CP Stock or CNR Stock: Which Is Better for Your TFSA?

Earnings are coming in for the big railway companies, but should Motley Fool investors consider CP (TSX:CP)(NYSE:CP) stock or CNR (TSX:CNR)(NYSE:CNI) stock?

Editor’s Note: An earlier version of this article stated that Canadian Pacific Railway would become the largest railway in North America. This is incorrect, it is now the only railway to stretch through North America from Canada to Mexico.

Canadian National Railway (TSX: CNR)(NYSE: CNI) and Canadian Pacific Railway (TSX: CP)(NYSE: CP) both have earnings due this week. And both have had quite the wild ride over the last year. CNR stock and CP stock were both in a battle over Kansas City Southern Railway. A battle that CP stock won.

But is that a win for long-term or short-term investors? And is CNR stock now not a good bet, or does the cash on hand make it a good choice for Motley Fool buyers?

Today, we’ll take a look at both stocks and see which one Motley Fool investors should consider for your Tax-Free Savings Account (TFSA) ahead of earnings.

Past earnings

First, let’s look at the last earnings report for CP stock and CNR stock for your TFSA. During the third-quarter report, the company reported a 10% year-over-year increase in diluted earnings per share to $1.52. Further, revenue increased 5% up to $3.6 billion. However, free cash flow went down to about $2 billion. It was a strong quarter, despite wildfires that disrupted transportation, with the company maintaining its goal of delivering $700 million of operating income for 2022.

As for CP stock, management announced revenue of $1.94 billion for the quarter, so almost a billion shorter than CNR stock. Further, diluted EPS of $0.88, with management blaming the short fall on supply-chain challenges as well as the wildfires. That being said, CP stock expects full-year double-digit adjusted diluted EPS growth in 2021.

The deal and the drama

This report came after the conclusion to a long drama throughout 2021. CNR stock actually went up when KCS announced it would be merging with CP stock. Then CP went down, as the huge cost to buy up KCS would surely hamper near-term operating income.

But that doesn’t mean the drama is over. Far from it. Since then, CNR stock practically had a coup, with its CEO ousted to be replaced with a large stakeholder’s choice. However, that choice dropped out soon, leaving them with an interim option for now. Meanwhile, CNR stock continues to try and raise capital by selling off rails in Michigan and Wisconsin.

As for CP stock, the company continues to spend money on future momentum. And not all shareholders are happy about it. The company recently added eight more hydrogen-fuel cell locomotives with Ballard Power Systems. It also entered a new long-term agreement with Canpotex to deliver its potash to overseas markets.

What analysts say

As of writing, CNR stock remains a hold by most analysts. The drama particularly surrounding company management is definitely one that cannot be ignored in your TFSA. Furthermore, near-term challenges, such as Western Canadian weather followed by summer droughts, will affect volumes moving forward. One analyst came out on Tuesday stating he expects earnings to be below estimates.

What Motley Fool investors should watch for is an update from management regarding the search for a new CEO, and an update on its strategic plan. This would include the plan to improve its operating ratio beyond 2022.

As for CP stock, analysts tend to lean towards it over CNR stock these days. This comes down the merger with KCS, true, but also because this merger isn’t reflected in its current share price. Despite facing the same difficulties as CNR, it now has the benefit of being the only railway in North America to stretch from Canada through the U.S. down to Mexico.

Investors should therefore look at CP stock and how management plans on removing some of the unclear points on the merger. However, long term, it’s certainly a strong option.

Analysts therefore mark CP stock as a buy, continuing to raise their targets. As of writing, the company has a target price of about $107 compared to CNR stock at $153. While CP has a decent upside of 18% for your TFSA, CNR trades at this value.

Fool contributor Amy Legate-Wolfe owns Canadian Pacific Railway Limited. The Motley Fool recommends Canadian National Railway.

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