A key focus of the WCM Quality Global Growth portfolio is to find quality global companies with durable, strengthening economic moats and corporate cultures aligned to this growth.
In this mid-month update, we discuss a company that we hold that has an expanding economic moat and aligned corporate culture.
Stock in Focus: Canadian National Railway
You’d be forgiven for thinking a 100-year-old traditional rail business was out of place in a modern ‘global growth’ portfolio. Canadian National Railway (CNR), however, displays the key attributes common to all holdings in the WCM Quality Global Growth Strategy.
Headquartered in Montreal, CNR transports more than C$250 billion worth of goods annually for a wide range of business sectors, ranging from resource products to manufactured products to consumer goods. CNR’s rail network of approximately 20,000 route-miles spans Canada and mid-America. The network connects three coasts: the Atlantic, the Pacific and the Gulf of Mexico. 2019 marked the firm’s 100th anniversary. Over this time CNR has evolved from a collection of disparate railways into the leading North American transportation and supply chain company.
The key attributes common to all holdings in the WCM Quality Global Growth strategy are:
- an expanding economic moat (rising competitive advantage), and
- a corporate culture aligned to this moat trajectory.
CNR’s competitive advantage
The oligopolistic nature and highly regulated structure of the railroad industry are the primary drivers of CNR’s moat. As regulators within the railroad industry continue to disallow companies to lay additional tracks, the physical infrastructure required to operate a rail network as large as CNR’s acts as a huge industry barrier to entry.
The expansion of CNR’s moat comes from its continued growth in market share at the expense of the trucking industry. Railways are not exposed to issues such as traffic congestion, fluctuating oil prices and driver shortages which plague the trucking industry.
CNR’s commitment to ‘Precision Scheduled Railroading’ (PSR) underpins the firm’s culture. Former CEO and railroad legend Hunter Harrison introduced PSR to Canadian National Railway in the early 2000’s. This approach involves a greater focus on increased efficiencies, reducing the number of accidents and more trains arriving on time. Harrison understood the need for employees to buy into his operational vision. As such, he led training camps for managers of all levels, enabling the PSR ethos to permeate throughout the organisation. This in turn has led to CNR achieving the highest operating margins in the railway industry.
Canadian National has been a holding in the WCM Quality Global Growth strategy since March 2014.