Canadian railway stocks have been struggling for more than a year, with labour disputes, wildfires and low demand for some commodities weighing on investor sentiment. Are U.S. tariffs now skewering hopes for a recovery?
Canadian National Railway Co. (CNR-T) has tumbled 21 per cent over the past 12 months, through April 3 – the day after U.S. President Donald Trump’s “Liberation Day, when he announced aggressive tariffs against U.S. trading partners.
Canadian Pacific Kansas City Ltd. (CP-T) has declined 16 per cent over the same period.
If you thought tariffs had been priced in, you were wrong: Both stocks tanked Wednesday as part of a global selloff.
“For those who were hoping that the tariff announcements on April 2 may be more bark than bite … they arguably got something very different than they had hoped for,” said Libby Cantrill, head of U.S. public policy at investment manager PIMCO, in a note.
The rails certainly reflect disappointment.
Though renowned for their market-trouncing performance over the long term, the stocks have underperformed the broad S&P/TSX 60 Index over the past year by about 30 percentage points, on average.
Both stocks sit within the 10 worst-performing names in the blue-chip index over this one-year period.
This unusual divergence from the benchmark may have looked like an opportunity for some investors to grab beaten-up gems on the cheap late last year (full disclosure: As a new CNR shareholder, I’m one of them), especially with the rails’ climate- and labour-related issues segueing into upbeat forecasts for 2025.
CNR said in February that its profit – specifically, adjusted diluted earnings per share, which provide an operational snapshot – will rise 10 per cent to 15 per cent over last year, based on price increases and margin improvements.
CPKC expects its profit will rise 12 per cent to 18 per cent as it continues to wring efficiencies from the recent merger of Canadian Pacific and Kansas City Southern.
The snag to the rebound thesis comes from Mr. Trump. His tariff announcements, and the tremendous economic uncertainty they have unleashed, are dragging on railway stocks like an unwanted caboose – without wheels.
“On tariffs, I know it’s on everybody’s mind,” said Ghislain Houle, the chief financial officer at CNR, at the J.P. Morgan Industrials Conference last month.
At the same conference, Keith Creel, CPKC’s chief executive officer, said the railway was “not tariff immune.”
Railways depend on trade. If tariffs slow shipments of everything from vehicles to lumber to grain, and also drive business confidence and economic activity into the ground, profits could suffer.
Capital Economics expects U.S. economic growth will slow to about 1.5 per cent this year while inflation rises to 4.5 per cent – an ugly combination known as “stagflation.” The economics analysis firm puts the odds of a U.S. recession at a worrying 30 per cent.
Yet, railway executives and some analysts have been arguing for months that CNR and CPKC can navigate this strange new environment.
Mr. Creel said in March – in his most detailed response to the threat of tariffs so far – that even a worst-case scenario would leave the lower end of CPKC’s 2025 earnings guidance intact, as Mexican and Canadian producers look for alternatives to the U.S. market.
“We’re the land bridge that makes it possible,” he said.
CNR’s Mr. Houle also reaffirmed his bullish outlook last month, adding that the low Canadian dollar and cheaper fuel – the price of crude oil plunged as much as 7 per cent Thursday and is now hovering near three-year lows – serve as shock absorbers.
That’s hardly an airtight case for buying a railway stock right now. But intrepid investors might consider taking the leap anyway.
One reason: Thursday’s severe stock market downturn had a sell-everything feel to it. Stocks that should be relatively immune to tariffs may have been tossed overboard with those that are more exposed.
Another reason rests on low stock valuations that leave little downside risk.
Konark Gupta, an analyst at Bank of Nova Scotia, said in a note this week that CNR trades at 17.9-times his estimated 2025 earnings, which is a six-year low. CPKC has a loftier price-to-earnings ratio of 21.2, but that’s the lowest valuation since CP announced its final deal for Kansas City Southern in 2021.
“We believe earnings per share can grow this year despite lingering tariff uncertainties,” Mr. Gupta said in his note.
A final reason: Just about every economist and market watcher believes Mr. Trump’s approach to tariffs makes no sense, which makes you wonder if the approach will survive his term in the White House. Railway stocks, then, offer an intriguing way to bet against the U.S. President.