RBC's Q2 Price Target Adjustments Highlight Tariff Policy Risks to North American Rail Profitability

The North American rail sector faces a pivotal juncture as tariff policies and macroeconomic headwinds reshape profitability. Royal Bank of Canada (RBC) recently adjusted price targets for Canadian National Railway (CNI) and Canadian Pacific Kansas City (CP), signaling shifting investor sentiment. While both companies remain strategic assets in the supply chain, the revisions underscore how regulatory uncertainty and cost dynamics are altering their valuation trajectories.

RBC's Q2 Adjustments: A Barometer of Sector Challenges

RBC's analysts trimmed Canadian Pacific's price target to $121 from $122, despite strong Q1 results and sustained volume growth. The reduction reflects concerns over management's decision to lower 2025 EPS guidance to a 10%-14% range from the prior 12%-18% projection. This cautious stance, paired with broader macroeconomic volatility, suggests that even robust operational performance cannot fully offset margin pressures. For Canadian National, RBC reaffirmed its “Outperform” rating but lowered its price target to C$163 from C$165, aligning with a consensus average of C$163.37—a 17.29% upside from current levels.

The adjustments highlight divergent risks: while CN retains analyst optimism due to its scale and diversified freight mix, CP's narrower margin of safety reflects execution concerns in a tightening regulatory environment.

Tariff Policy: The Overlooked Catalyst

At the heart of these valuation shifts lies the tangled web of North American tariff policies. The U.S. and Canadian governments have increasingly scrutinized rail pricing, with proposals to cap freight rates or expand antitrust oversight. For instance, the U.S. Surface Transportation Board's (STB) recent push to expedite rate reviews could compress railroads' pricing power. Meanwhile, Canadian regulators are weighing measures to ensure competitive rates for shippers, particularly in energy and agriculture—key revenue streams for both CN and CP.

These policies directly impact rail operators' ability to pass on rising costs, from labor and fuel to infrastructure investments. CN's broader network and cross-border exposure may afford it some pricing flexibility, but CP's reliance on high-margin energy shipments leaves it more vulnerable to rate caps. RBC's analysts have noted that even a 5% reduction in freight rates could erase 10% of CP's projected EBITDA, given its leaner margin profile.

Investment Implications: Navigating the Crosscurrents

Investors must weigh two competing forces: the railroads' structural importance to North American trade and the regulatory overhang threatening their profit models. For CN, its diversified portfolio—spanning intermodal, automotive, and bulk commodities—provides a buffer against sector-specific risks. RBC's maintained “Outperform” rating and the stock's undervalued status relative to its C$163.37 consensus target suggest it remains a safer bet.

CP, however, faces steeper hurdles. Its narrowed price target and EPS guidance cut signal that investors are pricing in regulatory headwinds. Unless management can demonstrate cost discipline or rate-base resilience, CP's valuation may lag CN's.

Conclusion: Regulate with Caution

The RBC adjustments serve as a reminder that rail profitability is not merely about volume or efficiency but about navigating a policy landscape that could redefine industry economics. For investors, CN's scale and diversified earnings profile position it as a more compelling long-term holding, while CP's prospects hinge on regulatory restraint and operational agility. As policymakers debate tariffs, the rail sector's success will depend on finding equilibrium between fair rates for shippers and sustainable returns for operators. In this climate, patience—and a preference for the less exposed—may be the wisest course.

Recommendation:
- Hold CN Rail (CNI): Maintain exposure to its resilient business model, with a 12-18 month target aligned to the consensus.
- Avoid CPKC (CP): Wait for clearer regulatory clarity and margin stabilization before considering entry.

The rails are still vital, but their path to profit is now a track with many switches.

Data as of June 19, 2025. Past performance does not guarantee future results.