Fewer railroads to consider

Feb 12th, 2010 – Comment

If you are going to chase CNR keep in mind that the uptrend is broken and that it is trading below its 50 day moving average.


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cnr

 

Hi,

Why does CNR trade at a lower P/E than BNI, when CNR is claimed to be the most efficient railway. Does this make CNR undervalued.

Sheldon

 

Hi Sheldon,

 

Great question. I think that when you are using the P/E ratio as an evaluative metric you have to keep in mind that investors use P/E as one measure not the only measure that they consider.

 

P/E is the price of the stock divided by the earnings per share of the company which tells us how much investors are willing to pay for a dollar in earnings. A P/E of 12 tells us that investors are willing to pay $12 for every dollar in earnings. A P/E of 40 tells us that investors are willing to pay $40 for a dollar in earnings.

Canadian National Railway Co. (CNR TSX) has a P/E of 13.6  and a forward P/E of 12.41 while Burlington Northern Santa Fe  ( BNI NYSE) has a P/E of 19.9 and a forward P/E of 15.69.

 

BNI

 

Right off the bat we can tell that investors expect more growth in BNI than CNR now and in the future.  Some of it might be driven by the network that BNI manages compared to CNR. The two rail maps suggest that BNI has more miles of track and research confirms that BNI has 50,000 miles of track while CNR has 21,000 miles of track. The more track the more growth potential.

In addition if you think that the cost of operating trucks will be hit by higher fuel costs then railroads will grab market share because of their lower operating costs. An increase in market share would be another driver of a higher P/E.

 

CNR2

When we look at the market cap of BNI it is valued at $34.16B while CNR has a market cap of $25.42B . BNI which was bought by Warren Buffett in what he called an all in bet on a US economic recovery will be taken private leaving fewer railroad assets for investors to chose from.

 

 

 

 

CNR3

The three year chart of CNR provides a view of the stock testing its 200 day moving average as the uptrend that it enjoyed from the March 2009 lows takes a breather. I would have liked the stock to hold support at $55 but that is not to be. What we need now is a bounce off the 200 day moving average.

 

 

 

 CNR4

The six month chart provides a look at the current action in CNR where the MACD seems to be turning up and suggesting that there could be bounce to come. If you are going to chase CNR keep in mind that the uptrend is broken and that it is trading below its 50 day moving average.

 

Happy Capitalism!

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