Canadian railway stocks aren’t the most glamorous equities on earth, but they’ve performed well over the last few decades. Since 1996, the Canadian National Railway (TSX:CNR) has risen 6,800% in the markets, easily outpacing the S&P 500. Its main rival, Canadian Pacific Kansas City Railway (TSX:CP) has performed well, too.
At a glance, you might find all this outperformance surprising. After all, isn’t rail an outdated relic of the roarin’ twenties? You might think so, but the truth is different. Although rail is an established transportation method that hasn’t changed much in decades, it is still the cheapest way to ship bulk goods by land. Railways also typically enjoy strong competitive positions, as there aren’t very many new entrants in the space chipping away at profit margins. In this article, I will explore the four main things investors need to know about Canadian railway stocks in 2025.
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Increasingly international
The first thing you need to know about Canadian railway stocks is that they are very international, and growing increasingly so over time. The Canadian National Railway has always been a cross-border giant, shipping goods not only across Canada but into the United States as well. The company’s rail network touches three coasts, giving it an edge in long distance shipping.
Canadian Pacific Kansas City Railway recently joined that club as well. With the acquisition of Kansas City Railway in 2023, the company acquired track that stretches all the way into Mexico. This makes CP the only North American railroad that serves all three of the continent’s countries.
Still relevant
Another thing you should know about Canadian railroads- – and railroads in general – is that they are surprisingly still relevant. Railroads are sometimes thought of as obsolete, as their big ‘boom’ occurred more than a century ago. Those who think this are incorrect. Rail is still the most cost-effective way to ship goods by land. Rail transportation works by fitting a lot of cars into a line that is powered by one car at the front. This lessens the amount of fuel used per unit of goods shipped. As a result, rail is cheaper than trucking. It is also considerably faster, as trains don’t have to deal with as many intersections and crossings as trucks do. So, rail will be part of North America’s transportation infrastructure for the foreseeable future.
Highly profitable
Another thing to know about Canadian Railroad stocks is that they are highly profitable. When a company has few competitors, it typically enjoys high profit margins, as it has more pricing power than a company facing many competitive threats. We can see this phenomenon in action by looking at CN Railway’s recent results. In the trailing 12-month period, the company had a 54% gross margin, a 26% net margin, and a 15% free cash flow margin. It also had a 22% return on equity. Overall, it’s a highly profitable enterprise.
Not as cheap as they once were
After all the good things I’ve written about Canadian railway stocks, it’s time to mention the one negative with Canadian railroad stocks:
They are not especially cheap. At today’s price, CP Kansas City Railroad trades at 28 times earnings and 6.6 times sales. This isn’t quite as pricey as the big US tech companies, but it’s pricey by the standards of non-tech stocks. So, investors might want to contemplate exactly what percentage of their money they invest in Canadian rail stocks. They aren’t the biggest bargains out there.
