Battle of the Rail Stocks: CN Rail (TSX:CNR) vs. CP Rail (TSX:CP) … Which Should You Buy?

Should TFSA investors load up on Canadian National Railway Company (TSX:CNR)(NYSE:CNI) or its peer?

| More on:
railroad

Image source: Getty Images

Canadian National Railway (TSX:CNR)(NYSE:CNI) and Canadian Pacific Railway (TSX:CP)(NYSE:CP), Canada’s top two rail plays, compete with one another for the investment dollars of Canadians. While both names are sensitive to the state of the North American economy, both names have their own company-specific strategies and differing valuations that are always changing.

At any given point in time, there’s a best rail for your buck, just like there’s a best bank for your buck. So, without further ado, let’s take a closer look at each name to determine which, if any, is a better buy in late July.

CN Rail

It’s tough to match the dividend-growth potential of CN Rail. It’s the king of the rails, with industry-leading fundamentals and an operating ratio that’s nothing short of enviable. Despite experiencing a few CEO changes over the last few years, the company is still chugging along, getting prepped for increased freightloads without compromising too much in terms of operational efficiency.

CEO J.J. Ruest, an unlikely man for the job after ex-CEO Claude Mongeau’s departure, has proven he has what it takes to take North America’s largest railway to the next level. CN Rail has one of the widest moats out there with its expansive rail network and ability to pass value to its customers.

As of the latest quarter, unfavourable winter weather conditions were a major culprit that weighed on CN Rail’s operating ratio (lower is better), causing it to increase to 69.5% from 67.8%. As the Canadian economy picks up in the second half, look for CN Rail to make up for lost time on the efficiency front, as management continues to scale up responsibly.

CP Rail

The number two rail player in Canada, although not as “growthy” as it was back in the Hunter Harrison days, is still a force to be reckoned with. Like CN Rail, CP Rail is well positioned to improve its operating ratio after the bout of poor weather in the early part of 2019.

While I don’t expect CP Rail to compete with CN Rail on the operational efficiency front over a long-term time span, CP Rail has been doing a lot of things right under Keith Creel, who was well versed in precision railroading under Hunter Harrison. Margins have been improving thanks to effective cost controls and operating leverage as of the first quarter.

CP Rail stock trades at 13.7 times EV/EBITDA, slightly higher than CN Rail, which trades at 13.2 times EV/EBITDA. Given CN Rail has a larger moat and CP Rail isn’t the same growth king it was many years back, I’d have to give the nod to CN Rail at this juncture.

Stay hungry. Stay Foolish.

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 Joey Frenette owns shares of Canadian National Railway. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. Canadian National Railway is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »