Subdued Growth No Barrier To Canadian National Railway Company’s (TSE:CNR) Price

With a price-to-earnings (or “P/E”) ratio of 27.6x Canadian National Railway Company (TSE:CNR) may be sending very bearish signals at the moment, given that almost half of all companies in Canada have P/E ratios under 16x and even P/E’s lower than 8x are not unusual. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Canadian National Railway has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Canadian National Railway

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TSX:CNR Price Based on Past Earnings August 27th 2020
Keen to find out how analysts think Canadian National Railway’s future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Canadian National Railway?

There’s an inherent assumption that a company should far outperform the market for P/E ratios like Canadian National Railway’s to be considered reasonable.

Taking a look back first, the company’s earnings per share growth last year wasn’t something to get excited about as it posted a disappointing decline of 17%. Unfortunately, that’s brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Accordingly, shareholders probably wouldn’t have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should generate growth of 11% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 25% each year, which is noticeably more attractive.

In light of this, it’s alarming that Canadian National Railway’s P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren’t willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Canadian National Railway’s P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn’t sensible, however it can be a practical guide to the company’s future prospects.

Our examination of Canadian National Railway’s analyst forecasts revealed that its inferior earnings outlook isn’t impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren’t likely to support such positive sentiment for long. Unless these conditions improve markedly, it’s very challenging to accept these prices as being reasonable.

Don’t forget that there may be other risks. For instance, we’ve identified 2 warning signs for Canadian National Railway that you should be aware of.

You might be able to find a better investment than Canadian National Railway. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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