We’ve initiated positions in the leading Canadian railway companies, Canadian Pacific (CP) and Canadian National (CNI) for clients in the Opportunities and Offshore strategies, respectively.
With near impenetrable staying power and copious free cash flow generation, these are the types of businesses we’re excited to hold as we continue through this inflationary period.
Not only did the introduction of railways change the perspective of time, it also changed the perspective of distance.
Canadian Pacific (CP) and Canadian National (CNI) are dominant leaders in a duopolistic industry. This duopolistic nature of the railroad business offers companies deep moats and commanding market share, which in turn results in strong pricing power. These dynamics have historically allowed railroad prices to grow in excess of inflation by more than a percent a year.
More than 200 years ago, the Canadian railways began to lay their ties, suddenly connecting North America’s growing economy in a way never before imagined. Coal, grain, fertilizer, chemicals, forest products, finished motor vehicles and more are still hauled by rail, with the industry ensuring a steady flow of some of the most critical inputs to our modern economy.
With defensive business models and disciplined operators at the helm, both companies have been steady compounders for years. Based on conservative estimates, we believe that Canadian National and Canadian Pacific should provide strong, stable performance for their respective strategies along with compelling upside at 15% and 19% 3 year IRRs, net of fees.
Both Canadian Pacific and Canadian National could have landed in the Offshore portfolio because, well, they are international companies. But we think there is a bit more to the Canadian Pacific story than catches the eye.
Last year, Canadian Pacific bought publicly-traded Kansas City Southern — previously KSU — after a dogfight with Canadian National. Kansas Southern is the only railway with a US-Mexico cross-border network, serving as the sole rail provider for the country’s Lazaro Cardenas – the largest port in Mexico. As geopolitical conflicts, port bottlenecks, and other shocks to the supply chain continue, companies aiming to de-risk their supply-chain have looked to Mexico to fulfill their needs.
The deal is expected to close in the back-half of this year, and we estimate more than $1B in EBITDA/year in growth opportunities. However, with any acquisition comes execution risk, and we have full faith in management to integrate KSU successfully. As investors when you take on a risk like an acquisition, you need to be compensated for taking said risk, leading us to higher target returns for CP vs. CNI. We’re excited to opportunistically add Canadian Pacific to Opportunities 😉.
As the largest railway in Canada by both revenue and rail network size, Canadian National (CNI) uniquely connects North America to global markets on three coasts (Atlantic, Pacific, and Gulf of Mexico) and offers the shortest route to Asia via the Port of Prince Rupert.
After losing the bid for Kansas Southern, CN’s management team released an updated strategic outlook, which is a fancy way of saying, “we see some low hanging fruit to improve our business.” A few of these initiatives include divesting from non-rail business lines, bringing their tech into the 21st century and focusing further on improving efficiency across their network. Albeit a small position today, we’re thrilled to welcome this steady, compounder to the Offshore portfolio.
We’ve been invested in CarGurus (CARG) since the launch of the Opportunities strategy in August 2020, and the name has performed better than our initial expectations. Even amidst a challenging first quarter for markets, CARG is up ~24% YTD which has led to the position growing organically to be quite large. We continue to have conviction in CARG over the long run, but we’re taking this opportunity to take some profits.
As always, let us know if you have any questions about these moves, and thank you for the opportunity to manage your capital.
Titan Investment Team
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