CN's Resilient Operating Margin Expansion in a Deteriorating Freight Environment

In the volatile freight landscape of the past five years, Canadian National Railway (CNI) has stood out as a rare example of operational discipline and strategic foresight. As global trade tensions, pandemic-driven disruptions, and economic uncertainty have battered the transportation sector, CN has not only preserved its profitability but expanded its operating margins. From 2020 to 2025, its operating margin fluctuated between 36.64% and 41.14%, a range that outperformed most of its peers and demonstrated a remarkable ability to balance cost control with infrastructure investment. This resilience is not accidental—it is the result of a meticulously executed strategy centered on operational efficiency and strategic cost management.

The Margin Resilience Playbook

CN's ability to maintain strong margins during periods of declining freight demand can be traced to two pillars: precision scheduled railroading (PSR) and dynamic capital allocation.

In 2020, as the pandemic-induced freight slump began, CN swiftly reduced its capital expenditure program from C$7.4 billion in 2019 to C$3.0 billion. This move freed up liquidity while allowing the company to maintain a robust balance sheet. Simultaneously, CN adopted PSR principles, which emphasize asset utilization and process optimization. By aligning train schedules with precise freight demand patterns, the company reduced idle time and improved asset productivity. For example, CN's operating ratio—a key metric of efficiency—improved by 2.3 points year-over-year in Q2 2025, even as revenues dipped slightly. This underscores the power of operational efficiency in offsetting volume declines.

Strategic cost controls further amplified CN's margin resilience. The company right-sized its workforce and vendor contracts to match reduced traffic volumes, while also leveraging technology to automate maintenance and logistics. By 2022, CN's operating expenses had stabilized despite a 6% revenue drop in 2019, a testament to its lean cost structure.

Navigating Macro Risks: A Balancing Act

CN's success in volatile markets is also rooted in its proactive risk management. Unlike many rail operators, CN diversified its freight portfolio to mitigate sector-specific downturns. For instance, while intermodal and coal shipments declined during the energy transition, CN offset these losses with growth in industrial and agricultural freight. This diversification shielded the company from single-sector shocks.

However, macroeconomic headwinds in 2024-2025—such as trade tariffs and geopolitical tensions—forced CN to adjust its outlook. The company revised its 2025 adjusted diluted EPS growth forecast to the mid-to-high single-digit range from the previously expected 10-15%. Despite this, CN's operating margin remained robust at 36.68% as of March 2025, outperforming its pre-pandemic levels. This was achieved by maintaining capital investment at C$3.4 billion for 2025, ensuring long-term infrastructure resilience while trimming short-term costs.

Investment Implications: A Defensive Play with Upside

For investors, CN's story is a masterclass in how strategic discipline can create value in uncertain times. While the broader freight sector faces headwinds from inflation and trade volatility, CN's operating margin expansion provides a buffer. Its ability to improve operating income by 5% in Q2 2025 despite a 1% revenue decline highlights this margin of safety.

The key question for investors is whether CN's cost controls and infrastructure investments can sustain this outperformance. Historically, the company has demonstrated a knack for balancing short-term flexibility with long-term growth. For example, its 2025 capital expenditure plan prioritizes digital infrastructure and fuel efficiency, positioning it to reduce costs and meet environmental regulations.

Investment Thesis: CN is a compelling addition to a portfolio seeking defensive exposure to the transportation sector. Its margin resilience, driven by PSR and cost discipline, provides downside protection, while its diversified freight mix and infrastructure investments offer growth potential. Investors should monitor CN's ability to navigate trade policy shifts and its progress in decarbonization, both of which could influence long-term margins.

In a world where macroeconomic volatility is the norm, CN Rail's playbook offers a blueprint for sustainable outperformance. For those who recognize the value of operational excellence in uncertain times, CN remains a compelling case study—and a strong investment candidate.