Market Commentary: 18.6% of Bill Gates Portfolio In 1 Canadian Stock

It’s no surprise that the top position in Bill Gates’ portfolio is Microsoft. As co-founder and former CEO, he led Microsoft to enormous success and the current CEO, Satya Nadella, picked up the baton and added hundreds of billions of more value to the firm when he transformed it to a cloud-focused business.

Equally, it’s of little surprise that his old friend from Omaha, Warren Buffett, should earn his trust to the extent that his second largest position is Berkshire Hathaway. But of all the stocks in the Universe, which one comes top of Gates’ list after these two?

The somewhat surprising answer isCanadian National Railway Company (CNI).

Key Points

• Bill Gates owns a large stake in Canadian National Railway Company (CNI) in spite of declining demand for rail transportation.
• Bears cite high debt levels as a concern and eroding market share of rail against trucks and air as reasons to steer clear.
• The bulls believe that CNI is a good investment because of its financial track record, diverse customer base, and a century long history of paying out dividends.

Why In The World Does Bill Gates Own CNI?

CNI is in some ways a peculiar choice. Reports suggest that the demand for rail transportation has declined in recent years. Trucks have won market share as the cost of trucking falls. Air freight companies also pose a competitive threat to CNI. And then there’s the regulatory challenges to factor in. Everything from environmental regulations to labor falls under this umbrella.

By our calculations, the company has $242 million in cash and an astonishing $10 billion in long-term debt on its balance sheet. To put that in perspective, imagine you had $242 in your bank account but had $10,000 in debt. That would seem like a precarious financial position and yet, it’s the precise one CNI finds itself in.

The Bull Case For Canadian National Railway

In spite of the reasons to be skeptical of CNI, the bullish investment thesis is pretty sturdy, and Gates must believe it strongly outweighs the drawbacks listed above.

For one, the company has been growing revenues recently. In 2022, they climbed 18.2%, the highest amount in 5 years. For such an asset-rich company it’s quite astonishing the size of its gross margin, which sits close to 55% most years. And maybe most impressively, CNI is an absolute monster when it comes to operating income. Last year, a full $5.3 billion was reported as EBIT. That’s in part because CNI does not have the operating expenses Gates would be so accustomed to seeing elsewhere, such as in the tech industry. For example, R&D costs were $0 for 2022. And SG&A was $0 too. COGS are really the primary P&L cost that hurt the bottom line.

Just as the company produces eye-popping operating income, so too is its levered free cash flow a thing of beauty. Over the last 5 years, it has increased from $1.7 billion to $2.8 billion.

With such high cash flow, you might be wondering why the cash levels are so low. There are three primary reasons for this. Firstly, capex is a significant cost for a railroad business. Debt financing also sucks up cash like a vacuum. And dividend payments are a third reason, though the 1.87% yield is relatively modest.

Other checkmarks in favor of the bulls are the company’s network of 20,000+ miles of track, a diverse customer base, and a century long history of paying out dividends.