Tickers in this Article: CNI, UNP, CSX, NSC, GWR, KSU
It is an odd quirk of Wall Street that the best operators in an industry do not always get the most respect from analysts and buy-side fund managers. I think the reasoning is basically that the underperformers have the most room for improvement, and this hoped-for improvement constitutes a "catalyst" in the lexicon of the Street.

So, in an earnings season where rival rail operators Union Pacific (NYSE: UNP) and CSX (NYSE: CSX) have already reported strong earnings, an "all right" performance from Canadian National (NYSE: CNI) gets a cooler reception.

Rail Recovery Seems To Be Here

That is not to say that CNI did not post a decent quarter. Revenue was up nearly 6%, as the company saw a 16% jump in carloads but weaker pricing (yields down more than 9%). CNI's industry-leading margins also stayed strong, as the company's operating ratio rose 230 basis points from last year (to 69.3%), but fell about 400 basis points from the prior quarter. In the end, the company's adjusted earnings beat the average estimate by 2 cents (77 cents versus 75 cents).

For those who track the rails as an indicator of what's going on in the economy, it may be noteworthy that CNI saw big jumps in autos, metals and coal. Carload figures for forest products and petrochemicals were the weakest, but they were still up in the low-to-mid single digits.

Looking ahead, CEO Claude Mongeau revised CNI's carload volume outlook up from the high single digits to the low double digits. Along with this volume growth, the company now expects "solid" double-digit earnings growth, though the Street was already there anyway. (For more, see The Characteristics Of A Successful Company.)

Good Needs To Be Better

As I said in the opening, it is not enough on the Street to be the best if you are not getting better. It is hard to argue that Union Pacific does anything notably better than CNI, but UNP stock could perform better simply on the expectation that the company will close the gap with CNI. In other words, for the stock to really get moving in the short term, a few "beat-and-raise" quarters will probably be required. Keep in mind, however, that CNI's stock is close to a 52-week high, so it is hardly as though the stock has been punished or maligned.

For the long term, CNI is still my favorite big railroad. It has a coast-to-coast network in Canada and links down to the Gulf of Mexico through Chicago. Nobody will be building a network to rival that in the foreseeable future (or even in our lifetimes). What's more, this company has a demonstrated track record of leveraging that network better than anybody else. That is a solid thesis for a buy-and-hold investor, or one looking to watch this stock and add on any significant dips.

Bottom Line

In the meantime, with rails on the mend, investors may want to check out the likes of Union Pacific, Norfolk Southern (NYSE: NSC) or CSX as investment ideas. Smaller rail operators, too, could be interesting - particularly Kansas City Southern (NYSE: KSU), which is highly leveraged to Mexico, and Genesee & Wyoming (NYSE: GWR).

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