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Canadian Pacific Railway Limited (USA) (CP), Canadian National Railway (USA) (CNI): Continue to Bet on Rail Stocks

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As the North American economy recovers, the rail sector has been one of the biggest beneficiaries. The demand for goods to be transported safely and efficiently by the railroads is still unsurpassed. As North America has undergone an energy renaissance, rail remains the fastest and easiest way to move crude oil. As the economies of Canada and the United States continue to recover, look for the rail stocks to continue making new highs.

The Canadian rails

Canadian Pacific Railway Limited (USA) (NYSE:CP)

Two Canadian rails have been great performers in the past year. Canadian Pacific Railway Limited (USA) (NYSE:CP) has outperformed Canadian National Railway (USA) (NYSE:CNI) by rising 89% versus 28% for Canadian National. Going forward, I think Canadian National can outperform Canadian Pacific Railway Limited (USA) (NYSE:CP) due to its cheaper valuation. Canadian National Railway (USA) (NYSE:CNI) has a P/E of 17 whereas Canadian Pacific has a P/E of 40. I also like the fact that Canadian National has higher margins than Canadian Pacific Railway Limited (USA) (NYSE:CP).

Canadian National Railway Canadian Pacific
Gross Margin 0.49 0.34
Operating Margin 0.37 0.24

Canadian Pacific Railway Limited (USA) (NYSE:CP) has performed well, thanks to activist investor Bill Ackman. His Pershing Square Capital is the company’s largest shareholder. In 2012, he launched a proxy fight and was appointed to the company’s board. He was instrumental in bringing in industry veteran Hunter Harrison as CEO. The stock has performed well due to Harrison’s success in turning the company around.

Ackman just announced that he is selling 7 million shares to trim his stake in the railroad. His investment in Canadian Pacific Railway Limited (USA) (NYSE:CP) has tripled in value since he took his position in 2011. He will still remain the largest shareholder in the company, and is just taking some profits on his investment to balance out his portfolio better.

Canadian National Railway (USA) (NYSE:CNI) has been one of the prime beneficiaries of oil sands development in Alberta. The company has rail lines that are at the heart of the Canadian oil sands industry. If the Keystone XL pipeline is rejected in the U.S., Canadian National stands to gain the most because without the pipeline, the only way the oil sands crude can get to the U.S. is on its railways.

Canadian National loves the crude by rail business. Most of that work is long-haul and that is the most profitable segment for the railroads. Canadian National Railway (USA) (NYSE:CNI) can transport oil sands crude from Alberta all the way to Alabama refineries. Whether the Keystone XL pipeline is approved or not, Canadian National Railway (USA) (NYSE:CNI) will benefit because of the tremendous growth in oil sands production. Pipelines don’t get built overnight and production is only increasing in Canada. The pipelines won’t be able to handle all the increased production anyways. Canadian National Railway (USA) (NYSE:CNI) wins either way.

The east coast rails

The two main east coast railways are CSX Corporation (NYSE:CSX) and Norfolk Southern Corp. (NYSE:NSC). Both companies have significant exposure to coal and have under-performed their peers because of coal weakness. As the coal sector looks to rebound, it will bring these two rail stocks with it.

By comparing these two rails, we see that they are very similar.

CSX Norfolk Southern
Market Cap $25.73 billion $24.28 billion
Revenue $11.75 billion $10.99 billion
EBITDA $4.55 billion $3.98 billion
Gross Margin 0.39 0.36
Net Income $1.87 billion $1.78 billion
Operating Margin 0.30 0.28
P/E 13.92 13.87
PEG Ratio 1.29 1.33
Price/Sales 2.19 2.21
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