Rails Relatively Stable; CN Top Performer

Canadian National (CN) could post the most volume growth of any North American railroad in 2008, says a report by Morgan Stanley Research North America. Coal and intermodal remain strong for the carrier.

The Canadian gross domestic product (GDP) is trending higher than the US GDP, say Morgan Stanley analysts William Greene and Adam Longson, and this should support an export-oriented economy and railroad. Further, the analysts suggest CN is the “best operator” and has a “history of cost control and entrepreneurial culture” which can improve its financial performance in 2008 and 2009. It already has industry-leading margins.

Further, CN has a number of volume, service, and productivity initiatives coming out in the next year to year and a half. Its investments in non-core businesses such as warehousing and freight forwarding may not provide expected growth if freight flows shift. Labor is also a risk in Canada.

While the investment side is concerned over CN's exposure in forest products, “Even weaker segments such as autos and forest products may not be the disaster the market is anticipating,” say the analysts. Intermodal could be a boon with the opening of the port of Prince Rupert, they observe.

“Canadian intermodal traffic is surprisingly robust,” they note. “Traffic at Vancouver has been surprisingly strong, which has led to double-digit intermodal growth in several recent weeks [leading up to the Dec. 9th report].”  Even without the benefit of the Prince Rupert opening, the railroad has predicted 6% to 8% revenue growth for intermodal.