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Canadian National in Labor Deal

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Canadian National Railway Company (CNI - Free Report) entered into a labor contract with the International Brotherhood of Electrical Workers (IBEW) System Council 11. Per the tentative agreement, the council will renew the contracts of about 700 signals and communications workers of the company in Canada.

However, none of the parties disclosed the details of the agreement as it is pending necessary approvals by the members of the union. The current contract between the parties will come to an end on December 31, 2012. Canadian National Railway expects to receive the approval of the union through voting before the end of January 2013.

Based in Montreal, Canadian National Railway is engaged in the rail and related transportation business and operates as the largest rail network in Canada. It is the only transcontinental network in North America.

We expect to see strong demand for the company’s services across all its businesses with growth in wholesale and retail market supporting high volumes. The company will likely keep a sustainable operating ratio, given stronger volume growth at low incremental cost with productivity initiatives such as improving system velocity and fuel efficiency.

Canadian National Railway’s growth momentum is also supported by a healthy balance sheet position. The increased liquidity profile of the company will not only aid in higher investment, but also assure shareholder return via dividend payouts and share buybacks.

Despite these positive aspects, we remain cautious on the stock, given its increasing pension expenses as well as the downtrend in coal and crop markets. Instability in the economy along with competitive threats from peers such as Canadian Pacific Railway Limited (CP - Free Report) and exchange rate fluctuations may limit the upside potential of the stock. Hence, we maintain our long-term Neutral recommendation on Canadian National Railway.

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