Has Canadian National Railway Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Canadian National Railway (NYSE: CNI  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Canadian National Railway.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

4.2%

Fail

 

1-Year Revenue Growth > 12%

11.3%

Fail

Margins

Gross Margin > 35%

49.2%

Pass

 

Net Margin > 15%

27.3%

Pass

Balance Sheet

Debt to Equity < 50%

57.0%

Fail

 

Current Ratio > 1.3

0.83

Fail

Opportunities

Return on Equity > 15%

23.2%

Pass

Valuation

Normalized P/E < 20

18.50

Pass

Dividends

Current Yield > 2%

1.7%

Fail

 

5-Year Dividend Growth > 10%

12.8%

Pass

       
 

Total Score

 

5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Canadian National Railway last year, the company has kept its five-point score intact. The stock has also done reasonably well, posting a better than 10% gain over the past year.

Railroads have gone through an extremely prosperous period in recent years, as high fuel costs brought their energy-efficient nature back into vogue. Along with high demand for shipping commodities like coal, railroads generally saw huge growth, with Canadian National taking its share of gains. Moreover, even as CSX (NYSE: CSX  ) and Union Pacific (NYSE: UNP  ) have worked on raising awareness of environmental issues and reducing carbon footprints, Canadian National has made big investments in energy-efficient intermodal equipment to cut costs even further.

More recently, railroad stocks have faced turbulence as low coal prices and weaker demand reduced transportation volumes. CSX and Norfolk Southern (NYSE: NSC  ) proved particularly susceptible to that trend, given their exposure to Appalachian coal shipments. But Canadian National's well-placed West Coast access and a low mix of coal have helped it hold up better than its peers.

Earlier this month, Canadian National only managed to match analyst estimates, while rival Canadian Pacific (NYSE: CP  ) posted a strong beat. Canadian Pacific has outperformed Canadian National over the past year, even as both seek to capitalize on delivering crude oil from the Bakken and other key energy plays.

For Canadian National to improve, it needs to work on getting its debt levels down just a little further and push revenue growth upward slightly. Continuing increases in dividends will also help the company get closer to perfection in the coming years.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

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Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Canadian National Railway. Motley Fool newsletter services recommend Canadian National Railway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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