Ask The Experts: July 3, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q: What are the main takeaways from the International Energy Agency’s report on “The Future of Rail”?
A:
The International Energy Agency (IEA) issued a major report on “The Future of Rail.” It will save you a lot of time to understand that the key point is that more rail use, while expensive, has a great return on investment (ROI) when climate, safety, efficiency and other issues are taken into account….

Q: What type of growth can we expect to see from Canadian National (CN)?
A:
CN made a case for $1.3B-$2.4B (C) in organic – or “secular” – i.e.; above “market”/economic and pricing - growth opportunities without over-emphasizing CBR nor counting on Inorganic Growth (i.e., M&A) contribution beyond the two deals already completed (more below). The big range there comes from energy, of course (helped perhaps even further by more delays on the Enbridge pipeline) – but intermodal should provide $750mm-$1.1B of growth, supported by BC port expansions and service reliability. One area that surprised me is the opportunity in the east (of Toronto/Montreal) region, now about 23% of the GTMs, with sole-served Halifax (big ships/big trains/minimal expansion capital needed) being teed up to be a Prince Rupert clone (despite the loss on their JV bid on the terminal – they can work well with PSA). The Eastern Region is run by a marketing specialist, esteemed veteran Doug Macdonald, rather than a traditional ops person. (Meanwhile, not to be fully outdone on CN’s birthday, CP issues a press release touting their new Vancouver auto facility, part of their own franchise-extension strategy).

Q: What do you expect Canadian National (CN) will do to raise its numbers?
A
: Capex will provide the fuel as CN transitions from “catch-up” (running ~25% of revenues 2018-19) to “keep up” (~20% of revenues to fuel the growth opportunities – worth it at that return on investment level and strongly countering the ongoing, mindless statement that Precision Scheduled Railroading (PSR—-or just “SR” in CN’s parlance as the originator)  - CN’s priority order for cash remains…. 1) the railway, yielding that 15-17% 2) Dividends (growing dividends per share faster than earnings per share, raising the payout to 35% from 33%); 3) M&A to “feed the beast”, or the network; 4) last – buybacks (still healthy!).  Speaking of catch-up, it was made clear that service metrics were close to or at 2017 (pre-surge) levels despite the higher volumes (in the case of the critical western region fully 15% more GTMs over the 2 years.

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Alison Babcock