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

Woman has an idea
Dividend Stocks

2 Blue-Chip Stocks Every New Canadian Investor Should Own

Canadian blue-chip stocks such as Toronto-Dominion Bank have the ability to deliver market-beating returns to investors in 2022 and beyond.

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

3 Canadian Dividend Stocks to Buy Hand Over Fist

These three Canadian dividend stocks each offer a unique opportunity, making them some of the best investments to buy at…

Read more »

A person builds a rock tower on a beach.
Dividend Stocks

Retirement Wealth: 2 Oversold Canadian Stocks to Buy Now and Own for Decades

These industry-leading dividend stocks look cheap right now and have increased their distributions annually for decades.

Read more »

Tired or stressed businessman sitting on the walkway in panic digital stock market financial background
Dividend Stocks

2 of the Safest TSX Stocks Right Now

The stock market is heading towards a crash. Investors are seeking the safety of dividends, and these two stocks provide…

Read more »

Payday ringed on a calendar
Dividend Stocks

Want Monthly Passive Income? Try These TSX Dividend Payers

In need of extra cash? These dividend stocks offer passive income each month, and you can pick them up cheap…

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

Want Safe Passive Income? Here Are 2 TSX Dividend Aristocrats for New Investors

Need some safe passive income? TSX Dividend Aristocrats like Fortis (TSX:FTS) are ideal stocks for new investors to hold in…

Read more »

grow dividends
Dividend Stocks

2 Cheap TSX Dividend Stocks to Buy Now

These top TSX dividend stocks now offer 6% yields.

Read more »

Piggy bank next to a financial report
Bank Stocks

Got $500? Create Passive Income of $500 in Just 33 Years

Only have a bit of cash to invest? By investing in the right stock, you could make $500 in annual…

Read more »