We think investors can look at a few other metrics that are valuable to the railroads, like revenue per ton growth (indicating pricing power) and volume growth (around 1%-3% would be decent). Canada’s railway stocks have demonstrated the ability to grow organically through pricing power and volume growth much better than US peers. Historically, CP has been a better operator than CNR. However, the market already priced in that operational superiority by rewarding CP with a higher trading multiple of 24x Forward P/E, while CNR trades at a discount of 19.2x Forward P/E. Therefore, we think the prospective returns for the two from these levels could be in line with each other.
We think railroads in general, especially Canadian rails will continue to be solid investments over time - these may not be great compounders, but we think over the long-term investors could potentially compound capital in the range of 12%-15% with relatively low risk.