Canadian National Railway (CNR): A High-Yield, Undervalued Play in the Resurging North American Freight Sector

The North American freight sector is undergoing a transformation, driven by a confluence of strategic infrastructure demand, ESG tailwinds, and long-term logistics growth. At the heart of this resurgence is Canadian National Railway (CNR), a company poised to capitalize on these dynamics while offering investors a compelling combination of high yield and undervaluation.

Valuation Metrics: A Discounted Yet Resilient Stock

CNR's current valuation metrics suggest it is trading at a significant discount relative to both its historical averages and industry peers. As of July 2025, the company's trailing twelve-month (TTM) price-to-earnings (P/E) ratio stands at 18.07, below its 10-year average of 20.06 and well under the P/E ratios of peers like Canadian Pacific Railway (25.46), Fortis Inc. (19.25), and Enbridge Inc. (21.41). This undervaluation is further underscored by CNR's dividend yield of 1.8%, which, while modest, is supported by a conservative payout ratio of 48.22%—leaving ample room for growth.

CNR's operating cash flow of $6.7 billion TTM provides a robust foundation for its dividend and share repurchase programs. The company's ability to generate consistent free cash flow, even amid macroeconomic headwinds, highlights its operational resilience. Analysts have not overlooked this potential: despite recent downward revisions, the average one-year price target of $139.00 (a 64.48% upside from its current price) reflects confidence in CNR's ability to recover as freight demand stabilizes.

Strategic Infrastructure Demand: Building the Backbone of North American Trade

CNR's 2025 capital expenditure program of $3.4 billion is a masterclass in strategic infrastructure investment. The company is not just maintaining its network but actively future-proofing it to meet the surging demand for freight logistics.

In Western Canada, CNR is investing $290 million to expand the Melville Railyard and upgrade track corridors in Saskatchewan, a key agricultural hub. These projects aim to reduce congestion by 15% and support Canada's $25 billion agricultural export industry. Meanwhile, in Minnesota, the Two Harbors Rail Yard Expansion and Duluth Iron Ore Dock Modernization are set to boost efficiency in handling iron ore shipments from the Mesabi Range, a critical region for U.S. steel production.

The Greater Chicago project—a $75 million siding extension—will increase corridor capacity by 17% and raise train speeds by 30%, addressing bottlenecks in one of North America's most vital logistics hubs. In Atlantic Canada, CNR's $80 million investment in New Brunswick and Nova Scotia is enhancing rail yard operations and the CN Autoport facility, ensuring the safe movement of goods and supporting long-term sustainable growth.

CNR's ESG credentials are equally impressive. The company has reduced absolute GHG emissions by 17.3%, planted 113,000 trees, and improved safety metrics by 13% in personal injury frequency and 17% in operational accidents. These efforts align with global investor demand for sustainability-linked infrastructure, potentially lowering CNR's cost of capital.

Long-Term Freight Logistics Growth: A Sector on the Rise

The North American freight sector is on an upward trajectory, with the broader market projected to reach $2.0 trillion by 2031 at a compound annual growth rate (CAGR) of 4.0%. The U.S. rail freight market alone is expected to expand from $71.77 billion in 2025 to $84.79 billion by 2030 (CAGR of 3.39%). This growth is fueled by e-commerce, infrastructure investments, and digital innovation.

CNR is uniquely positioned to benefit from these trends. The company's 46% market share in intermodal traffic—driven by e-commerce-led containerized freight—positions it to capture the surge in demand for faster, cost-effective shipping. CNR's cross-border capabilities are also a key strength: in 2024, the company reported a 9% increase in grain and fertilizer revenue, driven by robust U.S. harvests and improved rail grain movements from Canada.

Technological advancements are further amplifying CNR's competitive edge. The company's AI-powered predictive maintenance system, CN Cognition, is optimizing train routing and fuel efficiency. Meanwhile, investments in hydrogen and LNG-powered locomotives are positioning CNR to lead the transition to low-carbon freight.

Recent Financial Performance: Navigating a Challenging Environment

CNR's Q2 2025 results demonstrated its ability to adapt to a volatile macroeconomic landscape. Despite a 1% decline in revenue to C$4,272 million, the company improved its operating ratio to 61.7% (a 2.3-point improvement from the prior year) and delivered C$1.87 in diluted EPS, a 7% year-over-year increase. Free cash flow of C$922 million underscored its financial discipline.

CNR's dividend policy remains robust, with a quarterly payout of C$0.8875 per share and a total of C$1.7750 per share paid in the first half of 2025. While the company revised its 2025 guidance to mid-to-high single-digit EPS growth (down from a 10–15% target), this adjustment reflects caution rather than weakness. CNR's strong balance sheet—supported by more cash than debt and a stable adjusted debt-to-EBITDA ratio of 2.50x—provides a buffer against uncertainty.

Analyst Sentiment: A Range of Optimism and Caution

Analysts remain divided on CNR's near-term prospects. BMO Capital cut its price target from C$168.00 to C$163.00, while RBC reduced its target to C$157.00, both maintaining “Outperform” ratings. Conversely, UBS lowered its target to C$78.00, reflecting concerns over metallurgical coal demand and trade uncertainties. The consensus price target of C$118.36 (as of July 2025) implies a 40% upside from current levels, with the highest target at C$165.00 (Scotiabank) and the lowest at C$78.00 (UBS).

Despite the mixed outlook, the broader analyst landscape leans toward optimism. CNR's strategic infrastructure investments, ESG progress, and long-term growth drivers in the freight sector provide a compelling case for investors seeking a high-yield, undervalued play in a resurging industry.

Investment Thesis: A Balancing Act of Risk and Reward

CNR is not without risks. Trade uncertainties, tariffs, and macroeconomic volatility could delay the freight market's recovery. However, these challenges also create a buying opportunity for investors with a long-term horizon.

For those who can tolerate short-term volatility, CNR offers a rare combination of high yield, strategic infrastructure demand, and ESG-aligned growth. Its $3.4 billion capital program, coupled with a robust dividend and a strong balance sheet, positions it to weather near-term headwinds while capitalizing on the long-term tailwinds of North American freight expansion.

In a market where value investing is making a comeback, CNR stands out as a disciplined, forward-thinking company with the potential to deliver both income and capital appreciation. For investors seeking a high-yield, undervalued play in the resurging freight sector, CNR is a compelling addition to a diversified portfolio.