Stock Madness Elite 8: Canadian National Railway

Canadian National Railway vs. National Oilwell Varco

Canadian National Railway (NYSE: CNI  ) is certainly the underdog in this tournament.

After all, it's pitted against some of the most popular stocks on the market, like Apple (Nasdaq: AAPL  ) and Google (Nasdaq: GOOG  ) , and with our annual March Madness contest determined by popular vote, the odds are well-stacked against CN.

But in the spirit of surprise victors in the NCAA tournament, like Davidson and Western Kentucky, Canadian National Railway deserves a shot to show its merit. In the first round, it's up to me to convince you that it's a better stock than National Oilwell Varco (NYSE: NOV  ) .

I got three reasons for ya
While National Oilwell Varco might do a fantastic job at extracting black gold from the ground, Canadian National Railway is the better stock for three reasons:

  1. It benefits from increased demand for more than one commodity.
  2. It's the best-run North American railroad (and the best value).
  3. It's led by dedicated management.

Commodities on demand
Timber. Steel. Plastics. Petroleum. Coal. Grain. (Did I mention that CN's fate isn't tied to one commodity?)

These are just a few of the goods that Canadian National Railway transports across North America and to China every day.

Yes, I know there's not a railway that crosses the Pacific to China. What CN does have, however, is exclusive rail rights to the brand-new Prince Rupert port on the Canadian west coast, which also happens to be the closest North American port to Asia by two full shipping days.

Only five months ago, China's largest steamship company, China Ocean Shipping (COSCO), completed its first arrival at Prince Rupert port, thus beginning a meaningful contract with CN to deliver Chinese imports and haul away North American exports.

Canada and the U.S. are not only large importers of Chinese goods, but our lands are chock-full of natural resources that are in hot demand in emerging markets. Even if developing economies slow down in the near term, you can be sure that their governments will continue infrastructure spending, thus perpetuating the growth potential for CN.

Putting the "y" in "why"
One of CN's main competitive advantages is the "Y" shape of its North American rail network. It stretches from the Canadian west coast to the Canadian east coast and down the Mississippi River, making it the only railroad that connects the Pacific and Atlantic oceans and the Gulf of Mexico.

Moreover, when compared to its main North American competition, it becomes clearer that CN is not only "best in breed" but also the best value of the group:

Canadian National

Burlington Northern Santa Fe (NYSE:BNI)

CSX (NYSE:CSX)

Union Pacific (NYSE:UNP)

Debt-to-Equity Ratio

55.2%

73.1%

83.6%

49.3%

Return on Equity

21.6%

16.9%

13.9%

12.0%

Net Margin

27.3%

11.6%

13.3%

11.4%

Forward P/E

12.1

13.8

14.3

13.3

Data provided by Capital IQ, a division of Standard & Poor's, and Yahoo! Finance.

Taken with the company's generous 2% dividend yield, its superior ability to turn sales into profits and increase shareholder value, CN's below-industry forward P/E looks all the more enticing.

Roots in the rails
Finally, CN is run by a CEO with 45 years of experience on the rails. In 1963, E. Hunter Harrison was a carman-oiler in Memphis while still attending school. Not only does Hunter have a lot invested both emotionally and professionally in the railroad's success, but he also understands and relates well to all levels of the business.

Take a train to Moneytown
If you rooted for underdogs like Rudy and the 1980 U.S. hockey team, and you think CN is a great stock to buy, be sure to vote it to "outperform" on Motley Fool CAPS right now.

Together we can shock the investing world! (And screw up some brackets in the process ...)

Ready for Stock Madness? Who's going to take home the trophy? See the rest of this year's bracket.


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