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

Middle aged man drinks coffee
Stocks for Beginners

The Best Investment Hack Every Investor Should Know

An investment hack doesn't have to be risky, tricky, or any of those scary ideas. In fact, it can be…

Read more »

Investor reading the newspaper
Stocks for Beginners

A Better Post-Earnings Buy: Restaurant Brands or Lightspeed?

These two retail stocks have come out with earnings, but which is the clear long-term winner for investors?

Read more »

a person watches a downward arrow crash through the floor
Dividend Stocks

3 Everyday CRA Red Flags Investors Should Really Know

The CRA can be a blessing and a curse, but if you make sure to follow the rules and not…

Read more »

Train cars pass over trestle bridge in the mountains
Dividend Stocks

Canadian National Railway Stock is on Sale: Why Now is the Time to Invest

CNR stock has long been a top stock, with a solid position in a railway duopoly. But right now is…

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

This 7.9% Dividend Stock Pays Cash Every Month

We all want dividends, and having them come out monthly is ideal! But this might be a strong choice for…

Read more »

data analyze research
Stocks for Beginners

The Best TSX Stocks for Canadians to Buy With $700 on Hand

These TSX stocks may not cost much but can provide you with stability as well as growth like no other…

Read more »

Dividend Stocks

Top Canadian Stocks to Buy Now and Hold for a Lifetime in a TFSA

If you want stability in your long-term TFSA, then these four are choices you can pick up again and again.

Read more »

Senior uses a laptop computer
Dividend Stocks

7.4% Dividend Yield? Yes Please! I’ll Buy This Dividend Stock for Decades

This top dividend stock not only has a top dividend yield, it's offering decades of income for investors right now!

Read more »