The Canadian railways are incredible businesses to hold in your TFSA (Tax-Free Savings Account) for decades at a time. Of course, there will always be periods of sideways or even downward activity as the Canadian and U.S. economies pull the brakes by a bit. Regardless, the railways always find a way to march higher as they look to transport tons of goods across lengthy distances.
Indeed, the railways may be among the oldest businesses out there. But they still represent one of the most efficient and lowest-cost movers of massive quantities of goods across continental North America.
Additionally, the rise of electrified locomotives (and hydrogen-powered ones) may make the railways even better from an environmental standpoint in the coming decades. In any case, the future for the top Canadian rail stocks is bright. And with shares currently climbing higher with hopes that the economy can return to full speed, I think value investors may wish to hop aboard.
The Canadian rails are among the best-run on the continent. Further, they are slightly on the cheap side as we head into May, even if you’re a tad skeptical about the stock market rally.
Without further ado, let’s check in with CN Rail (TSX: CNR) and CP Rail (TSX: CP).
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CN Rail
CN Rail stock is one of those Canadian blue chips you can stash in your TFSA and forget you own. After rallying more than 22% in just the past six months, I think that the newfound momentum represents another reason to punch your ticket to a stock that I view as still undervalued. At 20.7 times trailing price to earnings (P/E), the wide-moat rail gem isn’t exactly expensive when you consider its track record of driving earnings growth and dividends higher steadily over time.
Recently, the firm clocked in its quarterly earnings, which saw profits fall a bit amid the recent rise in labour costs and softer container shipments. Indeed, the reaction to the number was quite muted. In any case, I think CNR stock is a great buy for the long haul, even if the recent rally is destined to go sideways for the next few months.
CP Rail
CP Rail is another great railway worth considering after its 24% surge over the past six months. Undoubtedly, with Kansas City Southern assets aboard, CP (or CPKC as it’s now called) seems like the better growth bet for the next 10-15 years. That said, the stock is a heck of a lot more expensive than CN Rail after the latest pop.
At 28.4 times trailing P/E, the industry premium is quite apparent. But is it worth paying up for? I’m not so sure. Personally, I’d much rather wait for a correction before having a chance to really load up if you’re a bull on the long-term growth story.
The bottom line
Though CP remains the more exciting of the two, I must say the lower P/E ratio on CNR has me more enticed at this juncture, especially following Bank of America’s latest upgrade (from neutral to buy). So, in short, CNR stock wins this battle of the rails for May 2024.
