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Here's Why You Should Hold Canadian National (CNI) for Now

Canadian National Railway Company CNI is benefiting from its solid freight demand and strong 2023 earnings outlook. However, liquidity is worrisome.

Factors Favoring CNI

Impressive freight demand and solid pricing environment are driving Canadian National’s growth. Freight revenues (C$4,219 million), which contributed 97.8% to the top line, increased 16.9% year over year in the first quarter of 2023. Freight revenues at the Petroleum and Chemicals; Metals and minerals; Forest products; Coal; Grain and fertilizers and Automotive segments increased 5%, 23%, 14%, 32%, 38% and 24%, respectively.

Despite the softening of the overall demand scenario, management expects adjusted earnings per share to increase in mid-single digits (prior view: low-single-digit range) percentage year over year in the current year. At its investor day in May, management stated that CNI’s earnings per share between 2024 and 2026 are expected to grow in the 10-15% range. CNI aims to reach the target through volume growth, favorable pricing and improving efficiency.

Key Risk

Canadian National’s liquidity position is a matter of concern. CNI's current ratio at the first quarter of 2023-end was 0.74. A current ratio of less than one implies that the company does not have enough liquid assets to cover its short-term liabilities.

Zacks Rank & Key Picks

Canadian National currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Zacks Transportation sector are Copa Holdings, S.A. CPA and Alaska Air Group ALK.

Copa Holdings, which currently sports a Zacks Rank #1 (Strong Buy), is aided by the improved air-travel demand. Management expects the current-year load factor (percentage of seats filled by passengers) to be 85%, assuming the rosy traffic scenario continues. You can see the complete list of today’s Zacks #1 Rank stocks here.

For second-quarter and full-year 2023, CPA’s earnings are expected to register 669% and 65% growth, respectively, on a year-over-year basis.

Alaska Air Group, currently carrying a Zacks Rank #2 (Buy), also benefits from the buoyant air-travel demand. On the back of upbeat air-travel demand and favorable pricing, Alaska Air's top line increased 31% year over year in the March quarter. ALK expects to boost its fleet and workforce in 2023 to meet the anticipated high demand.

For second-quarter and full-year 2023, ALK’s earnings are expected to register 12% and 44.8% improvements, respectively, on a year-over-year basis.

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Canadian National Railway Company (CNI) : Free Stock Analysis Report

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