A Smoother Ride on This Canadian Railroad
Paula is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Although the DOW transports have underperformed year-to-date, some of the index’s components have held up surprisingly well through a period of anemic economic growth. As an industry with near-insurmountable barriers to entry, the railroads have shown resilience in a range of economic climates, as well as a capacity to respond to secular trends. Environmental concerns and the advent of fracking and horizontal drilling have proven disruptive for the rails, which stand to lose traditional revenue streams as new sources emerge. The Canadian National Railway (NYSE: CNI) – the only Class 1 system that spans the continent north-south and east-west – appears poised to profit from a prolonged US recovery and from changing attitudes toward energy sourcing and transport.
CN Ships Lumber and Autos Throughout the US
According to USA Today, the average age of a car or truck in the US is now 10.8 years. That figure should decline as domestic auto sales continue to surpass expectations. Canadian National Railway has seen a steady improvement in revenues from auto and automotive parts shipments. In addition, in their Q3 2012 conference call, CN executives reported a 9% increase over 2011 numbers in revenues from lumber orders for new housing starts in the US. Investors who believe in a recovery from deeply depressed levels in housing and auto sales may find that railroads are a safer way to play than through homebuilder or auto stocks.
CN is a Net Beneficiary of Fracking
Due to the widespread adoption of hydraulic fracturing, natural gas is now plentiful and cheap. Utility companies looking to lower costs have switched from coal to natural gas, rendering coal a casualty of the dry gas boom. While investors have penalized stocks like CSX (NYSE: CSX) and Norfolk Southern (NYSE: NSC) for their heavy exposure to Appalachian coal, Canadian National Railway primarily ships metallurgical coal used in the production of steel. CN also benefits from the fracking phenomenon by transporting energy products and silica sand, which is used in large quantities in the hydraulic fracturing process.
Environmentalists and Those Who Want Their Votes Still Oppose Pipelines
The Enbridge pipeline spill in Michigan, the Exxon Mobil rupture in Montana and many other well-publicized accidents have raised voter ire over the safety of pipelines. Due to delays on Transcanada’s (NYSE: TRP) Keystone XL proposal and the Enbridge Northern Gateway project, rising production out of the Bakken and Western Canada’s oil sands has created a ‘bottleneck’ of crude that can’t reach markets in the south. In short, Canada’s oil is trapped, and Canada has a lot of oil, which has sought an alternative route by rail.
Canada’s Crescent Point has constructed its own crude-by-rail facilities to assist with transport of Bakken light crude, and Norwegian E & P giant, Statoil ASA, which controls significant assets in the North Dakota shale, has also begun to move oil by rail. According to a Reuter’s report, Canadian National Railway will ship 30,000 carloads of crude this year. Jean-Jacques Ruest, Chief Marketing Officer at CN, now expects the company to double revenues from light and heavy crude, condensate and bitumen in 2013.
Canadian National Railway Offers a Smoother Ride for Investors
In 2008, shares of CN fell less than 20%, or half of the decline of the S&P 500 that year. Furthermore, CN’s stock was able to recover its 2007 high early in 2010. A beta of 0.95 should provide some needed stability for holders of potential targets, speculative small caps and other bungee jumps of the financial world. Finally, CN’s $1.4 billion share repurchase program should lend some additional support to the stock.
The market’s recent respite for the coal-related cohort may be as short-lived as it is welcome. Thermal coal, which some hold responsible for a third of the carbon emissions in the US, clearly faces more headwinds than weak natural gas pricing. Ultimately, Canadian National and railroads with less dependence on coal will continue to benefit from increased natural gas production, as well as from regulatory barriers to pipeline construction.
webscribe has a position in CNI. The Motley Fool owns shares of Canadian National Railway and ExxonMobil. Motley Fool newsletter services recommend Canadian National Railway and Statoil (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.