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Canadian National Expands Shop

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Canadian National Railway Company (CNI - Analyst Report) recently announced an investment plan involving C$12 million for the expansion of Locomotive Reliability Centre in Prince George, British Columbia. 

In July, the company also laid down plans to build five extended sidings on Northern Lines in British Columbia.  These investments are expected to ease the ever growing traffic in the North corridor. The proposed infrastructural developments form a part of the company’s multi-year capital program, envisaged to boost capacity addition, thus supporting more volumes across the company’s Edmonton-Prince Rupert freight corridor.

It is Canadian National’s objective to maintain high railroading (velocity, reliability, lowers costs and asset utilization) standards. In addition, the company is continuously seeking productivity initiatives to reduce costs and leverage its assets.

For this purpose, the company targets to spend about C$1.8 billion this year, out of which over $1 billion will be directed toward track and infrastructure improvement as well as productivity initiatives. Approximately C$150 million has been allotted for acquisition of new freight cars and upgrading of locomotives along the Edmonton-Prince Rupert corridor while around C$500 million has been earmarked for information technology and various new projects.

We believe that these investment plans stem from the company’s confidence in future market conditions.  Canadian National expects strong demand across all its businesses with improvement in wholesale and retail market supporting high business volumes for the company. Pricing contributes substantially to revenue growth which rises 3% to 5% year over year.  Fuel surcharge also moves along the same path with similar growth rate.

Despite the slowing economy and stiff competition from Canadian Pacific Railway (CP - Analyst Report), we believe the improving operating efficiency along with expansion growth in key markets will help the company achieve strong financial results in the quarters ahead.   This has underpinned mid-single digit carload growth and approximately a 10% earnings growth in 2012. Management continues to expect a sustainable operating ratio, given stronger volume growth at low incremental cost with productivity initiatives such as improving system velocity and fuel efficiency.

Currently, Canadian National Railway has a Zacks #3 Rank, implying a short-term Hold rating on the stock. For the long-term, we maintain our Neutral recommendation on the stock.

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