“CN Rail Stock: Is It Time to Buy Despite Current Weakness?”
The Canadian National Railway (CN Rail) is currently facing a challenging year in 2023, with its stock down more than 9% year to date. This has led many investors to question whether now is the right time to buy CN Rail stock. Despite its current weakness, I believe that CN Rail stock has significant long-term potential for growth.
Why is CN Rail stock going down in 2023?
After a record-breaking performance in 2022 and a strong first quarter, CN Rail’s revenue and earnings have fallen behind prior-year levels in 2023. The second-quarter revenue decreased by 7% year over year, and adjusted earnings per share fell 8.8%. Several factors influenced this decline, including lower intermodal revenue, lower crude oil and U.S. grain exports, weaker demand for freight services, and outages caused by Canadian wildfires. Bay Street analysts predict that the upcoming earnings report will show even worse revenue and earnings performance. Naturally, investors are less willing to pay a higher price for a business that is experiencing declining sales and earnings, leading to a decrease in CN Rail stock value.
Can shares recover?
While short-term performance influences the stock price of CN Rail, long-term investors have a broader perspective. They are interested in the company’s potential to deliver consistent growth over multiple years. CN Rail is a cash-rich business with natural moats and persistent efficiency gains. This combination could unlock significant upside for investors who stay the course. This view is shared by legendary investor Warren Buffett, who favors companies with tangible moats that generate substantial cash flow. CN Rail’s influence in moving the North American economy ensures its ability to generate growing free cash flow for shareholders.
Watch cash flow
One key factor that sustains positive long-term investor returns on CN Rail stock is its ability to generate substantial free cash flow. Despite slower revenue and earnings growth, CN Rail continued to generate impressive amounts of free cash flow in 2023. This cash flow allows management to reinvest in growth, pay down debt, or distribute it to shareholders through dividends and share repurchases. In the second quarter, CN Rail’s free cash flow increased by 10% year over year, and for the first half of 2023, it was 8% higher than the previous year. Furthermore, CN Rail stock currently trades at a cheap enterprise value-to-free cash flow multiple, the lowest in a decade.
Time to buy CN Rail stock?
Given the potential for a return to volume growth and the company’s ability to reward investors, the current discount on CN Rail stock presents an opportunity. Higher dividends and sustained share repurchases could enhance annual total returns in the coming years. By taking advantage of the current weakness in CN Rail stock, investors may position themselves for significant growth and rewards in the future.
In conclusion, while CN Rail stock has experienced weakness in 2023, a long-term perspective reveals its potential for growth. With a strong cash position, persistent efficiency gains, and the ability to generate substantial free cash flow, CN Rail has the foundations for success. Investors who recognize the value and seize the opportunity may reap significant rewards in the years to come.
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