CN Rail (TSX:CNR) or CP Rail (TSX:CP): Better TFSA Buy?

CN Rail Co. Ltd. (TSX:CNR)(NYSE:CNI) and CP Rail Ltd. (TSX:CP)(NYSE:CP) just pulled back modestly, but are the dips buyable?

| More on:
TFSA and coins

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

What a glorious run it’s been for shares of CN Rail (TSX:CNR)(NYSE:CNI) and CP Rail (TSX:CP)(NYSE:CP) over the past several months. Both major railways will play a major role in lifting the Canadian economy out of its funk over the next several quarters.

With volumes likely to pick up traction into 2021, I think the recent dip in both rail stocks are buyable for TFSA investors looking for excess risk-adjusted returns as the world looks to recover from the coronavirus crisis. But which, if any, is the better buy for your TFSA portfolio at this juncture? Let’s have a closer look at each name:

CN Rail

At the time of writing, CN Rail stock is down just shy of 9% from its high due to what I believe is a massive overreaction to the firm’s sub-par quarterly results, which doesn’t appear to change the 2021 recovery trajectory.

While CN Rail stock’s valuation may have gotten ahead of itself going into the quarter, the name is worthy of a premium multiple as the stage looks set for a big revenue bump alongside what could be a huge improvement to its operating ratio, which, as you’d expect, has dragged for most of the year thanks to the disruptive crisis.

CN Rail is known as North America’s most efficient railway for a reason. Why the firm’s operating ratio (OR) deterioration may be concerning to some, I think the firm will have little trouble getting its OR back down to the mid-single-digits coming the coming year.

Even after the recent correction, CNR stock still looks pricy at 21.3 times next year’s expected earnings and 7.0 times sales. Given the upside to be had in a 2021 economic recovery, though, I’d say the slightly less frothy premium price tag is well worth paying, especially given the relative degree of downside protection you’ll get from the name if next year’s recovery ends up being far rockier than most are expecting.

CP Rail

CP Rail stock has retreated alongside its peer, with shares now down 5.6% from its high. The number two Canadian railway has done a magnificent job of staying operationally efficient (58.2% operating ratio as of the last quarter) despite the profound pressures brought forth by the coronavirus crisis.

The railway’s free cash flow (FCF) took a step back but is poised to bounce back abruptly next year alongside the Canadian economy. Management recently raised its 2020 guidance modestly and is now calling for at least mid-single-digit EPS growth.

At the time of writing, CP stock trades at 20.1 times forward earnings, and like CN, 7.0 times sales. CP has a lofty premium multiple that bakes in a strong economic recovery in 2021. Kay Ng, my colleague here at the Motley Fool, thinks that CP Rail is a better buy than CN Rail because of higher nearer-term EPS growth expectations.

Is CN Rail or CP Rail the better rail stock to buy for your TFSA right now?

Kay and I have agreed with one another on numerous occasions in the past. But this time, I’m afraid I have to disagree when she says CP Rail is the better rail stock to buy here.

CN Rail, I believe, is the far better bet following its 9% dip, as I see greater potential for margin improvement over the year ahead (CN’s OR swelled to 60%, but looks poised to revert to the mid-50s). Moreover, CN’s earnings bar looks to be that much lower following its brutal recent post-earnings flop.

As such, I think CN Rail stock is a far better bet and think shares have greater upside potential versus the likes of its smaller brother over the next 18 months.

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 and recommends Canadian National Railway. The Motley Fool recommends Canadian National Railway.

More on Stocks for Beginners

A stock price graph showing growth over time
Stocks for Beginners

How to Start Investing in U.S. Stocks

ETFs are a smart way for new investors to easily buy U.S. stocks.

Read more »

analyze data
Stocks for Beginners

3 Stocks All New Investors Should Buy Today

Are you interested in building your first stock portfolio? Here are three stocks that all new investors should buy today!

Read more »

Path to retirement
Stocks for Beginners

4 No-Brainer U.S. Stocks for Canadian Investors

These U.S. stocks should be picked up immediately in the rebounding economy, and held onto for significant gains in the…

Read more »

edit Woman calculating figures next to a laptop
Stocks for Beginners

3 Young TSX Stocks New Investors Should Buy Now

Nutrien (TSX:NTR)(NYSE:NTR) stock along with these two other TSX stocks are strong choices, even though they came on the market…

Read more »

Car, EV, electric vehicle
Stocks for Beginners

1 Canadian Electric Vehicle Stock You Can Buy Now and Hold Forever

Magna International’s increasing interest in electric vehicles and mobility technology could help its stock soar in the coming years.

Read more »

data analyze research
Stocks for Beginners

New to Investing? 3 Top Stocks Every Canadian Should Own

Looking to strike a balance in your portfolio? It's easier than you think! Here are three top stocks that every…

Read more »

A small flower grows out of a concrete crack.
Stocks for Beginners

TFSA Investors: 2 TSX Stocks With Unbelievable Staying Power

These two quality TSX stocks can deliver solid long-term returns for investors. Grow your money tax free in your TFSA!

Read more »

Shopping card with boxes labelled REITs, ETFs, Bonds, Stocks
Stocks for Beginners

TFSA Investors: Top TSX Stocks to Buy With $6,000

Here are two safe, dividend-paying TSX stocks for your long-term portfolio.

Read more »