Canadian National Railway Co Stock Appears To Be Modestly Overvalued
- By GF Value
The stock of Canadian National Railway Co (NYSE:CNI, 30-year Financials) shows every sign of being modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $112.48 per share and the market cap of $79.4 billion, Canadian National Railway Co stock gives every indication of being modestly overvalued. GF Value for Canadian National Railway Co is shown in the chart below.
Because Canadian National Railway Co is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 4% over the past three years and is estimated to grow 3.58% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Canadian National Railway Co has a cash-to-debt ratio of 0.04, which ranks in the bottom 10% of the companies in Transportation industry. Based on this, GuruFocus ranks Canadian National Railway Co's financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of Canadian National Railway Co over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Canadian National Railway Co has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $10.6 billion and earnings of $3.818 a share. Its operating margin of -23.85% worse than 85% of the companies in Transportation industry. Overall, GuruFocus ranks Canadian National Railway Co's profitability as strong. This is the revenue and net income of Canadian National Railway Co over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Canadian National Railway Co's 3-year average revenue growth rate is in the middle range of the companies in Transportation industry. Canadian National Railway Co's 3-year average EBITDA growth rate is 1.2%, which ranks in the middle range of the companies in Transportation industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Canadian National Railway Co's return on invested capital is -5.74, and its cost of capital is 4.71. The historical ROIC vs WACC comparison of Canadian National Railway Co is shown below:
In closing, the stock of Canadian National Railway Co (NYSE:CNI, 30-year Financials) gives every indication of being modestly overvalued. The company's financial condition is poor and its profitability is strong. Its growth ranks in the middle range of the companies in Transportation industry. To learn more about Canadian National Railway Co stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
