Canadian National Railway: A Case for Undervaluation Amid Sectoral and Macroeconomic Tailwinds

The question of whether Canadian National Railway (CNR) is undervalued hinges on a nuanced interplay of sectoral dynamics, macroeconomic catalysts, and intrinsic value calculations. As the Canadian economy navigates post-pandemic recovery and geopolitical tensions, CNR's strategic positioning in a growth-oriented sector offers compelling arguments for its current valuation.

Sectoral Tailwinds: Infrastructure and Freight Demand

The Canadian railway industry is poised for expansion, driven by federal infrastructure investments and shifting trade patterns. The “Investing in Canada” initiative, with projects like the Alto high-speed rail corridor, is projected to create employment opportunities and reduce emissions, aligning with global sustainability trendsCanadian Infrastructure Industry Outlook^[1]. Meanwhile, CNR and its peer Canadian Pacific Kansas City (CPKC) stand to benefit from rising freight volumes in agriculture, energy, and industrial goods, fueled by near-shoring and e-commerce demandCanadian Transportation Stocks for 2025^[2]. The global heavy rail market, valued at $12,560 million in 2025, further underscores the sector's resilience, driven by urbanization and high-speed rail developmentGlobal Heavy Rail Market Analysis^[3].

CNR's operational improvements—enhanced resource management and scheduling—have already translated into projected annual earnings growth of 6.4% and EPS growth of 8.4%CNR Future Growth Projections^[4]. These metrics suggest the company is capitalizing on sectoral tailwinds, even as it grapples with a high debt burdenCNR Debt Risk Assessment^[5].

Intrinsic Value: A Tale of Divergent Models

Discounted cash flow (DCF) analyses yield conflicting conclusions about CNR's intrinsic value. The most optimistic model, a 2-stage free cash flow to equity valuation, estimates an intrinsic value of CA$161.76, implying a 20% undervaluation relative to the current stock price of CA$129.70CNR Intrinsic Value (2-Stage DCF)^[6]. Another DCF model from Alpha Spread calculates a fair value of CA$143, suggesting the stock is trading near its intrinsic valueCNR Base Case DCF Valuation^[7]. Conversely, Simply Wall St's analysis, based on expected free cash flows through 2035, arrives at an intrinsic value of CA$123.33, indicating a 5.5% overvaluationCNR Intrinsic Value (Simply Wall St)^[8].

These divergences stem from assumptions about future cash flow growth and discount rates. For instance, GuruFocus smooths free cash flow over six to seven years and incorporates equity adjustments, while Alpha Spread's base case assumes a more aggressive growth trajectoryDCF Assumption Variability^[9]. Investors must weigh these assumptions against CNR's operational performance and sectoral trends.

Macroeconomic Catalysts and Risks

Canada's economic momentum in late 2024 and early 2025—marked by 2.3% year-over-year GDP growth and robust labor market gains—creates a favorable backdrop for CNRCanadian Economic Momentum^[10]. The goods-producing industries, particularly construction and oil and gas, have contributed significantly to this expansionGoods-Producing Industry Growth^[11]. However, long-term challenges persist. Canada's lagging productivity growth compared to the U.S. (less than half since the 2000s) raises questions about its ability to sustain competitive advantage in a reoriented North American trade landscapeCanada-U.S. Productivity Gap^[12].

CNR's high debt levels add another layer of risk. While the company has reiterated its financial guidance, excessive leverage could amplify vulnerability to interest rate hikes or economic downturnsCNR Financial Guidance^[13].

Strategic Positioning and Investment Thesis

CNR's undervaluation, if confirmed, is not merely a function of its intrinsic metrics but also its strategic alignment with sectoral and macroeconomic trends. The railway's expansion into intermodal services and its role in facilitating Canada's energy and agricultural exports position it to capture long-term growthCNR Intermodal Expansion^[14]. Analyst price targets, such as the CA$174 estimate, further suggest potential upside if earnings and margins meet expectationsAnalyst Price Targets^[15].

However, the investment case requires caution. The disparity in DCF valuations highlights the importance of scenario analysis. A conservative approach might favor models that incorporate lower growth assumptions, while a bullish stance could justify the 20% undervaluation estimate.

Conclusion

Canadian National Railway occupies a unique intersection of sectoral growth and macroeconomic tailwinds. While its intrinsic value remains a subject of debate, the preponderance of evidence—particularly the 20% undervaluation estimate—suggests that the stock may be trading below its long-term potential. Investors who can tolerate the risks of high leverage and productivity challenges may find CNR an attractive opportunity, provided they align their expectations with the company's operational trajectory and the broader economic context.