TSX Commentary

CNR hosted a site tour of its newly reconstructed rail classification yard in Memphis, Tennessee. Prior to the overhaul, the old Johnson yard was inefficiently run, consisting of two separate yards with low productivity and limited capacity. Post refurbishment, increased capacity and productivity enhancements are expected to generate cost savings that management estimates in the “tens of millions” (annually). Given the upside capacity and projected cost savings, it is RBC CM’ assessment (at this juncture) that the $100MM for this project was money well spent. The key revenue opportunity will come from the almost doubled volume capacity and increased service levels. Currently operating at 1,100 – 1,200 cars per day, the new site now has the capacity to go to 1,800 – 2,000 cars per day. The realignment of two inefficient yards into one single yard has resulted in a significant reduction in crew assignments. As a result, manpower savings are in the 30-40% range at the new yard. CNR’s strategic investment opportunities point toward solid growth potential over RBC CM’ investment horizon. With the heavy lifting done on the expense side, RBC CM sees the company as being poised to offer solid execution on these growth opportunities, resulting in strong free cash flow generation. While RBC CM continues to rate CNR Sector Perform based on one-year relative returns, it continues to view the company as a core holding.