CN Rail or CP Rail – A look at the Railways

People trying to get on board the Warren Buffett bandwagon and are too cheap to purchase a Class A share of Berkshire Hathaway (currently $129,538/share) to participating in Burlington Northern are looking at other publicly traded rail options.

These include the following American names:
CSX (NYSE: CSX) – Eastern USA, competes with NSC
Kansas City Southern (NYSE: KSU) – Mid-Southern USA and both sides of Mexico
Norfolk Southern (NYSE: NSC) – Eastern USA, competes with CSX
Union Pacific (NYSE: UNP) – Primarily competes with Burlington Northern

In Canada, there are two majors:
CN Rail (TSX: CNR) – Very large network from Prince Rupert and Vancouver on the Pacific to the St. Lawrence River and Halifax to the Atlantic and New Orleans to the Gulf of Mexico.
CP Rail (TSX: CP) – From Vancouver to the St. Lawrence River.

The railways trade at roughly the same valuations – very roughly, around 16-20 times earnings, depending on the company. There are reasons for these earnings differentials, mainly balance sheet factors.

Comparing CNR and CP, CP rail appears to be a tad cheaper right now, but both are relatively expensive for what you are purchasing – a utility-type company that will continue to be very profitable in the future as energy prices increase. They will once again decrease in valuation when the physical amount of goods in the economy slows down, like things did in the second half of 2008.

Although both companies are well run and profitable, they are classic examples of such companies that you would not want to invest in unless if you wanted to invest a huge amount of money in them for the purposes of stability. Even then, one would think that waiting for the next recession would give you a better entry point.