While rival Canadian Pacific (CP) is busy fighting its corporate battle with hedge fund owner and investor, Bill Ackman, Canadian National (CNI) remains focused on its growth plans. The leading Canadian railroad company, Canadian National has recently won an option to buy land for its Memphis Logistics Park through voting by the Memphis-Shelby County Port Commission.
According to the Memphis Business Journal, the Commission has approved Canadian National’s purchase of approximately 800 acres of Frank C. Pidgeon Industrial Park in Southwest Memphis that can support a $300 million development project and create around 5,000 jobs. The contract also includes terms that prevent the company from selling the land to a third party for profit.
Similar to last year’s Calgary logistics park initiative in the northeast of Calgary, Canadian National plans to construct another logistics park in the Memphis region. This would enable the company to participate in the heavy trading on the Mexico border.
Memphis occupies a significant position in cross-border transportation and logistics services and has a developed transportation and logistics network, including water, air, road and rail transportation as well as telecommunications, making it one of the key North American Distribution Centers. If Canadian National is able to buy land in this area, we believe that it will benefit from the strategic positioning of Memphis as regards its rail freight transportation and logistics centers.
The company expects Memphis Logistics Park to offer all modes of transport, including rail, truck and barge directly within the park. Its network is also expected to extend to the ports of Vancouver, Prince Rupert and Halifax.
We believe that the construction of the park would not only benefit from the connectivity to Canadian National’s existing business hubs but also expand its reach into the Mexican markets in future. The park is also expected to enable customers to build their own logistic facilities that connect with Canadian National network, eventually reducing dray costs.
We believe that these initiatives, coupled with a stronger volume outlook and favorable pricing trends in the freight segment will support Canadian National’s growth in the near term and also enable it to achieve its long-term growth targets.
However, Canadian National is prone to volatility in fuel prices due to changes in the economy or supply disruption. Rising fuel prices could adversely affect the company’s expenses. In an effort to forestall this risk, Canadian National has implemented a fuel surcharge program, wherein it added incremental charges (currently 18% of the net charges) to freight rates to reimburse fuel cost.
However, rising fuel prices have forced the company to raise its crude oil cost estimate to the range of $90–$100 per barrel, which is expected to reflect in the company’s forthcoming results for fiscal 2011. Additionally, increased depreciation charges and taxation are also expected to hurt earnings in the near term.
We maintain our long-term Neutral recommendation on Canadian National. However, the stock holds a short-term (1–3 months) Hold rating, as represented by the Zacks Rank of #3.
CDN NATL RY CO (CNI): Free Stock Analysis Report
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