Welcome to ‘Stock Teasers’, where we aim to provide investment research on a wide range of topics. In this edition, Cross-Border Stocks, we spotlight one Canadian stock and one US stock, regardless of sector or size. Let’s dive in!

Canadian Stock: Canadian National Railway Company (CNR)

Canadian National Railway (CNR) is one of the largest railroads in North America. The company has been around for many decades and operates in a favourable industry structure as a duopoly along with Canadian Pacific Kansas City (CP) in Canada. CNR has been one of the most solid performers in the Canadian industrial sectors over the years. CNR’s 20-year total return was around 14.4% compounded annual growth rate (CAGR) with dividends included.

In terms of its financials, it pays a decent dividend yield of 2.0%, along with a 4.4% share buyback yield on the trailing twelve-month basis. It has demonstrated a solid organic growth profile over the years due to the tremendous pricing power of the rails industry. Going forward, management expects to continue to compound its EPS in the range of 12%-15% over the long term. It trades at a reasonable valuation of 19.5X forward earnings, a slight discount to the company’s historical averages but on par with the overall industry.

We believe that CNR’s management can continue to grow organically through a combination of volume growth and price adjustment over time along with improved operational efficiency to create long-term shareholder value. CNR has shareholder-friendly policies with a generous capital returns program that is partially supported by a moderately leveraged balance sheet. We think the company is an above-average operator in the industry that trades at an attractive valuation.

US Stock: Union Pacific Corporation (UNP)

On the other hand, Union Pacific Corporation (UNP) operates as one of the largest railroad companies in the US. The business model is very similar to CNR, aside from one drawback that UNP’s shipment volume growth over the years has not been as strong as CNR.

The rail industry is largely mature, with the growth algorithm to be in the range of 1%-2% in volume and 3%-5% in pricing. The industry has been in consolidation mode for years, and operational efficiency has been the key lever to create shareholder value. That being said, the business has tremendously strong staying power, and investors can comfortably own UNP for decades without worrying too much about technological disruption. Additionally, the company has a track record of consistently growing dividends over time was quite impressive, 10-year dividend growth was around 11% on average. In addition, UNP bought back around 32% of the total share outstanding in the last ten years.

Looking at its financials, we see its valuation over the past 10 years has been consistent, this is largely because UNP is perceived as a low-risk, cash cow type of company. There is some cyclicality to its earnings due to the inherent cyclicality of the rail business which is sensitive to the macro environment.

Employees, directors, officers, related companies, the i2i Fund and/or partners of 5i Research do not hold a financial or other interest in the above companies at the time of publishing.