Canadian National Railway (TSE: CNR) (CNI) is a Canada-based rail and transportation company. Its services include rail, intermodal, trucking, supply-chain services, and more.
The company is an essential business that operates in a duopoly in the Canadian market. As a result, it has a measurable competitive advantage.
Breaking Down Canadian National Railway’s Competitive Advantage
There are a couple of ways to quantify a company’s competitive advantage using only its income statement. The first method involves calculating a company’s earnings power value (EPV).
Earnings power value is measured as adjusted EBIT after tax, divided by the weighted average cost of capital, and reproduction value (the cost to reproduce/replicate the business) can be measured using a company’s total asset value. If the earnings power value is higher than the reproduction value, then a company is considered to have a competitive advantage.
For Canadian National Railway, the calculation is as follows:
EPV = EPV adjusted earnings / WACC
C$67.527 billion = C$4.862 billion / 0.072
Since Canadian National Railway has a total asset value of C$48.24 billion, we can say that it does have a competitive advantage. In other words, assuming no growth for Canadian National Railway, it would require C$48.24 billion of assets to generate C$67.53 billion in value over time.
The second method to determine if a company has a competitive advantage is by looking at its gross margin because it represents the premium that consumers are willing to pay over the cost of a product or service. An expanding gross margin indicates that a sustainable competitive advantage is present.
If a company has no edge, then new entrants would gradually take away market share, leading to decreasing gross margins over time due to pricing wars.
In Canadian National Railway’s case, its gross margin has expanded in the past several years, going from about 50% in Fiscal 2014 to 55.8% in the past 12 months. This indicates that a competitive advantage is present in this regard as well.
Canadian National Railway’s Dividend
For investors that like dividends, Canadian National Railway currently has a 1.98% dividend yield, which is above the sector average of 1.29%. In addition, the company’s free cash flow of $3.7 billion suggests that its $1.8 billion dividend payment is safe.
Taking a look at its historical dividend payments, we can see that its yield range has remained relatively flat in the past several years:
At 1.98%, the company’s dividend is near the middle of its range, implying that the stock price is trading at a fair value relative to the yields investors have seen in the past.
Analyst Recommendations
Canadian National Railway has a Moderate Buy consensus rating, based on six Buys and 11 Holds assigned in the past three months. The average Canadian National Railway price target of C$160.24 implies 10.5% upside potential.
Final Thoughts
The economy continues to rely on railway companies to deliver goods across North America and will continue to do so for a long time. Investors that are looking to invest in essential businesses may want to consider CNR stock.