Canadian National: Investor Day Features Solid Growth Opportunities, but Capital Spending Could Jump

Canadian National CNR held an investor day during which management highlighted its reinvigorated focus on precision scheduled railroading over the past year, under new CEO Tracy Robinson and with help from hiring railroading veteran Ed Harris as COO. We believe the PSR playbook took somewhat of a back seat in previous years, as the rail focused to a greater degree on top-line growth—a dynamic that likely tempered operating efficiency. However CN’s return to a more disciplined “scheduled operating plan” seems to have made a difference (lifting velocity and asset utilization) considering its adjusted operating ratio improved 130 basis points in 2022—despite labor constraints and wage inflation—thus narrowing the gap relative to peers.

Importantly, management established medium-term targets that essentially call for 10%-15% compound average EPS growth for the 2024-26 timeframe. As we heard it, the firm expects this to be supported by volume gains ahead of economic growth, pricing above inflation, and incremental efficiency improvement from PSR refinements. Management detailed numerous volume opportunities (for carloads and intermodal), which it expects can yield 800,000 to 900,000 incremental annual carloads by 2026. This implies a total-volume CAGR near 5% (off our 2023 volume forecast); above our current model assumptions. On the other hand, although management has high confidence in securing this level of volume expansion, it sounded like only about 25% of this pipeline of opportunities has been fully negotiated with customers. Also, growth won’t come free—additional capacity will be needed, and CN expects annual capital expenditure to climb to almost $4.0 billion between 2024 and 2026—we’ve been baking in $3.1 billion.

Overall, we do not expect to alter our USD 111 fair value estimate. We may boost our medium-term volume assumptions modestly, but we are not inclined to give full credit just yet, and higher capital spending acts as an offset.