Analyzing CN's Income, Profit, & Growth

I recently completed the "Checking Financial Health" part of the Flank course and learned a lot about reading income statements.

I decided to apply what I learned to a company I've owned for a long time: Canadian National Railway (plus, it was Canada Day yesterday).

CN operates railways across Canada and the United States and plays a major role in transporting goods to and from the Pacific Coast, Atlantic Coast, and Gulf Coast of North America.

Is revenue growing or shrinking? CNR's revenue has grown 3.5% per year over the past 10 years, 2.7% over the past 5 years, and 1.3% over the last year.

What do expenses look like? Any abnormalities? Operating expenses have grown 4.6% per year over the past 10 years, 3.2% over the past 5 years, and 8.0% in the last year. Cost of goods sold has some wild fluctuations (from +31% in 2022 to drops of -12% to -15% in other years) but has remained steady overall at 2.4% CAGR (last 10 years) and 2.3% CAGR (last 5 years)

Gross profit margin? Between 70% and 80% over the last 10 years with a CAGR of 0.4% over the last 10 years.

Operating income positive or negative? Positive but trending slightly down since 2023 as operating expenses go up.

Net income? 3.5% CAGR over last 10 years, 1.1% CAGR over last 5 years, -20.9% over last year.

What's EPS doing? 6.2% CAGR over the last 10 years, 3.8% over the last 5 years, but -17.9% over the last year.

Ideally, we'd like to see a historical uptrend with a business becoming more profitable over time. CNI has continued to grow its gross profit and gross profit margins over the last 1, 5, and 10 year periods.

The gross profit margin of 70% to 80% seems very good (and it is), but railroads have some of the highest profit margins in the United States (50.93%, on average, according to the American Journal of Transportation (https://www.ajot.com/news/railroads-are-usas-most-profitable-industry-with-a-50-profit-margin). Buffett likes companies with a profit margin over 40%.

Why the big recent drop in an otherwise stable company? In their annual report, CN claimed the lower net income in 2024 was due to labor disputes and an early winter:

"The variance was mainly due to the ongoing impact of diversions to other ports due to rail and port labor-related disruptions and earlier winter operating conditions in the Western region in the fourth quarter of 2024 when compared to 2023."

Overall, last year's lower-than-expected results stand out - and 2025's trade war and tariffs have created further uncertainty.

However, CN has a stable record over the past 5 and 10 years and has easily weathered similar years in the past (like a 21.1% drop in net income in 2018). The company also has multiple moats - like a barrier to entry moat (you can't start a railway in your basement over a weekend) and a toll moat (access to ports in Prince Rupert, Vancouver, and the Gulf Coast), and longstanding operational efficiency.