Better Buy: Canadian National Railway or Canadian Pacific Railway?

Canadian National Railway (TSX:CNR) is a great company, but could its closest competitor be even better?

| More on:
rail train

Image source: Getty Images

Canadian National Railway (TSX:CNR) and Canadian Pacific Railway (TSX:CP) are two of Canada’s biggest transportation companies. Both are railroad companies with assets in trucking and other related transportation services. Both are economically indispensable components of North America’s supply chains. And both have been great investments for their shareholders, having appreciated more than the markets have over the last 10 years.

It’s quite likely that those who buy CNR or CP today will do well. The single most important factor in how successful a business will be is how much competition it faces, and CNR and CP are each other’s only real competitors. Probably buying both stocks and just sitting on them will prove to be a wise strategy. However, it is worth exploring which of the two is the better stock — as an intellectual exercise, if nothing else. Accordingly, I will spend the remainder of this article exploring CNR and CP side by side, so you can decide which is the better buy for you.

The case for CN Railway

The biggest advantage that CN Railway has over CP Railway is that its competitive position is somewhat more entrenched. It has a massive network of tracks that touches three coasts, an advantage that no other North American railroad has. For this reason, it is the go-to railroad for shipping goods to and from certain destinations (let’s say, British Columbia to New Orleans). Canadian Pacific Railway does not have quite the same indispensability.

Another thing that CN Railway has over CP Railway is a cheaper valuation. At today’s prices, CNR trades at 19.5 times earnings, 5.9 times sales, and 4.9 times book value. For its part, CP Railway trades at 26 times earnings, 10.6 times sales, and 2.6 times book value. CP has the lower book value multiple but is overall more expensive than CNR when we look at a number of different multiples and compare them side by side.

A final point that CNR has in its favour is “smart money” ownership. CN Rail is owned by the Gates family estate, “Cascade Investments,” managed by Michael Larson. This is one of the most sophisticated family offices in the world, with a sterling reputation. For its part, CP is backed by hedge fund legend Bill Ackman. I’ll call this factor a draw, with CNR and CP both having a lot of smart money support.

The case for Canadian Pacific Railway

The biggest advantage that the Canadian Pacific Railway has over CN Railway is growth. Over the last 10 years, CP has grown its revenue, earnings and free cash flow at the following CAGR rates:

  • Revenue: 4.7%
  • Earnings: 20%
  • Free cash flow: 39%

CNR, for its part, has grown at these CAGR rates:

  • Revenue: 5.8%
  • Earnings: 9.8%
  • Free cash flow: 11%

As you can see, CP’s growth has been much more rapid than CNR’s. However, past growth is not the same as future growth, and CNR is cheaper than CP today. On the whole, if I had to buy just one of these stocks today, I’d buy CNR due to the cheaper valuation.

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 Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends Canadian National Railway and Canadian Pacific Kansas City. The Motley Fool has a disclosure policy.

More on Dividend Stocks

A worker gives a business presentation.
Dividend Stocks

TSX Communications in April 2024: The Best Stocks to Buy Right Now

Here are two of the best TSX communication stocks you can buy in April 2024 and hold for years to…

Read more »

Man considering whether to sell or buy
Dividend Stocks

Royal Bank of Canada Stock: Buy, Sell, or Hold?

Royal Bank of Canada (TSX:RY) has a high dividend yield. Should you buy it?

Read more »

Businessman looking at a red arrow crashing through the floor
Dividend Stocks

BCE’s Stock Price Has Fallen to its 10-Year Low of $44: How Low Can it Go?

BCE stock price has dipped 39% in two years and shows no signs of growth in the next few months.…

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

Invest $10,000 in This Dividend Stock for $3,974.80 in Passive Income

This dividend stock gives you far more passive income than just from dividends alone, so consider it if you want…

Read more »

Payday ringed on a calendar
Dividend Stocks

This 6% Dividend Stock Pays Cash Every Month

Can a 6% dividend yield help you build a monthly retirement income? An investment made right can help you build…

Read more »

Payday ringed on a calendar
Dividend Stocks

Passive Income: How Much Should You Invest to Earn $1,000 Every Month?

These three monthly-paying dividend stocks can help you earn a monthly passive income of $1,000.

Read more »

Dividend Stocks

3 Dividend Stocks to Double Up on Right Now

Some of these dividend stocks will take longer to recover than others, but they'll certainly pay you to stick around.

Read more »

TFSA and coins
Dividend Stocks

TFSA Passive Income: How Much to Invest to Earn $250/Month

Want to earn $250/month of tax-free passive income? Here are four Canadian dividend stocks to look at buying in your…

Read more »