Tri-coastal Access And Operational Efficiency Will Unlock Value

Key Takeaways

• Strategic investments and cost discipline are driving margin expansion, positioning the company for higher earnings and improved free cash flow.
  
• Unique network advantages and pricing power support sustainable growth in market share amid rising demand for resilient, cross-border supply chains.
  
• Weaker demand, trade and currency risks, and competitive pressures threaten long-term growth, profitability, and the effectiveness of recent network investments.

Catalysts

About Canadian National Railway

Engages in the rail, intermodal, trucking, and related transportation businesses in Canada and the United States.

What are the underlying business or industry changes driving this perspective?

• CN is well positioned to capture long-term growth from increased demand for intermodal and bulk transportation as North American e-commerce expands and supply chains are re-optimized for resiliency-factors likely to drive higher future revenues as trade uncertainty eventually dissipates.
  
• The network's unique tri-coastal access and investment in Western corridor export capacity provides an advantage to serve growing international demand for Canadian energy, agricultural, and bulk commodities, supporting sustained revenue growth and market share gains over time.
  
• CN continues to deliver same-store pricing above rail cost inflation and is leveraging strong network performance to win market share in domestic intermodal, suggesting pricing power and improved margin potential as volumes return.
  
• Rigorous cost discipline, including flexible workforce management and automation-driven operational efficiency, is enabling CN to maintain and even expand net margins and operating ratio, setting up the business for accelerated earnings growth once volume headwinds normalize.
  
• Strategic capital allocation is increasingly focused on targeted, high-return projects and productivity-especially in maintenance and technology-laying the foundation for better free cash flow conversion and long-term EPS growth as long-term positive industry trends play out.

Canadian National Railway Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Canadian National Railway's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.9% today to 28.1% in 3 years time.
• Analysts expect earnings to reach CA$5.9 billion (and earnings per share of CA$10.12) by about August 2029, up from CA$4.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 22.2x on those 2029 earnings, down from 22.6x today. This future PE is lower than the current PE for the US Transportation industry at 27.0x.
• Analysts expect the number of shares outstanding to decline by 3.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.67%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent macroeconomic uncertainty, ongoing and escalating tariffs (especially on key commodities like steel, aluminum, lumber), and weaker industrial demand are causing sustained revenue and volume pressures in several business lines (merchandise, Forest Products, automotive, metals & minerals), which may limit both top-line growth and net margin expansion.
  
• CN's volume growth has been essentially flat over the past several years despite elevated capital expenditures, raising concerns about the company's ability to translate its network and efficiency investments into higher revenue and improved free cash flow, particularly if demand remains muted.
  
• Shifts in North American and global supply chains-driven by uncertainty in the tariff and trade environment-are leading customers to rethink their routing, potentially diverting freight away from CN's transborder and intermodal corridors, increasing the risk of structurally lower long-term volumes and margin compression.
  
• Currency fluctuations (specifically, an appreciating Canadian dollar against the U.S. dollar) and continued volatility in fuel prices and mix are significant headwinds; each $0.01 change in FX impacts EPS by ~$0.05 annually, which can negatively affect earnings stability even if core operations remain solid.
  
• Elevated industry CapEx, ongoing competition, and modal shift risks (including from new long-haul trucking technologies and mergers creating powerful transcontinental competitors), combined with a relatively slow North American economic and population growth outlook, could constrain CN's ability to drive structural revenue increases and sustainable margin improvement in the long-term.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of CA$190.11 for Canadian National Railway based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$205.0, and the most bearish reporting a price target of just CA$159.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be CA$20.9 billion, earnings will come to CA$5.9 billion, and it would be trading on a PE ratio of 22.2x, assuming you use a discount rate of 7.7%.
• Given the current share price of CA$178.71, the analyst price target of CA$190.11 is 6.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.