Canadian National Railway (TSX:CNR) and Canadian Pacific Railway (TSX:CP) are two of Canada’s biggest transportation companies. Both are railroad companies with assets in trucking and other related transportation services. Both are economically indispensable components of North America’s supply chains. And both have been great investments for their shareholders, having appreciated more than the markets have over the last 10 years.
It’s quite likely that those who buy CNR or CP today will do well. The single most important factor in how successful a business will be is how much competition it faces, and CNR and CP are each other’s only real competitors. Probably buying both stocks and just sitting on them will prove to be a wise strategy. However, it is worth exploring which of the two is the better stock — as an intellectual exercise, if nothing else. Accordingly, I will spend the remainder of this article exploring CNR and CP side by side, so you can decide which is the better buy for you.
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The case for CN Railway
The biggest advantage that CN Railway has over CP Railway is that its competitive position is somewhat more entrenched. It has a massive network of tracks that touches three coasts, an advantage that no other North American railroad has. For this reason, it is the go-to railroad for shipping goods to and from certain destinations (let’s say, British Columbia to New Orleans). Canadian Pacific Railway does not have quite the same indispensability.
Another thing that CN Railway has over CP Railway is a cheaper valuation. At today’s prices, CNR trades at 19.5 times earnings, 5.9 times sales, and 4.9 times book value. For its part, CP Railway trades at 26 times earnings, 10.6 times sales, and 2.6 times book value. CP has the lower book value multiple but is overall more expensive than CNR when we look at a number of different multiples and compare them side by side.
A final point that CNR has in its favour is “smart money” ownership. CN Rail is owned by the Gates family estate, “Cascade Investments,” managed by Michael Larson. This is one of the most sophisticated family offices in the world, with a sterling reputation. For its part, CP is backed by hedge fund legend Bill Ackman. I’ll call this factor a draw, with CNR and CP both having a lot of smart money support.
The case for Canadian Pacific Railway
The biggest advantage that the Canadian Pacific Railway has over CN Railway is growth. Over the last 10 years, CP has grown its revenue, earnings and free cash flow at the following CAGR rates:
- Revenue: 4.7%
- Earnings: 20%
- Free cash flow: 39%
CNR, for its part, has grown at these CAGR rates:
- Revenue: 5.8%
- Earnings: 9.8%
- Free cash flow: 11%
As you can see, CP’s growth has been much more rapid than CNR’s. However, past growth is not the same as future growth, and CNR is cheaper than CP today. On the whole, if I had to buy just one of these stocks today, I’d buy CNR due to the cheaper valuation.
