CP or CNI: Which Railroad is a Better Investment Pick Now?

Although railroad players in the United States are facing tough times coping with sluggish freight demand, their Canadian counterparts have largely remained unaffected, courtesy of robust freight demand in the country. With railroad participants deriving maximum revenues from transporting freight, an impressive freight demand is certainly a major catalyst for their growth.

The precision scheduled railroading model has become a rage in the industry with most major railroad players having already transformed into this business model. By reducing costs and optimally utilizing assets, the operating model is enabling individual companies to improve their operating ratio (operating expenses as a percentage of revenues), a key measure of efficiency, and thus boost profits. A few prominent players to have adopted this model are CSX Corporation CSX, Union Pacific Corporation UNP, Canadian Pacific Railway Limited CP and Canadian National Railway Company CNI.

Given this backdrop and stable economic conditions in Canada, let’s draw a comparison between two of the major Canadian railroads — Canadian Pacific and Canadian National — on the basis of a few important parameters. With both companies carrying a Zacks Rank #2 (Buy), let’s find out which of these is a better investment option. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price Performance

While shares of Canadian Pacific have rallied 13.3% in a year’s time, the Canadian National stock hopped 1.2%. The industry has inched up 0.7% in the period. Clearly, Canadian Pacific scores over Canadian National in this respect.

One-Year Price Performance

Valuation

The railroad stocks are mostly valued using the trailing 12-month P/B ratio because of large variations in their earnings results from one quarter to the next. Canadian Pacific has a P/B ratio of 6.2 compared with Canadian National’s P/B ratio of 4.9. Meanwhile, the industry’s P/B ratio stands at 5.

Price-to-Book Ratio

Price-to-Book Ratio

Dividend Yield

While both companies boast a track record of consistent dividend payouts, Canadian National has an edge over Canadian Pacific with a dividend yield of 1.7% compared with the latter’s 1.1%. Canadian National’s dividend yield is quite close to the industry’s average of 1.8%. The company has raised dividends consecutively for more than 20 years with the latest hike of 18% announced in January. Meanwhile, Canadian Pacific increased its dividend in May, approving a 27.5% hike. This marks the company’s fourth straight year of dividend increase.

Dividend Yield

Dividend Yield

Earnings Growth Rate & Surprises

Considering a comprehensive earnings history, Canadian National is much better placed, having surpassed the Zacks Consensus Estimate in three of the last four quarters, the average beat being 1.4%. Meanwhile, Canadian Pacific’s earnings beat estimates in only two of the last four quarters, the average beat being 0.4%.

Long-term earnings growth rate (next 3-5 years) gives us a vivid idea of a company’s likely future performance. Canadian Pacific with long-term earnings growth of 11.3% wins over Canadian National’s projection of 10.8%. Meanwhile, the industry’s average stands at 9.3%.

Conclusion

Our comparative analysis shows that Canadian Pacific has an advantage over Canadian National as far as price performance and long-term earnings growth rate are concerned. However, Canadian National is a winner with regard to dividend yield and earnings surprise history. Additionally, with a market capitalization of $65.4 billion, the company is more favorably placed to combat market downturns. Conversely, Canadian Pacific has a market capitalization of $32.86 billion.

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