Bill Gates and Warren Buffett, the two richest Americans, share a friendship, a commitment to philanthropy and an interest in railway investments. In 2014, Mr. Gates's trains are the better performers.
Canadian National Railway Co. is beating benchmark stock indexes as its profit and shipments surge, a boost for Mr. Gates, the largest shareholder. At $64.5-billion, the railway has passed Suncor Energy Inc. to become Canada's fourth-largest company by market value.
BNSF Railway Co., owned by Mr. Buffett's Berkshire Hathaway Inc., is struggling. North America's biggest railway by sales is grappling with slow traffic and is being scrutinized by U.S. regulators for poor service, spurring concern that it risks a permanent loss of some customers.
"CN still is the gold standard today, and they continue to execute extremely well," said Stephen Groff, a fund manager at the Cambridge Global Asset Management unit of Toronto-based CI Investments Inc., which owns CN stock. BNSF "is having some real problems. They are fixing these problems, but they are a little late."
While the recent growth at Montreal-based CN extends the carrier's history of operating efficiency, BNSF's stumbles are a rare setback for the railway that Mr. Buffett dubbed an "all-in wager" on the U.S. economy.
Winter storms and record demand for grain shipments snarled rail operations across the United States and Canada in early 2014. In July, CN CEO Claude Mongeau said the railway's grain-shipment chain was "fully back in sync." About a month later, Fort Worth, Tex.-based BNSF reported having 2,029 rail cars for grain pickups past due by an average of almost 11 days.
BNSF's operating ratio, a measure of costs against revenue, was second-worst among seven major North American carriers last quarter, according to data compiled by Bloomberg. CN's was the best.
"CN is probably going to remain the most efficient railroad," said Philippe Le Blanc, whose Cote 100 Inc. asset-management firm in Saint-Bruno, Que., owns CN stock among the $500-million it oversees.
Mr. Gates controls about 13 per cent of CN through his Cascade Investment LLC and the Gates Foundation, data compiled by Bloomberg show, and those holdings were valued at about $8.1-billion, based on the Aug. 29 closing price. CN's 29-per-cent surge this year through Aug. 29 added about $1.8-billion to the value of Mr. Gates's stake and beat the 15-per-cent gain for the benchmark Standard & Poor's/TSX composite index. The stock rose 1 per cent to $78.83 at 10:19 a.m., extending a leap of about tenfold since Mr. Gates disclosed his initial purchase in October, 2000.
CN began 2014 with a quarterly profit report that missed analysts' estimates when colder-than-normal weather forced it to run shorter trains. Last month, Ottawa ordered the company and Canadian Pacific Railway Co. to ship a minimum of more than one million tonnes of grain a week during the fall harvest to prevent a recurrence of a backlog that gridlocked farmers' crops last winter.
CN had already begun to catch up. In July, it forecast a "solid double-digit" increase in 2014 earnings per share, a refinement of a January assurance that the railway was "aiming for" growth of at least 10 per cent.
"They're firing on all cylinders," said Garey Aitken, chief investment officer at Franklin Templeton's Bissett Investment Management unit, said by phone from Calgary. The $2.6-billion Bissett Canadian Equity Fund counts the railway as its second-largest holding.
CN's price-earnings ratio of 23.6 now exceeds the 22.5 average for the six largest publicly traded North American railways, Bloomberg data show. On that basis, CP is the most expensive railway with a ratio of 29.6.
"We don't struggle with the valuation at all," Mr. Aitken said. "When we look at free cash flow and the growth profile of that free cash flow, the valuation is excellent. We have a business here that is going to be around 50 or 100 years."