Canadian National Railway (TSX:CNR) and Canadian Pacific Kansas City Railway (TSX:CP) are Canada’s only railroad stocks. One is a major transportation company with a prestigious “three coast” rail network, while the other is best known for having acquired the U.S. railroad Kansas City Railway. Together, they are a duopoly on rail transportation in Canada.
The question is, which railroad stock is better? Both have significant billionaire backing, CNR being owned by Cascade Investments, and CP being a longtime holding of Bill Ackman. Based on their shareholder registers, both of these companies are quite impressive. However, only one can be the true King of Canadian railroads. In this article, I will explore the two companies side by side, so you can decide which of the two Canadian rail giants is right for your portfolio.
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The case for CN Railway
A case for holding CN Railway instead of Canadian Pacific Railway can be built on profitability. CNR has better margins than CP railway across the board. As you can see in the table below, the “profit” factor is a “blowout victory” for CN Railway.
| CN Railway – Margins & related | CP Railway – Margins |
| Gross margin – 56.1% Operating income (“EBIT”) margin – 42% Net margin – 33% Free cash flow margin – 17% Return on equity – 27% | Gross margin – 52% Operating income (“EBIT”) margin – 39% Net margin – 31% Free cash flow margin – 12% Return on equity – 9.7% |
CN Railway is more profitable than CP Railway going by every common profit metric. That’s not surprising. A few years back, Canada Pacific completed the acquisition of Kansas City Railroad, which resulted in several deal-related costs. These kinds of costs sometimes take several years to be fully absorbed; some, such as debt, can incur interest expenses indefinitely. It’s likely that factors such as these are holding back CP’s profitability compared to CNR’s. It’s not all bad news for Canadian Pacific, though, because it has one factor over CN Railway: growth.
The case for Canadian Pacific Kansas City Railroad
A case for buying Canadian Pacific Railway over CN Railway can be built on the growth factor. CP is growing much faster than CN Railway, as you can see in the table below:
| CN Railway – Growth | CP Railway – Growth |
| Revenue: -1.6% EBIT: -3.6% Net income: 9.9% Diluted earnings per share (“EPS”): 14.6% | Revenue: 42% EBIT: 28.6% Net income: 11.6% Diluted earnings per share (“EPS”): 11.6% |
Without a doubt, CP is the faster growing railroad stock. However, this growth was achieved largely by buying Kansas City Railroad for $31 billion – a truly steep price tag. It’s not clear that the deal was worth the price, especially considering that CP had to assume $3.8 billion worth of Kansas City debt to make it happen. The cash and stock deal does not appear to have diluted Canadian Pacific’s equity, as CP’s net income and diluted EPS were identical in the trailing 12-month period.
On the whole, I am inclined to favour CN Railway stock over CP Railway. Although the latter company grew faster in the trailing 12-month period, an expensive deal was responsible for the growth. CNR’s better profit metrics win the day for me.
