We regularly review transportation stocks. Both of these key railroad stocks are relatively costly. Still, both remain buys for long-term share price gains and growing dividends.
Canadian National Railway (TSX—CN; NYSE—CNI) is expected to earn $6.87 a share in 2022. That’s up by 15.7 per cent from last year. This gives CN a hefty P/E (price-to-earnings) ratio of 20.9 times. Next year, its earnings are expected to grow by 13.8 per cent, to $7.82 a share. This gives the railroad a better, but still hefty, forward P/E ratio of 18.3 times.
North America and Asia trade much more these days. Trains carry a lot of manufactured goods to warehouses across North America. Trains also carry a lot of raw materials to the West Coast. Trains can make these long hauls profitable in a way that trucks can’t.
Prince Rupert is unclogged and closer
One problem with the TransPacific trade is that ports in North America and Asia are clogged with cargo. CN’s Port of Prince Rupert, however, has excess capacity to handle TEU (Twenty-foot Equivalent Unit) containers. This means that ships can quickly load and unload.
The containers go straight from the ships to the trains and vice-versa. Even better, the Port of Prince Rupert is several days closer to Asia than ports further south. With energy costs much higher, this proximity is even more valuable.
Mega acquisition integrates Canada to Mexico
Canadian Pacific Railway (TSX—CP; NYSE—CP) trades at a high multiple of 23.9 times the $3.69 a share that it’s expected to earn in 2022. Next year, however, CP’s earnings are expected to jump by 23.3 per cent, to $4.55 a share. This gives the railroad a better, but still high, forward P/E ratio of 19.4 times.
CP is expected to acquire KCS (Kansas City Southern). This will greatly expand its service in Mexico. We expect this to become more important in the years ahead.
For one thing, the North American economy is becoming increasingly integrated. This should raise train shipments between all three countries. For another thing, many supply chains have unraveled. We hear more talk about ‘onshoring’. With significantly lower labour costs in Mexico, that country could produce competitively-priced products close to North American factories.
CN and CP are not cheap. But both offer significant growth potential. They remain buys for long-term share price gains and improving dividends.
This is an edited version of an article that was originally published for subscribers in the June 3, 2022, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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