(The following article by Brent Jang was posted on the Globe and Mail website on January 25.)
TORONTO — Canadian National Railway Co. kept steaming ahead yesterday as its shares broke through the $100 barrier amid a North American rail renaissance.
The stock has been climbing steadily — a gain of more than 1,000 per cent since Ottawa privatized Canada’s largest railway in 1995.
In a tale of the not-so-little engine that could, CN shares surged to a record high of $101.24, rising $4.91 or 5 per cent, in heavy trading of more than 1.6 million shares on the Toronto Stock Exchange.
Investors were applauding the railway’s announcements, which were released late Tuesday, that CN posted a record $1.56-billion profit last year; it will undergo a two-for-one stock split next month and raise its dividend by 30 per cent in March.
And they could have another reason to cheer: The railway’s initial public offering came out at $27 a share on the TSX, or a split-adjusted price of $9.
Taking stock splits (but not dividends) into account, an investor holding 100 shares worth $2,700 back in 1995 would currently have 300 shares worth $30,372.
Other major North American rail stocks joined yesterday’s rally, including Canadian Pacific Railway Ltd., CSX Corp., Burlington Northern Santa Fe Corp.and Norfolk Southern Corp.The rail industry is poised to thrive for a third consecutive year, cashing in on North America’s trade bonanza with Asia, with Montreal-based CN leading the pack, transportation observers say.
“CN has created a lean and mean corporate culture. They’ve hammered down their costs,” said Joe Martin, director of Canadian business history at the University of Toronto’s Rotman School of Management.
While rivals scramble to make their already busy networks more efficient, CN has ample capacity that allows it to better manage peak demand from rail customers as well as capture market share away from the trucking sector, he said.
CN is budgeting $1.5-billion in capital spending across its rail network in 2006, up 9 per cent from 2005 — a sign that the railway is committed to maintaining its infrastructure because it is simply good business to do so, he added.
Rail experts say Hunter Harrison, an industry veteran who is CN’s chief executive officer, understands his competition, and CN has hustled to win over customers with the concept of a “precision” railway that’s able to deliver goods on time because of its extensive tracks and scheduling.
The stock surge over the years has made multimillionaires of executives and millionaires of managers.
Mr. Harrison, who replaced Paul Tellier as CN CEO in late 2002, made $27.7-million in stock option gains in February, 2005, and holds more options potentially worth tens of millions of dollars.
CN shares have soared 11 times higher than when they began trading in November, 1995, when Ottawa sold off the former Crown corporation.
“CN has lots of room for growth and knows how to use it wisely,” said transportation consultant Greg Gormick. He said CN has successfully nurtured the government legacy of spare rail capacity, taking advantage of a sprawling network to meet booming demand to move Canadian resources to West Coast ports for shipment to Asia, as well as handling imports of consumer goods, notably from China.
Over the years, Calgary-based rival CPR has grown mostly through expanding its domestic network and crossing modestly into the U.S. Midwest. But acquisition-hungry CN has gobbled up railways deep into the United States, quickly integrating new purchases into its system, which stretches in Canada from the Pacific to Atlantic oceans, and from the U.S. Midwest to the Gulf of Mexico.
In the past two weeks, CN has been busy on several fronts, signing renowned PEI golfer Lorie Kane to an endorsement deal, buying three small Alberta railways and announcing the record profit for 2005.
CN’s coffers are overflowing, so much so that it saw fit to sign Ms. Kane to a sponsorship deal that means she will be sporting a cap with the familiar CN logo for the next three years. CN also sponsors women’s golfing events such as the Canadian Women’s Open tournament on the LPGA Tour.
To be sure, it hasn’t been all sweetness and light because CN has had its share of challenges over the past year, weathering hurricanes Katrina and Rita, and suffering a series of high-profile derailments.
But investors have been impressed by the railway’s performance, especially in the face of such adversity.
CN’s operating ratio, a key measure of productivity — where operating expenses are divided by operating revenue — averaged 63.8 per cent last year, down from 67.1 per cent. A lower operating ratio is better, and CN’s is nearly 14 percentage points below CPR’s.