Sign of a financially healthy company
Posted in Finance on February 19th, 2009 by Sacha PeterCN Rail looks like it has no problem getting credit:
MONTREAL, Feb. 18 /CNW Telbec/ – CN (TSX: CNR – News; NYSE:CNI – News) today announced a public debt offering of US$550 million 5.55 per cent Notes due 2019. CN expects to close the financing on Feb. 25, 2009.
5.55% is about 260 basis points above the risk-free government rate. Compared to what other companies have to pay for debt (e.g. 1000 basis points over the risk-free rate), CN has easy access to credit.
Warren Buffett also sees value in the railroad companies – he’s been buying shares of Burlington Northern (BNI) like no tomorrow – his ownership of the company is 23%. I’ve done some research on CN and CP Rail and while you are not going to see your investment triple overnight, they do provide a store of value that will perform significantly better than bonds or cash.
The reason why railroad companies are so valuable is not because of their operations (which do have value) but rather because they have ownership over rights of way over land that would otherwise be impossible to get if a company were to start up from scratch today. CP Rail and CN Rail are both (very) indirect proxies for Canadian real estate. The business of railroads will also not go away as it is the cheapest method of transporting goods over land – only barges can compete with rail, but only near navigable waters.
Longer term, a world running short on cheap oil will prefer rail shipping over trucks by an increasing margin.
The Prince Rupert port was a big win for CN as well.
The train companies were able to fully offset fuel increases with fuel surcharges.
CN got a super deal with the BC rail takeover, that’s for sure. That said, BC rail wasn’t exactly amounting to much on its own, so that match had some synergy.