Canadian National Railway: A Strategic Engine for North America's Logistics Future

Canadian National Railway (CNR) has long been a cornerstone of North America's logistics infrastructure, but its recent performance and strategic moves suggest it is more than just a utility player. In a volatile macroeconomic environment marked by trade tensions, energy price swings, and shifting commodity flows, CNR's disciplined capital allocation, operational efficiency, and forward-looking infrastructure investments position it as a compelling long-term investment. While its stock trades at a discount relative to peers, a closer look reveals a company poised to capitalize on structural trends in the freight sector.

Financial Resilience Amid Macroeconomic Headwinds

CNR's Q2 2025 results highlight its ability to adapt to a challenging environment. Despite a 1% revenue decline year-over-year to C$4.27 billion, the company improved its operating ratio to 61.7%, a 2.3-point gain, and delivered 7% higher diluted EPS to C$1.87. This resilience stems from tight cost control and operational flexibility, particularly in high-margin segments like grain and fertilizers, which grew 13% in the quarter. However, weaker performance in petroleum and chemicals (-5% revenue) and intermodal (-3%) reflects broader economic fragility.

The company's 2025 capital expenditure plan of C$3.4 billion—directed at projects like the Melville Railyard expansion and ESG-focused infrastructure—signals a focus on long-term value creation. While CNR has trimmed its EPS growth guidance to mid-to-high single digits, this adjustment accounts for macroeconomic uncertainty rather than operational failure. Its free cash flow of C$1.55 billion in H1 2025 underscores financial discipline, with a stable adjusted debt-to-EBITDA ratio of 2.50x.

Competitive Positioning: Efficiency vs. Expansion

CNR's primary rival, Canadian Pacific Kansas City (CPKC), has gained attention for its transformative merger with Kansas City Southern, creating the only transcontinental railway spanning Canada, the U.S., and Mexico. CPKC's operating ratio of 59.7% in Q4 2024 (a 210-basis-point improvement) outpaces CNR's 59.3% in Q3 2024, reflecting leaner operations. However, CNR's broader network and higher dividend yield (2.2% vs. CPKC's 0.66%) appeal to income-focused investors.

CNR's strategic focus on infrastructure modernization and ESG initiatives—such as a 17.3% reduction in absolute GHG emissions—aligns with global investor demand for sustainable logistics. Meanwhile, CPKC's growth-oriented strategy, including reinvestment of earnings into its expanded network, appeals to those seeking higher returns. The key distinction lies in risk profiles: CNR offers stability and defensive characteristics, while CPKC leans into high-growth opportunities.

Undervaluation and Industry Tailwinds

CNR's valuation metrics suggest it is significantly undervalued. At a trailing P/E of 18.07, it trades below its 10-year average of 20.06 and well under CPKC's 27.01. Analysts project a 40% upside from current levels, with a consensus price target of $118.36. This discount is puzzling given CNR's dominant 46% share of intermodal traffic, driven by e-commerce growth, and its 9% revenue increase in grain and fertilizers in 2024.

The broader North American freight sector is set for expansion, with the U.S. rail market projected to grow at 3.39% CAGR through 2030. CNR's cross-border capabilities and investments in logistics hubs like Chicago and New Brunswick position it to capture this growth. Moreover, its dividend policy—paying C$1.775 per share in H1 2025—offers a compelling yield in a low-interest-rate environment.

Risks and Strategic Considerations

CNR's exposure to commodity cycles and trade policy volatility remains a risk. A slowdown in industrial production or a sharp drop in grain exports could pressure revenues. Regulatory scrutiny of rail pricing and environmental standards also looms. However, CNR's diversified portfolio and capital discipline mitigate these risks.

For investors, the decision hinges on risk tolerance. CNR's undervaluation and defensive attributes make it an attractive core holding, while CPKC's growth potential suits aggressive portfolios. Given CNR's alignment with structural trends—sustainable infrastructure, e-commerce, and intermodal freight—its current discount appears mispriced.

Conclusion: A Strategic Buy for the Long-Term

Canadian National Railway is a masterclass in balancing operational efficiency with strategic foresight. While short-term headwinds persist, its infrastructure investments, ESG progress, and dominant market position in key freight corridors justify a premium valuation. At current levels, CNR offers a rare combination of income security and growth potential—a rare find in today's market. For investors with a five- to ten-year horizon, CNR represents a compelling opportunity to ride the rails of North America's logistics renaissance.