CSX Corp. vs. Canadian National: Which Railroad Stock is a Better Buy?

CSX Corporation (CSX) provides rail-based freight transportation services. The company offers rail services, transportation of intermodal containers and trailers, and other transportation services, such as rail-to-truck transfers and bulk commodity operations. On the other hand, Canadian National Railway Company (CNI) engages in the rail and related transportation business. The company operates a network of 19,500 route miles of track spanning Canada and the United States.

The railroad industry was severely hit amid the COVID-19 pandemic as their operation came to a halt owing to restrictive containment measures. Even though several parts of the world are still witnessing the resurgence of infections, railroad companies are rebounding due to accelerating shipping overland demand and rising freight rates. According to a Technavio report, the railroad market is expected to grow at a CAGR of 10.1% by 2025. Therefore, both CSX and CNI should benefit.

CSX has gained 5.8% over the past three months, while CNI has returned 3.5%. However, CNI’s 18.4% gains over the past year are significantly higher than CSX’s 14% returns. Moreover, CNI is the clear winner with 12.6% gains versus CSX’s 3% returns in terms of the past six months’ performance.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On October 20, 2021, James M. Foote, President and CEO of CSX, said, “We are committed to helping our customers overcome current supply chain constraints and will continue to take action to keep our network fluid and design new solutions that enable the delivery of critical goods to millions of Americans.”

On October 19, 2021, JJ Ruest, CN’s President, and CEO said, “Our entire organization is highly confident that the investments we have made in safety, technology, and capacity over the past three years will support the Company in delivering enhanced financial results in the last quarter of this year, as well as in 2022 and beyond.”

Recent Financial Results

CSX’s revenue increased 24% year-over-year to $3.29 billion for the fiscal third quarter ended September 30, 2021. The company’s operating income grew 26% year-over-year to $1.44 billion, while its net earnings came in at $968 million, representing a 32% year-over-year increase. Also, its EPS came in at $0.82, up 34% year-over-year.

CNI’s revenues increased 5% year-over-year to C$3.59 billion ($2.81 billion) for the fiscal third quarter ended September 30, 2021. The company’s adjusted operating income grew 8% year-over-year to C$1.47 billion ($1.15 billion), while its adjusted net income came in at C$1.08 billion ($845.09 million), representing a 9.5% year-over-year increase. Also, its adjusted EPS came in at C$1.52, up 10% year-over-year.

Past and Expected Financial Performance

CSX’s EBITDA and total assets grew at CAGRs of 3.4% and 2.9%, respectively, over the past three years. Analysts expect CSX’s revenue to increase 18.1% for the quarter ending December 31, 2021, and 17.5% in fiscal 2021. The company’s EPS is expected to grow 20% for the quarter ending December 31, 2021, and 28.9% in fiscal 2021. Moreover, its EPS is expected to grow at a rate of 17.8% per annum over the next five years.

On the other hand, CNI’s EBITDA and total assets grew at CAGRs of 2.7% and 5.9%, respectively, over the past three years. The company’s revenue is expected to increase 4.3% for the quarter ending December 31, 2021, and 4.8% in fiscal 2021. Its EPS is expected to grow 9.6% for the quarter ending December 31, 2021, and 7.1% in fiscal 2021. Also, CNI’s EPS is expected to grow at a rate of 8.5% per annum over the next five years.

Profitability

CSX’s trailing-12-month revenue is 1.05 times what CNI generates. CSX is also more profitable with an EBITDA margin and levered FCF margin of 54.72% and 19.50% compared to CNI’s 51.67% and 17.61%, respectively

Furthermore, CSX’s ROE, ROA, and ROTC of 27.85%, 8.04%, and 10.70% are higher than CNI’s 23.01%, 7.82%, and 10.50%, respectively.

Valuation

In terms of forward non-GAAP P/E, CNI is currently trading at 27.83x, 25.6% higher than CSX’s 22.16x. Moreover, CNI’s forward non-GAAP PEG ratio of 2.03x is 46% higher than CSX’s 1.39x.

So, CSX is relatively affordable here.

POWR Ratings

CSX has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, CNI has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

CSX has a B grade for Sentiment, consistent with analysts’ expectations that its EPS and revenue will increase significantly in the upcoming months. On the other hand, CNI has a C grade for Sentiment, in sync with analysts’ expectations that its EPS and revenue will increase modestly in the near term.

Of the 16 stocks in the B-rated Railroads industry, CSX is ranked #2. In comparison, CNI is ranked #6.

Beyond what I’ve stated above, we have also rated the stocks for Growth, Stability, Value, Quality, and Momentum. Click here to view all the CSX ratings. Also, get all the CNI ratings here.

The Winner

The railroad industry is expected to grow exponentially with increasing demand this year and beyond. While both CSX and CNI are expected to gain, it is better to bet on CSX now because of its lower valuation, higher profit margins, and better growth prospects.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Railroads industry here.

CNI shares were trading at $129.49 per share on Thursday afternoon, up $3.29 (+2.61%). Year-to-date, CNI has gained 18.33%, versus a 23.76% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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