The railways have been insane investments for the past few years. Canadian Pacific Railway Limited (TSX: CP)(NYSE: CP) has reached levels that are unheard of and Canadian National Railway Company (TSX: CNR)(NYSE: CNI) continues to operate at a tremendous fashion. Both of these companies are solid investments if you have held them for the past year—or longer.
But going into 2015, I think one of these companies is going to outperform the other and will return more money to its investors.
Canadian Pacific Railway
This railway gets talked about a lot more because of its attempt to merge with other railroads and because it has activist investor Bill Ackman as an investor. In one year, it has gone from $160 per share up to over $240 per share and has now fallen to a respectable end-of-year $200 per share.
Where Canadian Pacific really proves its success is in its operating ratio. This is a measure of how much it costs a railroad company to add another dollar of revenue. The lower the number, the better it is. Canadian Pacific is currently at around 62% efficiency. The CEO had hoped to reach mid-60s by 2016, so by beating that already, the future could be even brighter for the company.
The company intends to aggressively increase its earnings per share and the CEO even suggested that it might double it from this year’s mark. If the company proves successful, Canadian Pacific will be valued at a significantly higher price than it currently is.
Canadian National Railway
The only true transcontinental railroad in existence, Canadian National Railway is the quieter of the two companies. It doesn’t have a big activist investor. But it has gone from below $60 per share to a high of $85 per share and has now fallen to the $74 per share range.
That transcontinental tag really is an attractive quality because it means that the railroad can ship east-to-west as well as north-to-south. Looking at the map of Canadian National Railway’s track, it looks like a T.
Like Canadian Pacific, it also has a really great efficiency. It is currently at around 58.8%, which is an industry best. As the company continues to upgrade its locomotives, that efficiency will only get better.
Which is better?
I believe Canadian National Railway is the better investments. Canadian Pacific gets more press and there are greater expectations there, with the company trying to double its growth. But the simple fact is, Canadian National outperforms on efficiency, value, and dividends.
Canadian National Railway is currently sporting a 20.76 P/E whereas Canadian Pacific is over 30. Canadian National pays a 1.35% yield whereas Canadian Pacific only pays 0.70%.
And putting that aside, I find it much harder for Canadian Pacific to double its growth than for Canadian National Railway. Because of that, I think the latter is the company to add to your portfolio for 2015.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Jacob Donnelly has no position in any stocks mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. Canadian National is a recommendation of Stock Advisor Canada.