The Canadian rail stocks are worthy investments for any portfolio aiming to top the TSX Index over the long haul. Indeed, few earnings growth gems have a moat that’s as wide as the railways. And though they may sag a bit in the face of economic weakness, I’d not look to ditch them while they go on sale. The rails always find their way.
This recent barrage of headwinds is nothing special, in my opinion. Arguably, recent dips in the Canadian railways are more of a golden buying opportunity than a sign that it’s time to hit the panic button over a waning economy.
After a solid 2023 for markets, we’d better temper our expectations for 2024, especially if the elusive recession finally makes an appearance. Just because a recession touches down does not mean 2024 will be a down year. A fairly weak year for the economy could be a pretty good one for markets. Remember the run in 2020-21?
It has not been the best past few years for the economy, as COVID lockdowns struck hard. Still, the market surged higher, only to falter in 2022.
Without further ado, let’s check in with CN Rail (TSX:CNR) and CP Rail (TSX:CP) to see which rail stock looks like the better deal after recent choppiness. Both rail stocks trade at similar price-to-earnings (P/E) multiples after recent turbulence. However, the growth stories for the two couldn’t be more different.
CN Rail
CN Rail stock has been a choppy and lacklustre performer in recent years. Chief Executive Officer Tracy Robinson was recently named Newcomer of the Year, according to The Globe and Mail. Indeed, Robinson stepped in at a pretty tough time for CN Rail.
Still, I think it’s too early to be giving CN’s managers too much praise, at least until the stock can break out past its ceiling of resistance, just north of the $170 per share mark. Inflation and macro headwinds could continue to keep shares of CNR from surging to new heights. Regardless, CN stands out as one of the companies that will eventually find a way to march higher again, likely as macro headwinds dissipate.
For now, the stock goes for 21.34 times trailing P/E. That’s arguably an expensive multiple, given the cost troubles the rail industry has faced of late. Though I’d like to pick up more shares if the P/E ratio falls back to the teens, I’m not so sure the premier railway will trade at such a discount again, especially if 2024 is a year that’s better than feared.
For now, there’s a lot to love about the fast-growing dividend, which yields 2.01% at writing. CN’s still a dividend-growth stud, even when times are less than ideal. That alone makes CNR stock worth the rich multiple.
CP Rail
CP Rail seems like a spicier play for younger Canadian investors seeking long-term upside to be had from the firm’s Kansas City Southern acquisition. The stock has freshly corrected, now off around 13% from its May 2023 all-time highs, thanks in part to concerns over macro headwinds, to which CP is not immune. The stock goes for a reasonable 21.88 times trailing P/E, which is just a hair higher than that of rail rival CN Rail.
With growth expectations now mild after the recent slip, I’d be inclined to step in. At the end of the day, you’re getting some of the best managers in the rail scene. And if they can stay resilient amid turbulent conditions, I think long-term investors who get in here will do reasonably well.
Better buy: CN or CP?
It’s hard to choose. CP seems more exciting, but CN’s dividend is more impressive. At this juncture, why not buy shares of both companies? If I had to choose one, it’d have to be CNR for the dividend.
