legal Disclaimer
I am not a registered investment advisors, brokers/dealers, securities brokers, or financial planners. This article is being provided for informational and educational purposes only and on the condition that it will not form a primary basis for any investment decision. The views about companies and their securities expressed in this article reflect my personal opinions. I do not represent the opinions on whether to buy, sell or hold shares of any particular stock.
None of the information in our articles is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The information is general in nature and is not specific to you. Wall St. Nerd is not responsible and cannot be held liable for any investment decision made by you. Before using any article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence. I did not receive compensation from any companies whose stock is mentioned here. No part of the writer’s compensation was, is, or will be directly or indirectly, related to the specific recommendations or views expressed in this article.

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Hi, I'm [Alexander Kelm]

Founder of Wall St. Nerd

Entrepreneur, value investor and angel investor. Founder of Wall St. Nerd. Join me here on to learn how to read financial statements, find healthy companies, and invest your money wisely.


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  • Very detailed and insightful analysis, which is clear easy to understand. What I particularly like about this analysis is that it doesn’t only provide a current snapshot of the company itself, but goes beyond that by taking the historical background, stakeholders, competitors and other industry insights into account, which were new to me. definitely helpful for making a better, more informed investment decision.

    Thumbs up and thanks a lot for sharing these valuable insights!

    • I’m glad to hear that you found the analysis insightful and helpful for making informed investment decisions! It’s important to consider various aspects such as historical background, stakeholders, competitors, and industry insights when evaluating a company. This comprehensive approach can provide a more nuanced understanding of the company’s position and potential future developments.

      If you have any specific questions or if there’s anything else you’d like to discuss regarding the analysis or any other investment-related topics, feel free to let me know. I’m here to help!

  • Very interesting and well written! I haven’t read such a good article for a long time. Looking forward to more content!

    • Thank you so much for your kind words, Lasse! I’m thrilled to hear that you enjoyed the article. I’m dedicated to delivering more engaging content, so stay tuned for future updates. If you have any specific companies in mind that you’d like to see covered, feel free to let me know. Your feedback is greatly appreciated!

  • Great analysis of Canadian National Railway stock! The comprehensive insights on its financial performance, strategic positioning, and industry trends provide a solid foundation for me as potential investors. The focus on key indicators like revenue growth, operating margins, and dividend yield enhances the overall assessment. Considering Canadian National Railway’s vital role in transportation and its commitment to sustainability, it seems like a promising long-term investment. However, keeping an eye on market dynamics and potential regulatory changes is crucial. Overall, your succinct yet informative analysis makes it a valuable read for anyone looking to understand Canadian National Railway’s investment potential.

    • Thank you so much for your thoughtful and encouraging comment, Louis! I’m glad you found the Canadian National Railway stock analysis valuable. Your positive feedback motivates me to continue sharing insightful content. Indeed, keeping an eye on market dynamics is essential, and I appreciate your emphasis on that point. If you have any specific questions or topics you’d like me to cover in future analyses, feel free to let me know. Happy investing, and I hope my analysis continues to be helpful for you!

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