CP Rail or CN Rail: Which Stock Is a Better Buy Today?

CP Rail and CN Rail are long-term rivals. The fight over the Kansas City Southern Railway is heating up. Which stock is the better buy today?

| More on:

The two top Canadian railroad stocks are locked in a battle to acquire the clutch railway business of Kansas City Southern (NYSE:KSU). Frankly, in a world where railroads are as hard to build as pipelines, it is understandable why the battle has turned tooth and nail.

The KSU network could be a game changer for these stocks

That is why the KSU network is so key. Whoever gets KSU gets to exclusively connect three industrial-leading countries together. It’s a toll-road arrangement every railroader dreams about. Not only is there the geographic advantages, but there are also significant operational synergies that can be unlocked over time.

In an industry where results are largely based on volumes, efficiency, and the overall economy, the opportunity to buy an entire railroad is literally “once in a lifetime.” With that in mind, I guess you can understand why this deal is so important. Given this, I guess the question needs to be asked: which of these value stocks is better to own today?

Canadian National is one of the biggest

Canadian National Railway (TSX:CNR)(NYSE:CNI) is, by far, the larger of the two Canadian railways. It has a market capitalization of $94 billion and is the fifth-largest Class 1 railroad in the United States. CN is known as Canada’s north-south rail line, because it spans all the way from Yellowknife to New Orleans. It has approximately 20,000 miles of track in its network.

Despite its expansive network, its stock has lagged over the past few years. In fact, year to date, the stock is down 4.5%. In the first quarter of 2021, year-over-year revenues were stagnant (and have not improved since 2019) and its adjusted operating ratio of 66% actually got worse. Regardless, the company is still very profitable, but perhaps not as profitable as it could be.

Certainly, CN has the balance sheet to complete its $33 billion takeover offer of KSU. However, there are many questions as to whether regulators will allow it. It would make it a behemoth in the U.S., and fair competition/pricing could be compromised. Given the collapse in the share price, it appears many shareholders are not loving the deal. The good news is this could present an attractive buying point for new investors.

CP Rail Stock Versus CN Rail Stock Over Five Years

Canadian Pacific is the best operator

Canadian Pacific Railway (TSX:CP)(NYSE:CP) is almost half the size of CN. It has a market capitalization of $49 billion. CP is the smallest Class 1 railroad in the United States. It operates 13,000 miles of track across Canada and the northern United States. Over the past five years, and particularly the last year, CP stock has outperformed CN’s. In fact, it has doubled CN’s returns.

This is largely because CEO Keith Creel has relentlessly pursued operational efficiencies and organic growth initiatives. While revenues declined 4% in the first quarter, the company still improved its adjusted operating ratio 70 basis points to 58.5%. That’s industry leading! Despite the pandemic, CP broke records for transporting grain, automobiles, and intermodal.

All in all, I like this stock for the fact that it makes much with little. The lower its operating ratio, the more profitable it is. Given a singular connection in Kansas City, I believe the KSU acquisition is a great fit. Regulators could smile more favourably on a smaller railroad merging with an equal. However, the deal comes down to price. Should CP match CN’s bid, I would start to get very concerned about its balance sheet. Its current offer is already a substantial bid for a railway.

Which stock should you buy?

So, which stock should you own? To be honest, both are great businesses that are well managed and well capitalized. Certainly, CN’s recent stock dip could be an attractive long-term buying opportunity. Likewise, it has a lot more room for operational improvement and better margins.

However, CP is undoubtedly one of the best operators in North America. It has a top management team that can make just about any asset profitable. If it can succeed through the bidding war (and subsequent regulatory hurdles), the KSU merger could propel exceptional returns going forward.

Considering this, my bet today is on CP. Given the increasing drama unfolding, however, that wager could change quickly.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Robin Brown has no position in any of the stocks mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of and recommends Canadian National Railway. The Motley Fool recommends Canadian National Railway.

More on Stocks for Beginners

The virtual button with the letters AI in a circle hovering above a keyboard, about to be clicked by a cursor.
Tech Stocks

Emerging Canadian AI Companies With Big Potential

These tech stocks are paving the way to an AI-filled future, but still offer enough growth ahead for a strong…

Read more »

Young Boy with Jet Pack Dreams of Flying
Tech Stocks

Is Constellation Software Stock a Buy, Sell, or Hold for 2025?

CSU stock has long been a strong option for high growth, high value stocks. But are there now too many…

Read more »

hand stacks coins
Dividend Stocks

3 Ultra-High-Yield Dividend Stocks You Can Buy and Hold for a Decade

These three high-yield dividend stocks still have some work to do, but each are in steady areas that are only…

Read more »

Asset Management
Stocks for Beginners

TFSA: 4 Canadian Stocks to Buy and Hold Forever

Thinking about what to buy with the new TFSA contribution space in 2025? These four Canadian stocks are worth holding…

Read more »

concept of real estate evaluation
Stocks for Beginners

2 No-Brainer Real Estate Stocks to Buy Right Now for Less Than $1,000

These two real estate sector-focused stocks have the potential to deliver strong returns on your investments in the coming years.

Read more »

engineer at wind farm
Energy Stocks

Invest $20,000 in This Dividend Stock for $100 in Monthly Passive Income

This dividend stock has it all – a strong outlook, monthly income, and even more to consider buying today.

Read more »

stocks climbing green bull market
Stocks for Beginners

3 TSX Stocks Soaring Higher With No Signs of Slowing

Don't ignore stocks just because they look like they're at a high price. Instead, see exactly why they've driven so…

Read more »

Middle aged man drinks coffee
Dividend Stocks

Here’s the Average TFSA Balance at Age 35 in Canada

At age 35, it might not seem like you need to be thinking about your future cash flow. But ideally,…

Read more »