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.

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.

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.

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.

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!

Hello Lou,

I read you column on globeinvestor.com whenever it appears. What is your view on Stella-Jones, which I have held many times and sold for good profits. Is this a good time to get back in, as it seems to be basing. Although somewhat illiquid, it has not hurt me in the past. Look forward to your comments and the very best of the Festive Season to you and the family.

 

Best regards,

Jim

 

Hi Jim,

Stella Jones Inc. ( SJ TSX) specializes in producing industrial pressurized wood products such as utility poles and railway ties. The area of weakness in the business model for SJ has come in the railway sector.

With reduced freight traffic there has been less demand for railway ties and operators have informed the company that they do not intend to build inventory in Q4 to prepare for the 2010 maintenance cycle. In response to weakness in the segment SJ has negotiated the purchase of Tangent Rail Corp. to expand their footprint in the United States.

Looks like management at SJ is taking advantage of the opportunity to expand when the getting is good.  The rule of thumb in business is that in a slowing market you need to expand your share of market if your balance sheet is in good shape.

The three year chart provides a good look at the base you mentioned as the stock holds onto support in the $22.50 range. 

The three month chart provides a close up of the recent action and the resistance at $25.00. Volume is light at 3,696 average daily volume over the last 3 months.

If you decide to get on this ride you are entitled to the dividend of $0.36 a year which at these prices yields 1.4%.

I think that you might want to chip away at this one on pullbacks and build a position. When rail traffic picks up SJ will be in a good position to benefit.

Happy Capitalism!

Lou:

I have been advised to consider both CNR and IMN as a recommended growth stock?
Your opinion on both please?
(enjoy you on 640)

Dave

Hi Dave,

Canadian National Railway Co. ( CNR TSX) and Inmet Mining Corp ( IMN TSX) offer opportunities in two completely different sectors which provides the opportunity to diversify and better manage risk. The good thing about these prospects is that they are both going up!

Canadian National Railway needs no introduction as it is one of the two large Canadian railway systems that move freight around the continent. The industry has been suffering through a drop in freight traffic as the recession has taken a bite out of aggregate demand and CNR hasn’t escaped the whip.

The three year chart clearly shows resistance at $55 and then again at $57.50 so it will take some fairly good news regarding a return to normal shipping patterns to take CNR any higher.

The three month chart shows a range bound pattern with resistance at $55 and support at $52.

The MACD turned lower in August indicating a slowing in upside momentum. The stock is also testing support on the 50 day moving average.

A breakout to the upside will require an recovery in freight traffic. If you take the advice and buy CNR you are by definition assuming that the recovery is real and that shipments will return to normal. Keep in mind that some railroad executives have not yet convinced themselves that we are going to get traction on the road to recovery.

Inmet Mining Corp is another proxy play on an economic recovery taking hold. IMN produces base metals and gold which in today’s environment with the U.S. dollar under pressure has helped drive value into the stock.

The three year chart shows a huge bounce off of the low of $12.15 it hit in December of 2008 with resistance at $60. With a six bagger in hand as we come to the end of the year the question becomes how much is enough?

A run at the highs of $100 IMN hit in late 2007 and early 2008 will require a return to historical highs for base metals prices which can only happen if the world economy recovers.

The three month chart shows the resistance at $60 more vividly and the RSI and MACD both are indicating a shift in momentum to the downside.

When considering CNR and IMN as candidates for growth I would suggest that you want to see both of these breakthrough the resistance that they have been fighting. That way you will have taken out some of the risk that the global economic recovery is living off the avails of stimulus and not the virtue of organic growth.

Happy Capitalism!