The Case for Canadian Rail Stocks in 2026

The North American rail sector is entering a pivotal year in 2026, with Canadian railway operators Canadian National Railway (CN) and Canadian Pacific Kansas City (CPKC) emerging as compelling candidates for valuation arbitrage and earnings-driven outperformance. While U.S. peers like Union Pacific (UNP) and CSX trade at premium valuations, their Canadian counterparts offer a compelling mix of undervaluation, disciplined capital allocation, and exposure to cross-border trade tailwinds. This analysis unpacks why investors should consider Canadian rails as a strategic play for 2026.

Valuation Arbitrage: Canadian Rivals Trade at a Discount

Canadian rail stocks are currently priced at a significant discount relative to their U.S. counterparts. As of December 2025, CN (CNI) trades at a forward P/E ratio of 18.8, while U.S. peers Union Pacific and CSX command higher multiples of 20.65 and 20.60, respectively according to market data. CPKC, meanwhile, is valued at 22x forward earnings, slightly above CSX's 21.98x but still below the five-year average of 24.4x for Canadian rails as reported. This valuation gap reflects divergent market perceptions: U.S. railroads are priced for continued resilience in domestic freight demand, while Canadian operators are undervalued despite robust operational performance and strategic cross-border advantages.

The discount is particularly striking for CN, which has demonstrated cost efficiency unmatched by its peers. In Q3 2025, CN became the only carrier to simultaneously grow revenue and reduce cost per revenue ton-mile, a feat that has yet to be fully reflected in its valuation according to Oliver Wyman analysis. Analysts argue this underperformance is temporary, with UBS projecting a 6% EPS growth for CN in 2026-well below its U.S. peers but sufficient to justify a re-rating as execution risks abate as UBS forecasts.

Earnings Growth: Analyst Upgrades Signal Confidence

Recent analyst upgrades underscore optimism about Canadian rail earnings potential. Cameron Doerksen of National Bank Financial revised his 2026 EPS forecasts for both CN and CPKC, projecting 5.7% growth for CN and 11.3% for CPKC-modest but conservative estimates that outpace the current consensus for CN (7%) and align with UBS's 14% growth forecast for CPKC as reported. These upgrades are rooted in tangible operational improvements: CPKC's third-quarter 2025 profits rose on higher freight volumes, driven by its Meridian Speedway corridor and new intermodal facilities according to FreightWaves.

Meanwhile, CN's management, led by CEO Tracy Robinson, has prioritized cost control and capex discipline, positioning the company to navigate a low-growth environment as CN's CEO stated.

The earnings story is further bolstered by CPKC's unique tri-national network. Its merger with Kansas City Southern (KCS) has unlocked cross-border synergies, with the Americold facility in Kansas City and enhanced east-west freight flows via the Meridian Speedway creating new revenue streams as Progressive Railroading notes. Analysts highlight these strategic assets as key differentiators, with CPKC's 28.4% profit margin and $91 billion market cap reflecting confidence in its ability to execute according to KoalaGains.

Operational Efficiency and Capex Discipline: A Foundation for Outperformance

Both CN and CPKC have demonstrated disciplined capital allocation, a critical factor in rail sector outperformance. CPKC's core adjusted operating ratio of 60.7% in Q3 2025 highlights its efficiency, while CN's focus on reducing cost per revenue ton-mile has positioned it as a cost leader as Oliver Wyman reports. This operational rigor is translating into improved margins: CN's operating ratio improved year-over-year, and CPKC's Q3 revenue growth of 3% was achieved without sacrificing profitability according to CPKC's investor relations.

Capex discipline is another shared strength. Both companies have avoided over-investment in low-return projects, instead prioritizing infrastructure upgrades that enhance service reliability and customer flexibility. For example, CPKC's $1.2 billion investment in the Meridian Speedway corridor is expected to boost intermodal capacity by 20% by 2027 as Progressive Railroading states. Such targeted spending contrasts with the more aggressive capex strategies of U.S. peers, which have led to higher leverage and valuation premiums.

Diverging Trade Exposure: Canadian Rivals Navigate Risk Better

The most compelling argument for Canadian rails lies in their divergent exposure to trade dynamics. CPKC's tri-national network provides a structural advantage in cross-border trade, with its Meridian Speedway and collaboration with CSX enhancing east-west freight flows as Progressive Railroading notes. This positions CPKC to benefit from U.S.-Mexico-Canada Agreement (USMCA) trade growth, a tailwind that U.S. peers lack. Meanwhile, CN's cautious approach to 2026-emphasizing preparation for uncertainty-reflects a more conservative stance, but its focus on grain and intermodal sectors remains resilient as CN's CEO stated.

In contrast, U.S. railroads face headwinds from saturated domestic freight markets and regulatory pressures. CSX's elevated P/E ratio (23.8x) reflects investor optimism about its long-term potential, but its exposure to volatile sectors like coal and industrial freight makes it more vulnerable to macroeconomic shifts according to Public.com. Canadian operators, by contrast, are insulated by their diversified service offerings and strategic cross-border positioning.

Conclusion: A Compelling Case for 2026

The combination of valuation discounts, upgraded earnings forecasts, and operational discipline makes Canadian rail stocks an attractive proposition for 2026. CPKC's strategic investments in cross-border corridors and intermodal capacity, coupled with CN's cost leadership and capex prudence, position both as outperformers in a sector facing structural challenges. As U.S. peers trade at premium valuations, Canadian rails offer a more compelling risk-reward profile, particularly for investors seeking exposure to North American freight growth without overpaying for speculative upside.

With 2026 earnings reports due in late January and analyst upgrades reinforcing confidence, the time to act is now. Canadian rails are not just undervalued-they are undervalued for a reason, and that reason is about to change.