Canadian National Railway

Canadian National's second-quarter revenue jumped 11% year over year—excluding foreign exchange—on higher carloads and strong all-in yield gains (surging fuel surcharges, positive core pricing). Adjusted margin fell this quarter mostly due to fuel noise.

Why it matters: Carload growth—excluding intermodal—accelerated (up 3%) on robust grain (favorable harvest) and stronger chemicals and automotive shipments, which benefited in part from new business wins. These factors were partly offset by lower coal (production headwinds), soft forest products, and tariff headwinds for certain Canada-US shipments such as steel. Intermodal activity flipped negative (down 5%) on tough import pull-forward comps for international containers. That said, it sounds like domestic activity increased with help from good service levels and new business wins—similar to what the US rails have reported. We believe CN is executing well in terms of network efficiency gains, but its adjusted operating ratio (expenses/revenue; lower is better) deteriorated to 62.2%—worse than our forecast—primarily because of the mathematical impact of rapidly rising fuel costs and surcharges, coupled with wage inflation.

The bottom line: We maintain our DCF-derived $113 USD denominated fair value estimate for wide moat Canadian National as our longer-term model forecast will likely remain intact. After a solid rally in first-half 2026 due to rebounding domestic intermodal demand and hints of industrial sector recovery (including improvement in the ISM Manufacturing PMI), CN is modestly overvalued relative to our long-term model forecasts. Valuation aside, tariffs will pressure certain cross-border shipments near term, but CN's new business pipeline is healthy, grain is strong, and we expect modest demand improvement among several industrial end markets this year barring a tariff- or oil shock-driven economic pullback.

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Our fair value estimate for Canadian National is USD 113 per share. We translate our fair value estimate into US dollars using an exchange rate of CAD 1.41/USD 1.

In 2024, consolidated revenue grew 1%, as total volume fell 1% but was partly offset by a 2% increase in all-in yield (revenue per carload). Yield benefited from longer average lengths of haul and core pricing gains on merchandise business, though intermodal pricing continued to see pressure from depressed trucking sector rates. Total volume growth benefited from an uptick in international intermodal activity (import growth and freight diversions from the US East Coast ports) and a better harvest for grain. That said, coal plummeted on competition from low-priced natural gas, intermodal strength from imports was tempered by labor disruption, and automotive activity flipped negative (year over year) in the second half on easing OEM production.

Although we believe CN's self-help network initiatives—including PSR efforts—have been bearing fruit, the firm's OR (expenses/revenue; lower is better) deteriorated to 62.9% in 2024 due to the brief Canadian rail work stoppage in August 2024, a Canadian port strike, and inefficiencies associated with new government-mandated work/rest rules.

2025 was another year of lackluster top-line growth, as CN's revenue was up only 1.5%. The increase was primarily driven by the addition of Iowa Northern and intermodal, which grew 6% on the first half import pull-forward and as CN clawed back business lost during port and rail work stoppages in 2024. Carload volume fell about 2% due to sluggish industrial end markets and lower metals and forest products (tariff headwinds for Canada-US shipments), only partly offset by higher coal and grain shipments and new business development.

Total yield came in flat due to mix, as core pricing on carload business was offset by lingering intermodal pricing pressure—rates in the competing truckload industry remained depressed. CN's OR improved to 61.7% in 2025, driven by healthy core pricing gains and network capacity rationalization, including headcount adjustments.

This year, CN's volumes will be pressured by sluggish housing end markets and direct tariff effects on metals and lumber, while international intermodal activity contends with tough import pull-forward comps. That said, assuming tariffs or an oil shock don't spark an economic pullback across North America, we expect the industrial sector to see modest improvement in carloads (along with CN's new business development tailwinds) and truck-to-rail conversions to prove more favorable for domestic intermodal. We also expect improvement in intermodal contract pricing as rates rebound in the competing truckload sector. Overall, we anticipate 5%-6% revenue growth in 2026 driven by spiking fuel surcharges, higher volume (especially grain), and incremental core pricing gains on carload business. We look for slightly more modest revenue growth of 4%-5% in 2027, but that's mostly due to tough comps for grain and fuel surcharges. Otherwise, we assume industrial end-market demand and new business wins remain healthy.

On the profitability front, we model OR improvement to 61.0% in 2026, as revenue growth and productivity gains offset wage inflation, fuel noise, and a jump in claims-related outlays. We look for further progress to around 60% in 2027 and 59.3% in 2028. Our fair value estimate bakes in a midcycle OR near 59.5%.

In our view, each of the North American Class I railroads we cover enjoys a wide economic moat rooted in cost advantages and efficient scale. Core pricing and margin resilience in past freight recessions and in the face of substantial coal volume losses over the past decade-plus is a testament to the rails’ robust competitive positioning. With near certainty, we expect the rails to continue to leverage their two core moat sources into economic profit for the next 10 years and more likely than not 20 years from now.

Cost advantage is a key driver of CN's wide economic moat. While barges, ocean liners, aircraft, and trucks also haul freight, railroads are by far the low-cost option where no waterway connects the origin and destination, especially for freight with low value/unit weight (bulk commodities). Along those lines, railroads enjoy quadruple the fuel efficiency of trucking (per ton-mile of freight), and through greater railcar capacity and train length, rails make more effective use of locomotive assets and manpower despite the need for train yard personnel. Rails can also carry significantly more freight at once. For freight that can be shipped by truck, we estimate railroads enjoy a 10%-30% discount on average on a similar lane. Even for intermodal container freight, which is largely made up of consumer-related products, rail has historically been cheaper than its key competitor, truckload shipping, on average over the cycle, thanks to the rails’ fuel efficiency and more economical use of labor.

Route density plays a role in rails’ cost advantage relative to a would-be new railroad entrant in a given corridor. We don’t expect any new mainlines to be built in the future, but the incumbent Class I providers would enjoy vastly lower unit and marginal costs than an upstart given immense network/lane density—the existing seven North American Class I railroads have thousands of customers across myriad end markets and geographies that drive significant freight volume across their networks.

CN and its Class I peers also benefit from efficient scale. Would-be rational competitors have little incentive to enter because massive upfront infrastructure costs and the potential for creating excess capacity amid limited demand would preclude economic profit and destroy value. The network of track and assets that the North American Class I railroads have in place is essentially impossible to replicate. CN's system is a unique three-coast, Y-shaped network, spanning Canada from east to west and stretching from north to south in the Midwestern United States. CN's rights of way and installed track across the full width of Canada and top to bottom of the US form a nearly impenetrable barrier to entry. Railroads occasionally build new spurs, but we anticipate no new mainlines will be built, given massive entry barriers.

Efficient scale followed industry consolidation escalated by the 1980 Staggers Rail Act, which permitted extensive rail line sales, abandonment, and combination while allowing for private contracts and rate setting based on market demand. In 1980, more than 40 Class I rails operated across North America. Today, there are only seven. (By definition, a Class I rail generates at least USD 475 million of revenue.) Consequently, on all but the busiest lanes, a single railroad often serves an end-of-the-line shipper, only two railroads operate in most regions, and providers have been able to reinvest while becoming quite profitable. In fact, we suspect that absent government intervention, the rational number of competitors on the continent would be four, via additional consolidation. This is because in most regions, customers already have only two capable providers that service the market effectively and efficiently.

Intermodal shipping should enjoy favorable long-term trends, including secular constraints on truckload capacity expansion and shippers' efforts to minimize transportation costs through mode conversions (truck to rail).

CN has reinvigorated its precision scheduled railroading roots in recent years, narrowing the margin gap with peers.

CN's exclusive access to the Port of Prince Rupert should continue to support long-term growth opportunities for international intermodal business.

US tariffs will temper carload demand for several commodity shipments like steel and aluminum this year.

Union contract wage and benefit inflation will remain a partial margin headwind over the near term.

The STB oversees railroads’ pricing in the US, so there will always be an underlying risk of reregulation in terms of a policy shift to a more heavy-handed approach.