Shares of CN Rail (TSX:CNR) received an upgrade courtesy of Morgan Stanley last week. The firm increased the rating from equal weight to overweight following the firm’s annual investor day presentation. Indeed, there was a lot to love about the meeting. Ravi Shanker, the analyst at Morgan Stanley, noted that the growth plans may yet to be priced into the stock at this juncture. I’m in agreement. CN Rail stock looks like a pretty compelling play right here, even though a recession could derail (pardon the pun) economic growth for a few quarters.
At writing, CN Rail stock is trading at $162 and change. They’re fresh off a correction and could be in a spot to stage a run for new highs, as the firm looks to make the most of a challenging macro climate. The stock is down just north of 6% from its all-time high of $173 per share and goes for 20.46 times trailing price to earnings (P/E), which is pretty much in line with that of historical averages.
Of course, CN Rail may have lost a bit of lustre, thanks to its top rail rival in CP Rail Kansas City (TSX:CP), which won the right to acquire Kansas City Southern.
When the two top Canadian rails were duking it out in an effort to buy the American rail, I noted that it was very unlikely that CN Rail would walk away the winner. It already had an impressive and extensive rail network. And regulators were less likely to give the larger, more dominant firm the benefit of the doubt.
Though we’ll never know if CN Rail was simply trying to raise the price for its Canadian rival, I think many investors aren’t giving CN the attention it deserves now that CP and Kansas City Southern have merged.
CN Rail is still duking it out with its long-time rival
Yes, CP Kansas City seems like a more interesting play here. There are a lot of efficiencies to be juiced post-merger. Further, it’s also a rail operator that spans Canada, the U.S., and Mexico. And it could leverage its unique position effectively.
Indeed, CP is now a more effective challenger to CN. Although I am impressed with CP’s growth prospects with Kansas City’s assets aboard, I cringe slightly at the valuation. Further, I think investors are discounting CN Rail’s ability to compete when it comes to Canada-U.S.-Mexico transportation services. Recently, CN Rail teamed up with two other railways on an intermodal service called Falcon Premium. Just like that, CN (and its collaborators) will be more competitive with the likes of CP Kansas City in the southern U.S. and Mexican regions.
I’m incredibly bullish on the announcement and think CN Rail stock may have a bit of room to run, as investors grow to better appreciate the potential of Falcon Premium.
The Foolish bottom line
CN Rail stock may not be a steal at current levels, but it is a “wonderful” business at a pretty fair price, especially versus its top rival CP, which trades at a steep 27.3 times trailing price-to-earnings ratio at the time of writing. With the larger dividend yield (1.96% vs. 0.7%) and a lower multiple, CNR stock comes out over CP stock, in my books.
