CN Rail Navigates Q1 with Strong Financials, But Macro Risks Linger

Canadian National Railway (CNR) delivered a resilient first-quarter performance in 2025, showcasing financial discipline and operational efficiency despite macroeconomic headwinds. BMO Capital Markets’ analysis highlights key metrics that underscore CN’s undervalued positioning, yet warns of risks tied to global trade and labor negotiations. Here’s a deep dive into the numbers and what they mean for investors.

Ask Aime: "Outperforming First Quarter for Canadian National Railway, but Beware of Trade and Labor Risks"

Financial Fortitude in a Challenging Quarter

CN’s Q1 results reflect strong fundamentals, with diluted EPS rising 8% year-over-year to C$1.85, driven by cost management and improved pricing. Revenue climbed 4% to C$4.4 billion, while operating income increased 4% to C$1.61 billion, narrowing the operating ratio to 63.4%—a 0.2% improvement from 2024.

Ask Aime: What's behind CN National Railway's strong Q1 earnings?

Free cash flow surged to C$626 million, a C$100 million increase from Q1 2024, signaling robust liquidity. Net income also rose to C$1.16 billion, bolstering CN’s financial health score to 3.13 (“GREAT”), with returns on equity (ROE) at 20% and returns on invested capital (ROIC) at 17%. These metrics suggest efficient capital allocation and a balance sheet capable of withstanding volatility.

Operational Highlights and Sector-Specific Trends

CN’s operational performance was mixed but largely positive:
- Revenue Ton Miles (RTMs) rose 1% to 60.05 billion, driven by 17% growth in coal RTMs and 1% expansion in grain/fertilizer RTMs.
- Freight revenue per RTM improved 3% to 7.14 cents, with notable gains in petroleum/chemicals (+6%), metals/minerals (+7%), and grain/fertilizers (+9%).

However, challenges emerged in certain sectors:
- Carloads fell 2% to 1.31 million, reflecting declines in metals/minerals (-11%) and forest products (-6%).
- Fuel efficiency dipped, with consumption rising to 105.3 million gallons despite lower fuel prices.
- The accident rate increased to 2.09 per million train miles, though injury frequency remained stable.

BMO’s Take: Valuation and Risks

BMO’s analysis emphasizes CN’s undervalued status, with a P/E ratio of 7.88x—well below peers like Canadian Pacific Kansas City (CPKC) at 27.01x. The firm notes CN’s 9% 5-year revenue CAGR and $3.4 billion capital spend in 2025 as positives, supporting its bullish long-term outlook.

Yet risks loom large:
1. Recessionary Fears: Global trade tensions and potential North American recessions could dampen demand for CN’s services, especially in metals and intermodal sectors.
2. Labor Uncertainty: While Canadian conductor arbitration concluded with a 3% wage hike, U.S. labor negotiations remain unresolved, posing operational risks.
3. Intermodal Pressures: Blank sailings and supply chain disruptions continue to strain intermodal volumes, which fell 2% in Q1.

Peer Comparison and Competitive Positioning

CN’s valuation stands out against peers:
- CPKC, the merged entity of Canadian Pacific and Kansas City Southern, trades at a premium due to merger synergies but faces labor risks (e.g., ongoing TCRC negotiations).
- Union Pacific (UNP), the U.S. giant, maintains scale but lacks CN’s Canadian-Mexican trade corridor advantages.

CN’s Prince Rupert terminal expansion and focus on service reliability in key sectors like petroleum/chemicals (revenue up 7%) position it to outperform peers in trade-sensitive environments.

Conclusion: A Buy for the Long Run, But Mind the Headwinds

CN Rail’s Q1 results reaffirm its status as a financially resilient operator. With a P/E ratio of 7.88x, 10–15% EPS growth guidance, and $626 million in free cash flow, the stock appears attractively valued. BMO’s bullish stance is justified by CN’s operational agility and balance sheet strength.

However, investors must remain cautious. Risks like a potential North American recession, unresolved labor disputes, and ongoing supply chain disruptions could test CN’s growth trajectory. The 2.2% dividend yield offers some downside protection, but the stock’s near-term performance hinges on macroeconomic stability.

For now, CN remains a compelling long-term bet, but the path to its 2025 EPS target will require navigating a landscape fraught with geopolitical and economic uncertainty.

Data as of Q1 2025. Analysis by BMO Capital Markets and CN Rail’s earnings reports.