Transportation stocks may be steering a tad off course these days, with the broader markets being weighed down by the effect of higher rates. While the Bank of Canada recently noted that more hikes could be in the cards, I’d argue that we’re closer to peak rates than many think. Of course, we’ll only know when there’s a peak well after the fact.
So, investors looking to prosper from a swift retreat in rates may need to punch their ticket now, when it’s not clear what direction rates will head over the nearer term. Indeed, Guaranteed Investment Certificates get more bountiful by the month these days. In any case, there’s no denying the pressures faced by the economy. If it’s enough to convince the Bank of Canada to stop the rate hikes entirely, though, will continue to be a mystery.
Of course, transportation stocks will always be sensitive to the state of the economy. Right now, the outlook isn’t all too upbeat, as the negative impact of recent rate hikes begins to weigh on economic growth.
Over the long run, though, transportation stocks stand out as vital to the health of a functional economy. If you’re committed to investing for years at a time, rather than just weeks or months, recent weakness hitting the transport plays is looking compelling from a valuation perspective.
CN Rail
CN Rail (TSX:CNR) has been my preferred way to play the railway industry for many years now. After going through a few chief executive officers over the past decade and losing ground (and a major bidding war for Kansas City Southern) to its rival CP Rail, I’m inclined to like CP Rail (TSX:CP) a little more nowadays, at least on a relative basis.
Certainly, CN Rail looks more affordable at these levels. It looks to be the better value relative to CP stock at around 18.9 times trailing price to earnings. The 2.14% dividend is also quite impressive and poised to grow at a consistent rate over the coming years and decades. Not to mention that it towers over CP’s dividend yield, which is shy of 0.8%.
Of course, CNR stock has not done anything for three years now. At $147 and change, shares are right back to where they were during the October 2020 peak.
What’s behind the share stall? Higher costs (fuel and labour), a sluggish economy, and worries of a recession ought to take most of the blame. Personally, I think management hasn’t been able to live up to the company’s reputation as North America’s most efficient railroad.
CP Rail
CP Rail has been steadily catching up to CN in recent years, with some exceptional results on a relative basis. CP stock is up a solid 88% in the last five years compared to a mere 32.5% delivered by CNR. That’s some serious outperformance.
The Kansas City Southern deal may very well be the long-term catalyst that allows CP to surpass CNR stock in market cap (CNR’s market cap is $96.5 billion vs. CP’s $91.5 billion) at some point over the next few years. In any case, there’s no denying that CP has become a more efficient operator over the past decade.
Though CP seems to be improving at an impressive rate, I’m not itching to pay a hefty multiple of 21.34 times trailing price to earnings. That’s expensive, given the headwinds that could lie ahead.
Further, the 0.77% dividend yield isn’t nearly as enticing as CN Rail’s. Though the growth profile looks attractive, I think CNR may ultimately be the better way to play a “flatlining” market weighed down by high rates. At the very least, you’ll get the juicier dividend with CNR shares. Further, CP is the “growthier” play in a market where growth could stand to be punished further amid ongoing rate hikes.
Ultimately, I don’t think Canadians can go wrong by picking up shares of either CP or CNR as they go flat.
