3 Canadian Rail Companies to Have on Your Radar

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With Canadian rail firms outperforming their United States counterparts in recent quarters, it's easy to see why many American investors are looking north to invest their money. While Canadian National Railway (TSX: CNR) and Canadian Pacific Railway (TSX: CP) dominate the northern rail lines, CSX Corporation (NYSE: CSX) also has a stake in Canadian freight deliveries.

Canadian deliveries have been steadily increasing in Canada due to strong demand in agricultural products, chemical carloads and intermodal.

Canadian National Railway diverts law suit, for now

CN shareholders can breathe a sigh of relief now that the firm has been exonerated by the Supreme Court of Canada after facing a potential $1.75-billion class action lawsuit. The court said the Saskatchewan law firm that filed the suit breached its duty of loyalty, as the firm had previously been retained by CN. This is a relief to CN, but the firm could face a future suit in relation to allegations that the firm overcharged 100,000 Western farmers for transporting their grain.

Unlike many of its counterparts, CN transports an incredibly wide range of cargo. However, its competition largely carries more coal and less forest products. The company is strong in hauling chemicals, intermodal and agriculture, and that has helped the firm to increase its net income at about a 13% compounded annual rate over the past decade.

According to Morningstar, the fair value of the company is $102, yet it is currently priced at around $103 per share. However, I see the efficiency of the firm as being a major benefit moving forward, as the company continues to streamline operations with an ever-improving operating ratio (expenses/revenue), which has improved from about 90% to around 60%. 

Canadian Pacific Railway recovering from Alberta floods

CP is dealing with the aftermath of one of its bridges collapsing in Calgary. Other portions of its track were wiped out during a massive flood in Southern Alberta. A CP spokesperson said in late June that the company hadn't figured out how much the damage has cost the company.

The firm's future looks bright, as new CEO Hunter Harrison has made solid steps since joining the company at the end of the second quarter in 2012. He is getting costs under control in several departments, which indicates increased profit margins in the years ahead. In the first quarter after taking over, CP managed to more than double its profit margin, from around 7.5% to 15.5%. 

CSX Corporation improves operating ratio

CSX operates in the Canadian provinces of Ontario and Quebec, as well as in 23 Eastern states. Similar to CN, the company has shown major progress in the operating ratio. In 2003, the operating ratio was over 90%, but that has improved to about 71% recently. According to Morningstar, the company might manage to increase carloads in every commodity except for coal in 2013. 

The firm is not only at an advantage to its American counterparts due to its Canadian exposure, it is also at a future advantage because of its strategic positioning in the Eastern portion of its U.S. network. In fact, the company's tracks stretch further than one of its large competitors, Norfolk. The track reaches to New England and Florida, which sets the company up nicely as the go-to source for future business. 

Rail is a safe way to invest

Investing in rail companies is almost a surefire way to help recession-proof your portfolio. Rail firms are among the least likely to go out of business due to competition because it is next to impossible to attain the right-of-way if it is not already established. That makes these three rail operators in Canada secure in their position to cash in on major hauling in the years ahead, particularly due to increasing cargo demand throughout Canada.

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