When deciding whether Canadian Pacific Kansas City (TSX:CP) or Canadian National Railway Company (TSX:CNR) is the better railway stock to invest in for 2025, there are several factors to consider. These include recent earnings, financial metrics, operational efficiency, and long-term growth prospects. Both railway stocks are industry leaders in Canada, with rail networks playing vital roles in North American trade and logistics. Here’s a deeper dive into how these two railway giants compare and which might be the better buy for your portfolio in 2025.
Into earnings
CNR recently released its earnings for the third quarter of 2024, showcasing diluted earnings per share (EPS) of $3.29, representing a 57% increase year over year. However, adjusted diluted EPS fell by 4% to $2.02, reflecting some operational challenges. Revenue grew modestly by 3.1% year over year to $17.16 billion. Supported by strength in certain freight categories despite disruptions from labour stoppages and wildfires in Alberta earlier in the year. The operating ratio, a key efficiency measure, rose to 59.3% compared to 57.9% in the prior year, indicating higher costs relative to revenue.
Meanwhile, CP is set to release its fourth-quarter results, with analysts forecasting earnings of $0.91 per share. Thus representing potential year-over-year growth. CP has consistently outperformed in terms of operational efficiency with its leaner network and strategic acquisitions. Such as its merger with Kansas City Southern, expanding its network to cover Canada, the U.S., and Mexico. Analysts expect CP’s revenue to grow as it continues to benefit from its cross-border trade routes and rising demand for freight services.
The numbers
When comparing valuations, CNR offers a lower trailing price-to-earnings (P/E) ratio of 17.77, suggesting a better value proposition for investors focused on earnings relative to price. Its forward P/E ratio stands at 18.32, highlighting moderate growth expectations. CNR also boasts an impressive profit margin of 31.66%, reflecting strong operational efficiency and cost management. Furthermore, the railway stock offers a forward annual dividend yield of 2.25%, which is higher than CP’s 0.67%. This makes CNR an attractive choice for dividend-focused investors.
CP, however, trades at a higher trailing P/E ratio of 29.77, reflecting a premium valuation due to its growth potential. CP’s profit margin of 24.50% is lower than CNR’s, but it is still robust for the industry. The railway stock’s forward annual dividend yield is modest at 0.67%, which may not appeal to income investors. Yet, it aligns with its strategy of reinvesting earnings into growth opportunities. Its revenue per share of $15.49 lags behind CNR’s $26.90, but CP’s smaller share base and higher asset turnover contribute to its strong growth outlook.
Future focus
CNR has faced headwinds, including labour disruptions and weather-related challenges, which led to a downward revision in its 2024 profit forecast. The railway stock now expects low single-digit adjusted EPS growth for the year, a downgrade from its earlier projection of mid- to high single-digit growth. Despite these challenges, CNR remains focused on its long-term strategy, aiming for high single-digit EPS growth annually from 2024 to 2026.
CP, however, has been aggressively expanding its network and operational capabilities. The Kansas City Southern acquisition has been a game-changer, allowing CP to establish the first single-line railway connecting Canada, the U.S., and Mexico. This network integration is expected to drive significant growth in cross-border trade, particularly in the automotive, agriculture, and energy sectors. CP’s proactive cost-cutting measures and increased efficiencies are anticipated to bolster margins in the coming years, providing a strong platform for earnings growth.
Bottom line
Ultimately, the choice between CP and CNR depends on your investment priorities. If you value stability and a focus on operational efficiency, CNR is the clear winner. Its lower valuation and higher dividend yield make it an attractive option for conservative investors looking for income and steady growth.
However, if you are seeking a growth-oriented stock with strong long-term prospects, CP may be the better choice. Its innovative network expansion and proactive strategies position it well for capital appreciation. While CP’s higher valuation and lower dividend yield may deter some investors, its growth potential could outweigh these factors for those with a long-term investment horizon.
