TSX Commentary

Veritas Research: Canadian National Railway CNR
Buy, Intrinsic Value Estimate: $65.50
CN’s same store (same-car) pricing came in at 4% in the quarter with the company guiding to expectations of 4% for 2010. While this is lower than expectations of 4-5%, it is in line with the overall slowdown in pricing growth seen at other rails. Veritas believes the deceleration can be attributed to economic conditions and the fact that substantial excess capacity still exists on all the networks. The company also noted that it has priced 80% of its book for 2010. CN announced both a new share buy-back and an increase in the dividend of 7% to $1.08 per share. The buy-back of 15 million shares translates into roughly $835 million of cash returned to shareholders at today’s price and could potentially reduce the total share count by 3%. While this represents a smaller amount compared to previous years, it reflects the company’s expectations for solid cash generation in the coming year and is in contrast to CP’s previous announcement to fund its pension plan. While the decline in pricing is a negative, Veritas’s initial preference for CN was based on the downside protection the stock offered in a scenario where prices weakened. Consequently, Veritas is still positive on CN, but plans on following up with an update in due course. Veritas maintains its intrinsic value estimate of $65.50.