CP Rail or CN Rail: Which Stock Is a Better Buy Today?

CP Rail and CN Rail are long-term rivals. The fight over the Kansas City Southern Railway is heating up. Which stock is the better buy today?

| More on:
railroad with nature background

Image source: Getty Images

The two top Canadian railroad stocks are locked in a battle to acquire the clutch railway business of Kansas City Southern (NYSE:KSU). Frankly, in a world where railroads are as hard to build as pipelines, it is understandable why the battle has turned tooth and nail.

The KSU network could be a game changer for these stocks

That is why the KSU network is so key. Whoever gets KSU gets to exclusively connect three industrial-leading countries together. It’s a toll-road arrangement every railroader dreams about. Not only is there the geographic advantages, but there are also significant operational synergies that can be unlocked over time.

In an industry where results are largely based on volumes, efficiency, and the overall economy, the opportunity to buy an entire railroad is literally “once in a lifetime.” With that in mind, I guess you can understand why this deal is so important. Given this, I guess the question needs to be asked: which of these value stocks is better to own today?

Canadian National is one of the biggest

Canadian National Railway (TSX:CNR)(NYSE:CNI) is, by far, the larger of the two Canadian railways. It has a market capitalization of $94 billion and is the fifth-largest Class 1 railroad in the United States. CN is known as Canada’s north-south rail line, because it spans all the way from Yellowknife to New Orleans. It has approximately 20,000 miles of track in its network.

Despite its expansive network, its stock has lagged over the past few years. In fact, year to date, the stock is down 4.5%. In the first quarter of 2021, year-over-year revenues were stagnant (and have not improved since 2019) and its adjusted operating ratio of 66% actually got worse. Regardless, the company is still very profitable, but perhaps not as profitable as it could be.

Certainly, CN has the balance sheet to complete its $33 billion takeover offer of KSU. However, there are many questions as to whether regulators will allow it. It would make it a behemoth in the U.S., and fair competition/pricing could be compromised. Given the collapse in the share price, it appears many shareholders are not loving the deal. The good news is this could present an attractive buying point for new investors.

CP Rail Stock Versus CN Rail Stock Over Five Years

Canadian Pacific is the best operator

Canadian Pacific Railway (TSX:CP)(NYSE:CP) is almost half the size of CN. It has a market capitalization of $49 billion. CP is the smallest Class 1 railroad in the United States. It operates 13,000 miles of track across Canada and the northern United States. Over the past five years, and particularly the last year, CP stock has outperformed CN’s. In fact, it has doubled CN’s returns.

This is largely because CEO Keith Creel has relentlessly pursued operational efficiencies and organic growth initiatives. While revenues declined 4% in the first quarter, the company still improved its adjusted operating ratio 70 basis points to 58.5%. That’s industry leading! Despite the pandemic, CP broke records for transporting grain, automobiles, and intermodal.

All in all, I like this stock for the fact that it makes much with little. The lower its operating ratio, the more profitable it is. Given a singular connection in Kansas City, I believe the KSU acquisition is a great fit. Regulators could smile more favourably on a smaller railroad merging with an equal. However, the deal comes down to price. Should CP match CN’s bid, I would start to get very concerned about its balance sheet. Its current offer is already a substantial bid for a railway.

Which stock should you buy?

So, which stock should you own? To be honest, both are great businesses that are well managed and well capitalized. Certainly, CN’s recent stock dip could be an attractive long-term buying opportunity. Likewise, it has a lot more room for operational improvement and better margins.

However, CP is undoubtedly one of the best operators in North America. It has a top management team that can make just about any asset profitable. If it can succeed through the bidding war (and subsequent regulatory hurdles), the KSU merger could propel exceptional returns going forward.

Considering this, my bet today is on CP. Given the increasing drama unfolding, however, that wager could change quickly.

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 Robin Brown has no position in any of the stocks mentioned. 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

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

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

potted green plant grows up in arrow shape
Stocks for Beginners

3 Growth Stocks I’m Buying in April

These three growth stocks are up in the last year, and that is likely to continue on as we keep…

Read more »

Growth from coins
Dividend Stocks

1 Grade A Dividend Stock Down 11% to Buy and Hold Forever 

If you're looking for the right dividend stock at the right price, you're going to want to consider this insurance…

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Stocks for Beginners

3 TFSA Hacks That Could Make You a Millionaire

Do you want a $1 million without worrying about the tax bill? These TFSA hacks could help you become a…

Read more »

Early retirement handwritten in a note
Stocks for Beginners

These 2 TSX Growth Stocks Could Help You Retire Early

Buying these two TSX growth stocks can help you retire early by multiplying hard-earned savings in the long run.

Read more »

Technology
Stocks for Beginners

The Best Stocks to Invest $1,000 in Right Now

Want a great starter portfolio? Here’s a list of the best stocks to invest $1,000 in right now for long-term…

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »