Investors: Should You Buy CNR or CP Stock Right Now?

These two railway companies have long been superior investments. But one seem to slightly edge out the other.

Amy Legate-Wolfe

Author Bio Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Her work can also be found at Canada's National Observer, where she writes on the business side of climate action. Before joining Motley Fool Canada, Amy wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Social Media Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published September 19, 2024 4:30 pm EDT

Canadian railways have long been a cornerstone of the country’s economy, offering steady returns for investors. Railways are integral to North America’s supply chain, moving over $250 billion worth of goods annually. Not only are Canadian rail companies highly efficient, but they also consistently generate significant cash flow, thereby making them strong contenders for long-term investment. But which is the better buy?

A train passes Morant's curve in Banff National Park in the Canadian Rockies. — Source: Getty Images

CNR stock

Canadian National Railway (TSX: CNR) is one of the largest railway companies in Canada and is a strong long-term investment. With a market cap of $98.49 billion and a trailing price-to-earnings (P/E) ratio of 18.58, CNR stock has established itself as a stable player in the market. Despite recent fluctuations in earnings, the company’s operating margin of 40.42% and profit margin of 32.02% signal efficient management and robust profitability. Over the last quarter, CNR stock reported a 6.70% revenue growth year over year, indicating solid business momentum. The company’s focus on efficiency and strategic expansion makes it a compelling buy for long-term investors. In the words of CNR’s chief executive officer (CEO) Tracy Robinson, “Our disciplined approach to growth and efficiency has positioned us well for future opportunities.”

Earnings momentum for CNR stock has been strong, with net income reaching $5.46 billion over the trailing 12 months and a quarterly revenue growth rate of 6.70% year over year. While there was a minor dip in quarterly earnings growth, down 4.5%, CNR stock continues to generate significant free cash flow, reporting $2.55 billion in levered free cash flow. CNR’s consistent dividend payouts, with a forward annual dividend rate of $3.38 at writing, make it attractive for dividend investors as well. Despite short-term fluctuations, its long-term growth prospects remain solid due to its essential role in transportation infrastructure.

CP stock

For Canadian Pacific Kansas City (TSX: CP), another leading railway company on the TSX, the case for investment is equally strong. With a market cap of $104.87 billion and a forward P/E of 21.79, CP has continued to perform well despite the challenges in the global economy. The company has consistently posted strong revenue growth, with a quarterly year-over-year revenue increase of 13.50%. CP’s operating margin stands at 38.38%, reflecting its efficient operations and strong market position. Its history of growth and commitment to long-term success make it a standout investment option in the transportation sector.

Although CP saw a 31.6% decline in quarterly earnings growth year over year, its ability to maintain robust revenue and free cash flow generation demonstrates resilience. CP reported earnings before interest, taxes, depreciation, and amortization (EBITDA) of $7.33 billion and levered free cash flow of $2.04 billion, thus indicating it can comfortably handle debt and finance growth initiatives. CP also offers a dividend yield of 0.68%, providing a reliable income stream for investors. As CP’s CEO Keith Creel stated, “Our strategy of disciplined growth, operational excellence, and shareholder returns positions us well for the future.”

Foolish takeaway

Both CNR stock and CP are strong long-term investment options for Canadian investors. These companies are deeply embedded in the economic framework of North America, offering a reliable mix of income through dividends and capital appreciation. The consistent earnings momentum and ability to navigate economic challenges make them safe and valuable holdings for the next decade. Whether you’re building a portfolio or looking to diversify, the stability and growth potential of Canada’s rail sector are hard to ignore.

When comparing both, however, CNR stock edges out as the better buy for long-term investors. With a stronger operating margin and a more attractive dividend, CNR stock presents a combination of stable income and solid growth potential. While both companies have robust revenue streams, CNR’s higher efficiency and dividend reliability make it a slightly safer bet for those focused on long-term returns.