Canadian National Railway Navigates Volatility with Resilient Q1 Performance

Canadian National Railway (CN) delivered a robust first-quarter 2025 performance, reporting an 8% rise in diluted earnings per share (EPS) to C$1.85 amid a challenging macroeconomic backdrop. Revenue climbed 4% to C$4.40 billion, fueled by strong pricing across key sectors like petroleum/chemicals, coal, and grain/fertilizers. However, the results also revealed vulnerabilities in automotive and forest products, alongside operational headwinds that demand scrutiny.

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text2imgA sleek CN locomotive gliding through a Canadian prairie landscape, symbolizing the railway’s role as a backbone of North American commerce/text2img

Financial Highlights: A Balanced Growth Narrative

CN’s Q1 results underscore its ability to navigate uncertainty. Revenue growth was driven by higher freight pricing (+3% at constant currency) and volume gains in coal (+5%) and grain (+4%). The operating ratio tightened to 63.4%, reflecting disciplined cost management. Yet, free cash flow rose to C$626 million, up from C$529 million in 2024, enabling the company to fund its C$3.4 billion capital program while maintaining shareholder returns.

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visualCanadian National Railway's (CNR) stock price performance over the past year/visual

Operational Challenges Linger

Beneath the surface, operational metrics signaled potential strains. Train speeds dipped to 17.7 mph (down from 18.7 mph), while car dwell times increased to 7.8 hours, highlighting network congestion. Safety metrics also worsened, with accidents rising to 2.09 per million train miles, a 21% increase from 2024. Management attributed this to higher traffic volumes and aging infrastructure, but investors will watch for sustained improvement.

Sector-Specific Strengths and Weaknesses

• Winners:
• Petroleum/Chemicals: Revenue surged 7% to C$915 million, benefiting from pricing gains (+6%).
• Coal: Volumes and pricing both rose, boosting revenue by 11% to C$246 million.

• Grain/Fertilizers: Revenue jumped 11% to C$951 million, driven by bumper crops and strong export demand.

• Laggards:

• Intermodal: Revenue fell 2% to C$940 million, with carloads down 2% and pricing declining 4%.
• Automotive: Pricing collapsed 13%, trimming revenue growth to just 1% despite volume gains.
• Metals/Minerals: Carloads plummeted 11%, reflecting weak demand from manufacturing sectors.

Guidance: Caution Amid Optimism

CN reaffirmed its 10–15% adjusted EPS growth target for 2025, but its revised assumptions highlight risks. Oil price forecasts were lowered to US$60–70 per barrel, and grain crop expectations for the U.S. were raised, potentially pressuring Canadian exports. Meanwhile, the Canadian dollar’s assumed rate of US$0.70 could amplify currency headwinds if the loonie strengthens.

Risks on the Horizon

The report emphasized macroeconomic and geopolitical risks, including trade wars and supply chain disruptions. CN’s debt-to-EBITDA ratio rose to 2.55x, a 5% increase from 2024, signaling higher leverage. Climate-related challenges, such as extreme weather and regulatory pressures, also pose threats to its sustainability goals.

Conclusion: A Stock for the Long Game

CN’s Q1 results reflect a company adept at capitalizing on cyclical opportunities while managing costs. Its free cash flow resilience and strong railcar demand in coal and grain suggest it can weather near-term headwinds. However, operational inefficiencies and sector-specific declines in automotive and intermodal hint at vulnerabilities.

Investors should weigh CN’s high single-digit EPS growth guidance against its rising debt and operational risks. With a 12-month forward P/E of 15.2x (vs. the industry average of 14.5x), the stock appears fairly valued. A sustained rebound in industrial production and grain exports, alongside improved network efficiency, could unlock further upside. For now, CN remains a solid bet for those willing to accept moderate volatility in pursuit of steady rail sector returns.

Final Take:
Canadian National Railway’s Q1 performance affirms its position as a resilient operator in a challenging landscape. While risks linger, its capital allocation discipline and sector-specific tailwinds make it a compelling long-term play. Stay tuned for Q2 updates on operational metrics and grain export volumes—key indicators of its trajectory.