Apr 27, 2009

The Northern Track to Profits

When you look at the news that is being circulated buy the many investment pundits, it is very clear that value companies are rarely what generate the buzz in the financial community. The best example I have in mind is the Canadian National Railway Company.

Canadian National Railway Company (TSE: CNR, NYSE: CNI), incorporated in 1922, is engaged in the rail and related transportation business. CN’s network of approximately 21,000 route miles of track spans Canada and mid-America, connecting three coasts: the Atlantic, the Pacific and the Gulf of Mexico. CN’s freight revenues are derived from the movement of a diversified portfolio of goods, including petroleum and chemicals, grain and fertilizers, coal, metals and minerals, forest products, intermodal, and automotive. They are so diversified that every company in North America large enough to need their services has very probably heard of them!

They also have a long history of profitability and their financial statements for the year 2008 show that there is no end to the earning power of the CN. With 8 billion dollars of revenues and 2 billion dollars of profits for the year, the resulting 22% net profit margin is very attractive since very few companies get to reach such a level.

The most amazing those is the impressive 18% return on equity generated by the firm. Even if it has declined throughout the year 2008, that number is almost twice that of the average company. Keeping such a fast pace for almost a ninety years is a very rare feat considering that the great majority of companies fail in their first years without even showing signs of profit to their owners.

I guess I am not the only investor noticing those attributes since the common stock of the company, dually traded on the New York Stock Exchange and the Toronto Stock Exchange has been recovering a lot faster that the overall economy year to date and is moving closer to the intrinsic value per share of the company. It is a sure sign that bargains never last and that investors have to act fast to avoid the mistakes of omission that are caused by what Warren Buffett calls “Thumb sucking”.

Full disclosure: the author has no position in CN

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