The Indispensable Artery for a New North American Economy

Core Thesis: Canadian National Railway (CN) is a wide-moat, irreplicable infrastructure asset whose recent cyclical underperformance has created an attractive entry point. I believe the market is underappreciating a powerful, long-term secular tailwind: the reshoring and nearshoring of critical manufacturing and supply chains to North America. CN's unique tri-coastal network, connecting the Atlantic, Pacific, and U.S. Gulf coasts, positions it as the primary logistical backbone for this new economic reality, providing a clear path to re-accelerated growth and shareholder returns.

1. The Foundation: A Wide-Moat "Forever Asset"

CN's business is built on a foundation that cannot be duplicated. Its 20,000-mile rail network is a natural oligopoly, protected by immense barriers to entry—namely, the astronomical cost and regulatory impossibility of building a competing transcontinental railroad. This "wide moat" is further strengthened by:

• A Unique Network: It is the only railway in North America connecting three coasts, offering customers unparalleled reach and efficiency.
• Durable Cost Advantages: As a pioneer of Precision Scheduled Railroading (PSR), CN is highly efficient. Rail transport remains multiples cheaper than trucking for long-haul freight, giving CN immense pricing power.
• Proven Profitability: This moat is not theoretical. As historical data shows, even in a sluggish environment, the company has maintained a robust 10-year average Net Income Margin of 25.5%, which has even expanded to 28.5% in the last year.

2. The Opportunity: Cyclical Pain, Secular Gain

Despite its strengths, the stock has languished, delivering a negative annual return over the last one and five years. This performance reflects a well-understood set of current business risks:

• Macroeconomic Headwinds: Slowing GDP growth, high interest rates, and weak demand in cyclical sectors like construction and automotive have dampened freight volumes.
• Operational Risks: The business is exposed to labor disputes and extreme weather events (wildfires, floods), which can temporarily disrupt operations and increase costs.

This recent weakness (1.3% revenue growth, -2.5% EPS growth in the last year) is, in my view, cyclical, not structural. It masks the emergence of a powerful new catalyst.

3. The Catalyst: The Great Re-Shoring

For decades, globalization meant supply chains stretched to Asia. Today, geopolitical friction and pandemic-era disruptions have exposed the risks of that model. The clear trend is "reshoring" or "nearshoring"—bringing manufacturing and production back to the U.S., Canada, and Mexico.

This is the central pillar of my bull thesis. This trend will fundamentally re-wire North American logistics, creating a surge in demand for land-based freight. CN is perfectly positioned to capture this demand. Its network is not just a railroad; it's the future artery for North America's industrial heartland, connecting new manufacturing hubs in the U.S. South and Midwest to Canadian resources and coastal ports. This provides a structural tailwind that should reverse the recent slowdown and drive volume growth for the next decade.

4. Forecast Scenarios (2024A - 2030E)

I have modeled three scenarios based on the execution of this thesis.

Mid Case: (Base Scenario - 14.1% IRR)

• Revenue Growth (CAGR): 3.5%
• Net Income Margin: 28.5%
• EPS Growth (CAGR): 7.3%

This is my most probable scenario. The reshoring trend provides a steady tailwind, allowing revenue to grow in line with its 10-year historical average. The company's wide moat and PSR discipline allow it to hold its exceptional 28.5% net margin, translating revenue growth into 7.3% annual EPS growth. As the market recognizes this shift from a "slow-growth" to a "stable-growth" utility, the stock sees modest P/E expansion (1.8% CAGR), leading to a compelling 14.1% annualized return and a target price of C$231.44.

High Case: (Bull Scenario - 19.8% IRR)

• Revenue Growth (CAGR): 4.9%
• Net Income Margin: 30.9%
• EPS Growth (CAGR): 10.4%

In this "full reshoring" scenario, the catalyst materializes quickly. New manufacturing plants and supply chains come online, driving revenue growth to a robust 4.9%. The increased network density and strong pricing power allow CN to capture significant operating leverage, expanding its best-in-class margins even further to 30.9%. This results in double-digit (10.4%) EPS growth, and the market re-rates CN as a true growth-utility. This combination drives a potential 19.8% annualized return and a target price of C$284.80.

Low Case: (Bear Scenario - 6.8% IRR)

• Revenue Growth (CAGR): 3.1%
• Net Income Margin: 26.1%
• EPS Growth (CAGR): 5.0%

This is the "moat protects, but catalyst fails" scenario. The reshoring trend is slow to materialize or is offset by persistent trade friction and macroeconomic weakness. Revenue growth remains sluggish at 3.1%. Stubborn inflation and labor costs put pressure on margins, which compress slightly to 26.1%. While the moat prevents disaster and EPS still grows at 5.0%, the market remains skeptical, leading to further P/E compression (-1.3% CAGR). The resulting 6.8% annualized return would likely trail the market, but the investment is protected from significant permanent loss.

5. Conclusion

We are investing in an irreplicable asset at a moment of cyclical pessimism. The thesis rests on the long-term, structural re-wiring of the North American economy. Our mid-case scenario, which assumes a simple return to historical norms powered by this new catalyst, provides a highly attractive 14.1% annual return. The high-case (19.8% IRR) offers significant upside, while the low-case (6.8% IRR) is buffered by the company's formidable economic moat.