Is Canadian National Railway (TSX:CNR) a Mispriced Opportunity Amid Mixed Valuation Signals?

The stock of Canadian National Railway (CNR) has long been a favorite among income-focused investors, but recent valuation signals have created a puzzle. On one hand, disciplined cost management and capital discipline have driven strong earnings growth and a leaner operating model. On the other, conflicting valuation models-ranging from discounted cash flow (DCF) to Gordon Growth-paint a picture of a stock that's both fairly priced and potentially undervalued. Let's break it down.

The Valuation Split: DCF vs. Gordon Growth

CNR's intrinsic value estimates vary widely depending on the model. A DCF analysis, which discounts future cash flows to present value, suggests a fair price of C$133.10 to C$138.11 per share, depending on assumptions about growth and discount rates. This aligns closely with the current market price of around C$140, implying the stock is fairly valued. However, the Gordon Growth Model (GGM), which values stocks based on dividend growth and cost of equity, tells a different story.

Using CNR's recent dividend of C$0.8875 per share and a projected long-term dividend growth rate of 10.2% based on its 5-year average, the GGM implies a fair value of C$165.51 per share, assuming a cost of equity of 8.75%. This suggests the stock is undervalued by roughly 18%. The discrepancy? DCF models rely on cash flow assumptions, while GGM hinges on dividend growth-a metric CNR has historically outperformed.

Industry Comparables: A Mixed Bag

CNR's price-to-earnings (PE) ratio of 17.5x to 17.9x sits above the broader transportation sector average but below its rail peers according to industry analysis. Analysts at Simply Wall St argue this reflects CNR's superior earnings growth and risk-adjusted returns, with a proprietary fair PE of 18.1x to 21.7x. Meanwhile, industry multiples and narratives highlight a tug-of-war between bullish and bearish scenarios. Optimists project fair values as high as C$284.80 under reshoring and margin expansion, while pessimists cap it at C$132.87 due to macroeconomic risks.

Forward-Looking Catalysts: The Real Game Changer

The real intrigue lies in CNR's strategic moves. The company slashed 2026 capital expenditures to C$2.8 billion, a C$600 million reduction from 2025, to boost free cash flow and improve capital efficiency. This, combined with C$1 billion in share repurchases in Q3 2025, signals a shift toward shareholder returns. Management also announced C$75 million in labor cost savings and improved locomotive availability to 92.2%, positioning CNR to handle volume growth without sacrificing margins.

Moreover, CNR's operating ratio dropped to 61.4%, a 170-basis-point improvement, driven by pricing above inflation and productivity gains. Analysts at Alpha Spread argue this operational discipline could unlock value as volumes rebound, particularly in intermodal and coal segments.

The Bottom Line: A Stock for the Patient

Here's the rub: CNR isn't a screaming buy, but it's far from overvalued. The DCF model suggests it's priced for stability, while the GGM hints at upside if dividend growth holds. The key lies in CNR's ability to execute its capital discipline and navigate macroeconomic headwinds. If the company can maintain its operating ratio improvements and sustain dividend growth, the Gordon Growth Model's higher valuation becomes more plausible.

For investors with a 5- to 10-year horizon, CNR offers a compelling mix of income and growth. The current yield of 2.6% according to Yahoo Finance is attractive, and the payout ratio of 48.17% according to Seeking Alpha leaves room for further increases. However, those seeking short-term fireworks may want to look elsewhere.