CP is perceived as a better operator in the rail industry, with stronger volume growth over time and better margin profiles. However, this superiority in operational efficiency has been mostly priced into the valuation. CNR is trading at around 17.4x forward P/E, while CP is trading at around 21x forward P/E. Therefore, we think the forward returns over the next three to five years are likely to be similar. With that said, we are comfortable with the switch, as in our experience it is often better to pay a premium valuation and stick with the best operator in the industry. Great management teams tend to surprise investors on the upside. We have been a bit more cautious on CP in the past two years as debt rose, but it is back under control now following the Kansas City acquisition.
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