Canadian National Railway: Stock Forecast & Analysis After Guidance Update

Canadian National Railway Co (CNR:CA)

Canadian National Railway has recently updated its guidance, which has disappointed investors by setting expectations to a more modest and achievable level. Despite this, CN remains a preferable choice compared to its competitor, Canadian Pacific Kansas City (CPKC), primarily due to the excessive valuation premium CPKC commands and ongoing risks related to foreign investment in Mexico.

Current Market Position

• Target Price: Based on forecasts from 19 analysts, the average target price for CN is CAD 174.94 over the next 12 months.
• Analyst Rating: The average rating for CN is Buy.
• Stock Advisor’s Analysis: Stock Target Advisor rates CNR as Bullish, supported by 7 positive signals and 2 negative signals.
• Current Stock Price: CAD 161.44.
• Price Performance: Over the past week, CN’s stock price increased by +3.18%, +3.99% over the past month, and +2.51% over the past year.

Recent Developments

• Operational Recovery: CN has announced that its operations have fully recovered following previous labour uncertainties. However, the company has revised its 2024 and 2024-2026 earnings outlook downward. This revision is seen as slightly negative.
• Earnings Outlook: CN now expects lower single-digit growth in 2024 EPS, compared to previous expectations of mid-to-high single-digit growth and around 10% growth originally. The updated EPS forecast for 2024 is approximately $7.47 to $7.63, indicating ~3%-4% growth.
• Guidance Drivers:
  • Labour Disruptions: The August work stoppage and subsequent labour uncertainties have significantly impacted CN’s international intermodal business.
  • Macroeconomic Factors: Weaker-than-expected macroeconomic conditions, including challenges in forest products and metals, have also contributed to the revised guidance.
  • Regulatory Impact: The Labour Minister’s request for the Canadian Industrial Relations Board (CIRB) to reassess whether rail services should be classified as essential added further uncertainty. The CIRB decided that the status quo should prevail, maintaining that rail is not an essential service.
• Operational Metrics: Despite these challenges, CN’s key operational metrics have recovered post-August work stoppage, and the company is now meeting shipper demand.
• Long-Term Outlook: CN’s revised long-term guidance projects a high single-digit EPS growth CAGR from 2024-2026, down from the previous 10%-15% forecast. The expected EPS for 2026 is $9.68/$9.63, suggesting a lower-end growth rate of ~10% over the next three years.

Valuation Comparison

• Valuation: CN trades at 18.8x P/2025E consensus EPS, representing a discount compared to CPKC’s 23.1x multiple. However, it trades slightly above the U.S. rail average of 17.8x.

Outlook

While CNR’s revised earnings outlook and operational challenges present some headwinds, the stock remains a solid investment relative to its peers. The discount valuation compared to CPKC and the recovery in operational metrics post-labour disruption make CN an attractive choice despite the current slightly negative guidance adjustment. The preference for CN over CPKC is supported by the excessive premium CPKC commands and uncertainties surrounding foreign investment in Mexico.