Executive Summary

The North American rail industry stands at a pivotal moment, defined by a new wave of consolidation, the maturation of the Precision Scheduled Railroading (PSR) operating model, and its critical role in facilitating reshoring and cross-border trade under the USMCA. While facing cyclical economic headwinds and intense competition from a soft trucking market, the industry’s oligopolistic structure, high barriers to entry, and pricing power provide a durable foundation for long-term value creation. The proposed Union Pacific-Norfolk Southern merger represents a seismic shift, promising the first true U.S. transcontinental network and forcing a strategic re-evaluation across the sector. Investment opportunities are differentiated by network positioning, operational efficiency, and exposure to secular growth themes, with Canadian Pacific Kansas City’s (CPKC) unique north-south franchise and the potential scale of a combined Union Pacific-Norfolk Southern (UP-NS) presenting the most compelling long-term narratives.

The industry is currently navigating a bifurcated economic landscape. Carload volumes, tied to industrial production, have remained resilient through mid-2025, signaling underlying strength in the goods-producing economy. Conversely, intermodal traffic, a proxy for consumer spending and imports, has softened after a record 2024, facing pressure from slowing consumer demand for goods and highly competitive rates in the trucking sector. This dynamic underscores the industry’s sensitivity to macroeconomic trends but also highlights its indispensable role in the core industrial supply chain.

Structurally, the industry is a stable and highly profitable oligopoly with formidable, near-insurmountable barriers to entry. Decades of consolidation have culminated in a landscape dominated by six Class I carriers. This structure is now on the verge of its most significant transformation in a generation. The 2023 merger creating CPKC established a novel, single-line network connecting Canada, the U.S., and Mexico. The recently announced proposal for Union Pacific to acquire Norfolk Southern for an enterprise value of $85 billion would shatter the traditional East-West divide, creating a dominant U.S. transcontinental carrier. This move will likely trigger a strategic response from competitors BNSF and CSX, potentially leading to a new duopolistic structure that will redefine competitive dynamics for decades.

Operationally, Precision Scheduled Railroading is now the industry standard. Having driven a decade of dramatic margin improvement and cost reduction, the focus of PSR is now shifting. The key challenge for management teams is no longer just cutting costs but leveraging their more efficient and reliable networks to improve service, win market share from trucks, and drive sustainable top-line growth. Technology, from Positive Train Control (PTC) to artificial intelligence and predictive maintenance, is a critical enabler of this next phase.

From a valuation perspective, the sector trades at reasonable multiples relative to historical averages. However, significant value discrepancies exist between carriers, reflecting differences in network quality, operational performance, and growth prospects. The market has yet to fully price in the long-term strategic implications of the new era of consolidation. This report finds that carriers with unique geographic franchises aligned with secular growth trends—namely the north-south USMCA trade corridor—and those poised to achieve unparalleled scale offer the most compelling risk-adjusted returns for the long-term equity investor.

1. Industry Dynamics & Structure

Market Overview: Navigating Economic Crosscurrents

The North American freight rail industry in mid-2025 is a study in contrasts, reflecting a broader economy characterized by both underlying strength and significant uncertainty. The sector’s performance is a critical real-time indicator of the health of the goods-producing economy, and current data paints a picture of a resilient industrial core coupled with a more cautious consumer.

Recent volume data from the Association of American Railroads (AAR) reveals a clear divergence between the two primary segments of rail traffic: carloads and intermodal. Carload traffic, which consists of bulk and merchandise commodities like chemicals, grain, and industrial products, has demonstrated continued strength. Total U.S. rail carloads in the second quarter of 2025 were up 4.8% compared to the same period in 2024, marking the largest quarterly percentage gain since the third quarter of 2021.¹ For the first 30 weeks of 2025, U.S. carloads increased by a solid 2.7% year-over-year.² This sustained growth points to firm footing in the industrial economy, with sectors like chemicals and grain posting record or near-record volumes.¹ Even coal, a commodity in secular decline, has seen a surprising short-term rebound in carloads, though this is largely due to favorable comparisons against a weak prior year.¹

In stark contrast, intermodal traffic—the movement of shipping containers and truck trailers, largely tied to consumer goods and international trade—has shown signs of softening. After a record-setting 2024 fueled by robust consumer spending, U.S. rail intermodal originations fell 2.9% in June 2025, their first year-over-year monthly decline in 22 months.¹ This stumble is attributed to a combination of factors, including broader uncertainties in global supply chains, a cooling in consumer demand for goods, and intense price competition from a soft trucking market.¹ Despite this recent dip, year-to-date intermodal volumes through the first 30 weeks of 2025 remain positive, up 4.8% from the prior year, indicating that the long-term growth trend remains intact even as near-term headwinds mount.²

This bifurcation in rail volumes is a direct reflection of mixed macroeconomic signals. The U.S. labor market remains a pillar of strength, with steady job gains and a low unemployment rate supporting the economy.¹ However, this has not fully translated into continued goods consumption, as inflation-adjusted consumer spending on goods has slowed, with month-over-month declines registered in early 2025.¹ Meanwhile, the manufacturing sector remains a key area of concern. The Institute for Supply Management’s (ISM) Manufacturing PMI® has remained in contraction territory (below a reading of 50) for the vast majority of the last two years, signaling persistent weakness that directly impacts a significant share of rail carloads.¹ Compounding the uncertainty is stubbornly persistent inflation, which remains above the Federal Reserve’s 2% target, clouding the outlook for future monetary policy and interest rates.¹

The AAR’s Freight Rail Index (FRI), a vital economic indicator that aggregates data on economically sensitive freight while excluding the more volatile coal and grain categories, captures this dynamic succinctly. The FRI fell in June 2025, driven primarily by the softness in intermodal volumes, confirming a potential slowdown on the consumer side of the economy.¹ As a leading indicator of economic momentum, the FRI’s recent performance suggests that while the industrial backbone of the economy is holding firm, the rail industry and the broader economy are likely to continue navigating these challenging crosscurrents in the months ahead.⁵

Oligopolistic Nature and Competitive Dynamics

The North American railroad industry is a classic oligopoly, a market structure dominated by a small number of large firms whose strategic actions are interdependent.¹⁰ This structure is the result of over a century of consolidation, which accelerated following the Staggers Rail Act of 1980 that partially deregulated the industry. From dozens of Class I railroads in the mid-20th century, the landscape has condensed to just six major freight carriers today: BNSF Railway, Union Pacific, CSX Transportation, Norfolk Southern, Canadian National, and the newly formed Canadian Pacific Kansas City.¹¹

This concentration of market power has profound implications for competitive dynamics. Historically, the industry has oscillated between periods of intense, often destructive, price competition and periods of tacit or explicit cooperation to manage capacity and maintain pricing discipline.¹³ In the 19th century, overcapacity and fierce competition for traffic led to rate wars and financial instability, which in turn spurred the formation of cartels and trusts to control prices.¹² This exercise of market power ultimately led to the creation of the Interstate Commerce Commission (ICC) in 1887, the first federal agency designed to regulate a specific industry, with a mandate to ensure “just and reasonable” rates.¹²

Today, while direct price collusion is illegal, the oligopolistic structure facilitates rational pricing behavior. The immense capital costs and network effects create a stable competitive environment where carriers are more likely to compete on service and efficiency rather than engaging in value-destroying price wars. The primary economic and legal concern for shippers and regulators is that this limited competition can lead to higher prices, reduced service options for “captive shippers” (those served by only one railroad), and a slower pace of innovation.¹⁰ This inherent tension between the railroads’ need for profitability to fund massive capital investments and the public’s interest in competitive pricing is the central dynamic managed by the Surface Transportation Board (STB).

Barriers to Entry: A Formidable Moat

The barriers to entry in the freight rail industry are among the highest of any industry in the modern economy, creating a powerful and durable competitive moat for the incumbent Class I carriers. It is virtually inconceivable that a new, large-scale competitor could emerge to challenge the existing players. These barriers are multifaceted:

1. Extreme Capital Intensity: The sheer cost of building a new railroad is staggering. It involves acquiring vast tracts of contiguous land, grading the terrain, laying thousands of miles of track, constructing bridges and tunnels, building yards and terminals, and purchasing a massive fleet of locomotives and specialized railcars.¹⁰ To put this in perspective, the existing Class I railroads collectively invest over $23 billion annually just to maintain and upgrade their existing networks.¹⁶ Union Pacific alone has invested approximately $34 billion into its network over the past decade.¹⁷
2. Land and Right-of-Way: The historical development of the rail network, often aided by federal land grants in the 19th century, created a footprint that is impossible to replicate today.¹⁰ Assembling the necessary contiguous property rights and navigating the environmental and zoning regulations to build a new transcontinental line would be a legal and logistical nightmare.
3. Network Effects: The value of a railroad is directly proportional to the size and reach of its network. An established carrier serves thousands of customers across hundreds of markets and has interchange agreements with other railroads, creating a seamless transportation product. A new entrant would start with zero connectivity, making it an unattractive option for shippers who rely on the interconnected North American system.¹⁵
4. Economies of Scale and Density: Railroad economics are heavily dependent on achieving high traffic density. The high fixed costs of the network mean that profitability increases dramatically as more volume is added. An incumbent with a dense, established traffic base has a massive cost advantage over a new entrant trying to build volume from scratch.¹⁹
5. Institutional and Operational Hurdles: Beyond the physical and financial barriers, a new company would face significant operational challenges. Gaining the cooperation of existing carriers for interchange traffic and navigating the complex web of industry standards and labor agreements would be difficult. As one industry analysis notes, new entrants can expect “a significant amount of resistance” from established personnel and require an “internal champion” to even begin the process of establishing service and rates.¹⁵

These formidable barriers ensure the stability of the oligopoly, protecting the incumbents from new competition and allowing them to generate the substantial, consistent cash flows necessary to maintain and modernize their capital-intensive networks.

Regulatory Environment: The STB’s Critical Role

The Surface Transportation Board (STB) is the primary federal agency charged with the economic regulation of the U.S. freight rail industry. As the successor to the ICC, the STB has exclusive jurisdiction over matters such as rate reasonableness, service adequacy, line construction and abandonment, and, most critically, railroad mergers and acquisitions.²⁰

The STB’s approach to mergers has evolved significantly and is the single most important regulatory factor shaping the industry’s structure. For decades following the Staggers Act, the ICC and later the STB approved a series of mergers that consolidated the industry. However, service disruptions following the Union Pacific-Southern Pacific merger in 1996 led to a more cautious approach. In 2001, the STB established new, more stringent rules for major railroad mergers (those involving two or more Class I carriers).²⁰ Under these new rules, applicants must not only show that a merger is in the public interest but also demonstrate that it will

enhance competition, a significantly higher bar than the previous standard of simply preserving it.²⁰

These 2001 rules effectively froze major consolidation for two decades. The landscape began to shift with the STB’s landmark 2023 approval of the Canadian Pacific and Kansas City Southern merger. The STB reviewed this transaction under the pre-2001 rules, granting KCS a waiver because it was the smallest Class I railroad and the combination was an “end-to-end” merger with minimal overlapping routes. The board reasoned that the merger would create a new, stronger competitor to the larger carriers and enhance competition.²⁰

This decision has set the stage for the industry’s next, and potentially final, wave of consolidation. In July 2025, Union Pacific and Norfolk Southern announced their intention to merge in a transaction that would create the first truly seamless transcontinental railroad in U.S. history.²¹ The combined entity would have a network of over 50,000 route miles spanning 43 states and an enterprise value exceeding $250 billion.²⁶ This proposed transaction will be the ultimate test of the modern STB’s merger policy. The applicants argue the combination will enhance service, reduce transit times by eliminating interchange delays, and create a more formidable competitor to trucking and the Canadian railroads.²⁴ Shippers and competitors, however, will likely raise significant concerns about a reduction in competitive options. The STB’s decision, which will follow a lengthy and rigorous review process, will fundamentally reshape the North American competitive landscape.

For over two decades, the North American rail map has been defined by a stable “four-railroad” system: two dominant carriers in the West (UP and BNSF) and two in the East (CSX and NS), with the two Canadian railroads (CN and CP) providing critical north-south and cross-border connectivity. The STB’s stringent 2001 merger rules were the primary reason for this prolonged stability.²⁰ However, the recent approval of the CPKC merger signaled a critical shift in regulatory thinking. By approving the transaction under the older, less restrictive rules and emphasizing its end-to-end nature that created a new competitive force, the STB opened the door for other carriers to propose transformative combinations if they could be framed as pro-competitive.²⁰

Union Pacific and Norfolk Southern have seized this opening. Their proposed merger is strategically framed not as a horizontal combination that reduces competition, but as the creation of a vertically integrated, coast-to-coast network that offers a superior single-line service product. The core argument to the STB will be that this new entity can more effectively compete against the trucking industry and the newly expanded Canadian-based networks (CPKC and CN) for the flow of goods across the continent.²⁴ This move forces a strategic reckoning for the remaining players. BNSF and CSX, the primary competitors to UP and NS in their respective territories, are now at a significant strategic disadvantage. They face the prospect of competing against a single, seamless transcontinental network that can offer faster transit times and simpler pricing by eliminating the need for interchanges in congested hubs like Chicago. This pressure makes a responsive combination between BNSF and CSX not just possible, but strategically necessary to maintain competitive parity. The result is the likely end of the four-railroad map and the dawn of a new era defined by two dominant U.S. transcontinental systems competing head-to-head, alongside the two distinct north-south networks of CN and CPKC. This fundamental reshaping of the industry’s structure will have profound, long-lasting implications for supply chains, shipper negotiations, and the investment appeal of each carrier as the market reprices their strategic positions within this new paradigm.

The recent divergence in AAR volume data, with resilient carload traffic and faltering intermodal volumes, highlights the tug-of-war between cyclical pressures and secular trends that defines the current investment landscape.¹ The weakness in intermodal is a direct cyclical response to a specific set of economic conditions: a post-pandemic cooling of consumer spending on goods, elevated retail inventories, and, most importantly, a soft trucking market where excess capacity has driven down rates, making trucks more price-competitive for freight that could move by either mode.¹ In contrast, the relative strength in carloads for commodities like chemicals and grain points to a more durable industrial and export economy that is less sensitive to immediate consumer sentiment.¹

However, it is crucial for long-term investors to look through this near-term cyclical noise. The secular, or long-term, trends overwhelmingly favor the growth of intermodal rail. These trends include the continued expansion of e-commerce and global trade, the persistent shortage of long-haul truck drivers, increasing highway congestion, and the powerful push for more sustainable supply chains.³⁰ Rail is three to four times more fuel-efficient than trucking, which translates into a significant reduction in greenhouse gas emissions—a factor of growing importance for shippers’ corporate ESG mandates.³¹ Therefore, while the current softness in the trucking market presents a temporary headwind for intermodal, it does not negate the fundamental long-term value proposition of converting freight from road to rail. This period of cyclical weakness may, in fact, present an attractive entry point for investors. The market’s focus on the near-term challenges could be undervaluing the railroads with the strongest intermodal franchises and best access to major ports, such as BNSF and Union Pacific on the West Coast, which are best positioned to capture the inevitable rebound and capitalize on the powerful secular growth drivers of intermodal transportation.

2. Competitive Landscape

Profiling the Major Class I Carriers

The North American rail network is the backbone of the continent’s economy, and its arteries are controlled by a small group of Class I carriers. As defined by the Surface Transportation Board, a Class I railroad is one with annual operating revenues of $1.07 billion or more.²² Following the merger of Canadian Pacific and Kansas City Southern, there are now six major freight carriers that meet this definition, in addition to Amtrak, the national passenger carrier.¹¹ Each of these freight railroads possesses a unique network, a distinct strategic focus, and a set of competitive advantages defined by its geography.

Union Pacific (UP)

• Ticker: UNP
• Network: Union Pacific operates a formidable 32,693-mile network that is the largest in the United States, covering 23 states primarily in the western two-thirds of the country.¹⁷ Its historic routes, stemming from the original transcontinental railroad, form the core of its franchise, connecting the fast-growing markets of the West and South.³⁴
• Strategic Advantages: UP’s premier strategic asset is its unparalleled access to Mexico. It is the only railroad to serve all six major rail gateways between the U.S. and Mexico, positioning it perfectly to capitalize on the secular trend of nearshoring and the growth of USMCA trade.¹⁷ It also has extensive access to all major West Coast and Gulf Coast ports. Alongside BNSF, it forms a powerful duopoly on freight traffic west of the Mississippi River. The company is also a leader in leveraging technology, using its vast network as a “continent-spanning data laboratory” to develop proprietary AI and machine learning applications for operational efficiency and predictive maintenance.¹⁷ Its proposed merger with Norfolk Southern would fulfill the historic vision of a single-line transcontinental railroad, connecting its western network directly to the eastern seaboard.²⁴

BNSF Railway

• Ticker: Privately held by Berkshire Hathaway Inc.
• Network: BNSF operates a 32,500-mile network that is a direct competitor to Union Pacific, also covering 28 states in the western, midwestern, and southern U.S., as well as three Canadian provinces.³⁵ Its northern and southern transcontinental routes are among the most important freight corridors in the world.
• Strategic Advantages: BNSF is the market leader in U.S. intermodal transportation, leveraging its direct routes from the key West Coast ports of Los Angeles and Long Beach to Chicago and other major inland markets.³⁶ It is also a dominant carrier of agricultural products, connecting the grain-producing heartland to domestic and export markets.³⁶ As a private company, BNSF is not subject to the quarterly pressures of public markets, allowing it to take a very long-term approach to capital investment and strategic planning. The proposed UP-NS merger presents the most significant strategic challenge to BNSF’s competitive position.

CSX Transportation (CSX)

• Ticker: CSX
• Network: CSX operates an approximately 20,000-mile network concentrated in the eastern United States, serving 23 states, the District of Columbia, and two Canadian provinces.³⁸ Its network connects every major metropolitan area in the East, where nearly two-thirds of the U.S. population resides, and provides access to over 70 ocean, river, and lake ports.³⁹
• Strategic Advantages: CSX has a dense, efficient network serving a diverse mix of merchandise, coal, and intermodal markets. It forms a duopoly with Norfolk Southern in the East. In response to the creation of CPKC, CSX has proactively formed a partnership with the new railroad to create the “Southeast Mexico Express,” a direct interchange service designed to provide shippers a new, competitive option for moving goods between the U.S. Southeast, Texas, and Mexico.⁴⁰ This demonstrates a nimble strategic response to the changing competitive landscape.

Norfolk Southern (NS)

• Ticker: NSC
• Network: Norfolk Southern’s nearly 20,000-mile network also serves 22 states and the District of Columbia, primarily in the Southeast, East, and Midwest.⁴² It is the primary competitor to CSX in the eastern U.S.
• Strategic Advantages: NS boasts a franchise that serves more than half of the U.S. population and manufacturing base, with a network well-positioned to serve the fastest-growing segments of the U.S. economy.⁴² The company has a strong merchandise franchise and a significant presence in the automotive and intermodal markets. Its strategic importance is underscored by its position as the acquisition target in Union Pacific’s transcontinental merger proposal, which, if approved, would combine NS’s dense eastern network with UP’s expansive western franchise.²⁴

Canadian National (CN)

• Ticker: CNI (NYSE), CNR (TSX)
• Network: CN possesses the most unique geographic footprint of any Class I railroad. Its approximately 20,000-mile network is the only one that is “tri-coastal,” connecting the Atlantic and Pacific coasts of Canada with the U.S. Gulf Coast.⁴⁴
• Strategic Advantages: CN’s tri-coastal network is an irreplicable strategic asset, providing a seamless single-line service for moving Canadian natural resources (such as grain, potash, and lumber) to U.S. and global markets, and for moving U.S. imports and exports through Canadian ports. This geographic diversity provides a balanced portfolio of business that is resilient to regional economic downturns. CN was an early pioneer of Precision Scheduled Railroading and has historically been one of the most efficient operators in the industry.

Canadian Pacific Kansas City (CPKC)

• Ticker: CP
• Network: Formed in April 2023 through the merger of Canadian Pacific and Kansas City Southern, CPKC operates a roughly 20,000-mile network.²³
• Strategic Advantages: The entire strategic rationale for CPKC’s existence is its status as the first and only single-line railroad connecting Canada, the United States, and Mexico.²³ This transnational network offers shippers a seamless transportation product for goods moving along the USMCA trade corridor, eliminating the need for interchange between separate carriers at the border. This provides a powerful new competitive option against larger rivals and positions CPKC to directly capture growth from the trend of nearshoring manufacturing to Mexico. The company has already established new services, such as the Mexico Midwest Express (MMX) intermodal service and a partnership with CSX to improve access to the U.S. Southeast.⁴⁰

Carrier	Ticker	Route Miles (approx.)	FY2024 Revenue	FY2024 Operating Income	Market Cap (Jul 2025)	Primary Geographic Territory
Union Pacific	UNP	32,700	$24.3B	$9.7B	~$138B	Western, Midwestern, Southern U.S.; Mexico Gateways
BNSF Railway	Private	32,500	$23.4B	$7.5B	N/A	Western, Midwestern, Southern U.S.
CSX Corp.	CSX	20,000	$14.5B	$5.2B	~$66B	Eastern U.S.
Norfolk Southern	NSC	19,500	$12.1B	$4.1B (adj.)	~$63B	Eastern, Southeastern, Midwestern U.S.
Canadian National	CNI	20,000	C$17.0B	C$6.2B	~$60B	Canada (coast-to-coast), U.S. Midwest to Gulf Coast
CPKC	CP	20,000	C$14.5B	C$5.2B	~$71B	Canada, U.S. Midwest, Mexico (single-line)

Table 1: Class I Carrier Snapshot. Data compiled from company 2024 10-K filings and market data providers. Financials for Canadian carriers are in their reporting currency (CAD). BNSF is a wholly-owned subsidiary of Berkshire Hathaway. ¹⁷

Intermodal Competition: The Battle with Trucking

The most dynamic and competitive arena for railroads is intermodal transportation, where they go head-to-head with the trucking industry for long-haul freight. Intermodal, which involves moving shipping containers and truck trailers on railcars for the long-haul portion of a trip, has become the largest single source of revenue for U.S. freight railroads.³¹ This growth is a result of a powerful partnership that leverages the strengths of both modes: the efficiency of rail for long distances and the flexibility of trucks for first- and last-mile connections.³⁰

The fundamental competitive advantage of rail is its efficiency. On average, railroads are three to four times more fuel-efficient than trucks. This translates directly into lower costs, especially when fuel prices are high, and a significantly smaller environmental footprint, with rail reducing greenhouse gas emissions by up to 75% compared to trucks.³⁰ A single intermodal train can remove several hundred trucks from the nation’s congested highways, reducing road wear-and-tear and alleviating pressure on public infrastructure.³⁰ These factors, along with the persistent challenge of truck driver shortages, provide a strong secular tailwind for converting freight from road to rail.³¹

However, this conversion is not guaranteed. The competition between rail and truck is a constant battleground where the advantage shifts based on two key factors: price and service.

• Price: Rail is most cost-competitive on long-haul routes, typically over 500 to 750 miles.⁵⁴ On these lanes, the lower line-haul cost of rail is significant enough to offset the added costs of drayage (the short-haul truck move to and from the rail terminal) and the terminal lifts at both ends. In the current economic environment of mid-2025, the trucking market is experiencing a period of excess capacity, which has driven truckload rates down substantially. This has narrowed the price gap and made trucking more competitive, putting pressure on intermodal volumes.²⁹ This is a cyclical phenomenon; as the freight market tightens and truck rates rise, the economic advantage will swing back decisively in favor of rail.²⁹
• Service: Price is irrelevant if service is not reliable. Shippers demand consistency and predictability. In past years, when rail networks were congested and service was poor, shippers pulled their freight from the rails and paid a premium for trucks to ensure their supply chains remained fluid.²⁹ Recognizing this, railroads have used the operational discipline of PSR to dramatically improve network velocity and service consistency. As one analysis notes, rail service has “never been better” than it is now, with improved fluidity and faster transit times.⁵⁵ This improved service product is the key to convincing shippers to make the long-term commitment to integrate rail into their supply chains.

The Role of Short-Line and Regional Carriers

While the six Class I carriers dominate the headlines, the North American freight network is a complex ecosystem that relies heavily on the contributions of over 600 short-line and regional railroads.⁵⁶ These smaller, often entrepreneurial railroads operate approximately 47,500 route miles, accounting for nearly 30% of the total freight rail mileage in the United States.⁵⁶

Their primary and most critical function is providing “first-mile and last-mile” service.⁵⁶ They act as the essential link between thousands of shippers—farmers, manufacturers, and producers located in rural and small-town America—and the main lines of the Class I network. One in every five railcars moving on the national system either originates or terminates on a short line.⁵⁶ Without these smaller carriers, countless businesses would be cut off from the national and global supply chain, making short lines vital engines of local economic development.⁵⁶

Short lines are symbiotic partners with the Class I railroads. They gather freight from many smaller customers and aggregate it into blocks of cars that are then efficiently handed off to a Class I for the long-haul journey. This feeder system generates significant traffic for the major carriers.⁵⁷ In turn, the Class I railroads provide the national and international reach that short-line customers depend on. Due to their smaller size and local focus, short lines can often offer a level of flexibility and customized service that is difficult for the larger carriers to provide, fighting for single-carload business with the same intensity as for unit trains.⁵⁹ This entrepreneurial spirit has allowed the short-line industry to thrive, growing from just 8,000 miles of track in 1980 to nearly 50,000 miles today.⁶⁰

The competitive advantages and long-term value of a railroad are overwhelmingly dictated by the unique geography of its network. Financial metrics and operational efficiency are critically important, but they are ultimately outcomes of the strategic positioning of a carrier’s physical assets. The recent and proposed mergers are the clearest possible illustration of this principle. The entire rationale for the CPKC merger was to create a unique, irreplicable single-line network connecting Canada, the U.S., and Mexico, positioning the new company to directly capture the growth in USMCA trade.²³ Similarly, Union Pacific’s pursuit of Norfolk Southern is a direct attempt to solve the largest structural inefficiency in the U.S. rail system: the time-consuming and costly interchange of traffic between separate eastern and western carriers in congested hubs like Chicago.²⁴ The strategic prize is a seamless coast-to-coast service that no competitor can currently offer.²⁴

Even among the established carriers, network geography is the key differentiator. CN’s “tri-coastal” network provides access to three oceans, a unique advantage for international trade.⁴⁵ UP’s dominance at all six Mexico gateways gives it a distinct edge over its western rival, BNSF, in the lucrative cross-border market.¹⁷ Therefore, when evaluating these companies as long-term investments, an analyst is not simply acquiring a set of financial statistics; they are investing in a piece of strategic North American geography. The railroads whose networks are best aligned with the dominant and emerging corridors of continental trade—such as the increasingly vital north-south axis—are the ones most likely to generate superior returns over the long term.

3. Financial Performance & Metrics

A deep analysis of financial and operational metrics is essential to differentiate among the Class I carriers and to understand the tangible results of their strategic and operational initiatives. The industry’s high capital intensity and operational leverage make metrics of efficiency and return on capital particularly critical for investment analysis.

Operating Performance: The Primacy of the Operating Ratio (OR)

In the railroad industry, the single most scrutinized metric of performance is the operating ratio (OR), calculated as operating expenses as a percentage of revenue. A lower OR signifies greater efficiency and profitability. The widespread adoption of Precision Scheduled Railroading (PSR) over the past decade has led to a dramatic and industry-wide improvement in this key metric, as carriers have focused relentlessly on optimizing assets and controlling costs.

An analysis of the operating ratios for the publicly traded Class I carriers from 2020 to 2024 reveals distinct tiers of performance and highlights the transformative impact of PSR. Canadian National and Canadian Pacific have historically been the industry leaders in efficiency, consistently posting ORs at or below 60%. Union Pacific has made significant strides, bringing its OR down from the mid-60s to a record 59.9% in 2024, demonstrating successful execution of its PSR-based strategy.⁵² The eastern carriers, CSX and Norfolk Southern, have also undergone major PSR-driven transformations, leading to substantial improvements in their operating ratios, though they still generally lag their western and Canadian peers.⁴⁹

Carrier	2020 OR	2021 OR	2022 OR	2023 OR	2024 OR
Union Pacific (UNP)	59.9%	57.2%	60.1%	62.3%	59.9%
CSX Corp. (CSX)	58.8%	55.3%	59.9%	62.5%	63.9%
Norfolk Southern (NSC)	69.3%	60.1%	62.3%	67.4% (adj.)	65.8% (adj.)
Canadian National (CNI)	65.4%	61.2%	60.0%	60.8%	63.4%
Canadian Pacific (CP)	57.1%	60.6%	61.4%	65.0%	64.4%
BNSF Railway (Private)	62.9%	60.9%	65.9%	69.0%	68.1%

Table 2: Comparative Operating Ratios (2020-2024). Operating ratios are as reported in annual 10-K filings. NS adjusted OR for 2023 and 2024 excludes certain one-time charges. CP data for 2023 and 2024 reflects the post-merger CPKC entity. ⁵⁰

Beyond the headline OR, other metrics illustrate operational health. Pricing power, a key benefit of the oligopolistic structure, is evident in the carriers’ ability to consistently increase revenue per carload or revenue per ton-mile (RTM), even after excluding the impact of fuel surcharges. Union Pacific, for example, noted that strong core pricing gains helped drive a 4% increase in freight revenues (ex-fuel) in 2024, a year with a muted economic backdrop.⁵²

Asset productivity metrics provide a ground-level view of PSR’s impact. Freight car velocity (the average miles a car travels per day) and terminal dwell (the average time a car spends stationary in a terminal) are crucial indicators of network fluidity. Improvements in these metrics, such as UP’s 2% increase in freight car velocity in 2024, directly translate to better service for customers and more efficient use of capital assets.⁵² Similarly,

locomotive productivity, often measured in gross ton-miles per horsepower day, has improved across the industry as PSR principles have enabled carriers to move more freight with fewer, longer trains.⁶¹

Capital Intensity & Returns

The railroad business is defined by its high capital intensity. Carriers must continually invest billions of dollars each year to maintain and upgrade their vast infrastructure of track, bridges, signals, and rolling stock. In 2024, for example, Union Pacific’s capital program totaled $3.4 billion, while BNSF’s was $3.7 billion.⁵² These investments typically represent 15-18% of annual revenues.

Given this enormous and continuous need for capital, the most important measure of long-term financial success is Return on Invested Capital (ROIC). ROIC measures how effectively a company is generating profits from the capital it has deployed. A high and stable ROIC indicates a strong competitive advantage and disciplined capital allocation. In 2024, Union Pacific reported an industry-leading ROIC of 15.8%.⁶¹ Comparing the 5-year average ROIC across the peer group provides a clear picture of which management teams are the most effective stewards of shareholder capital.

Strong operating performance and disciplined capital spending translate into robust Free Cash Flow (FCF) generation. FCF—the cash generated from operations minus capital expenditures—is the lifeblood of shareholder returns, funding dividends and share repurchases. In 2024, Union Pacific generated $2.8 billion in free cash flow, while Norfolk Southern generated $1.7 billion.⁵⁰ The ability to consistently generate substantial FCF through economic cycles is a hallmark of the industry and a key component of its investment appeal. The

FCF conversion rate (FCF as a percentage of net income) is a useful metric for comparing the cash-generating efficiency of the different carriers.

The initial implementation of PSR across the industry was primarily a cost-cutting and margin-expansion story. By rationalizing assets, closing inefficient hump yards, and reducing headcount, carriers like CSX, NS, and UP were able to achieve dramatic, step-change improvements in their operating ratios. This phase of harvesting low-hanging efficiency gains is now largely complete. As the comparative OR table shows, recent improvements are more incremental than transformative.

This marks a critical strategic inflection point. The conversation in management presentations and investor calls has shifted from a singular focus on cost reduction to a more balanced approach centered on leveraging the newly efficient network to provide a superior service product and drive top-line growth.⁴² The goal is no longer just to run a cheaper railroad, but to run a better, more reliable railroad that can aggressively compete for market share against trucks. The proposed UP-NS merger exemplifies this new paradigm. While the deal projects $1 billion in annual cost savings, the headline synergy is the $1.75 billion in anticipated new

revenue opportunities unlocked by the single-line service.²⁷ This signifies that the industry’s next chapter of value creation will be written by the companies that can successfully translate their operational improvements into sustainable volume and revenue growth. For investors, this means the analytical focus must evolve. While the OR remains a vital metric, the key differentiators going forward will be revenue growth, market share trends, and customer-facing service metrics.

4. Business Model & Revenue Streams

The business model of a Class I railroad is to leverage its vast, fixed-asset network to transport a diverse portfolio of essential goods for the North American economy. Revenue streams are segmented by the type of commodity being hauled, each with its own unique demand drivers, cyclicality, and competitive dynamics.

Commodity Mix Analysis

A railroad’s revenue mix is a key determinant of its growth profile and sensitivity to various economic factors. The major commodity groups are Intermodal, Merchandise (which includes chemicals, automotive, forest products, and metals), Agricultural Products, and Coal.

• Intermodal: This is the largest and fastest-growing segment for most carriers, typically accounting for 25-40% of revenue. It involves the movement of domestic and international shipping containers. Volumes are driven by consumer spending, retail inventory cycles, and international trade flows, particularly imports from Asia through West Coast ports.³⁰ This segment is the most directly competitive with long-haul trucking. BNSF and UP are the dominant players in western intermodal due to their direct routes from the ports of Los Angeles and Long Beach.¹⁷
• Merchandise: This diverse category is closely tied to the health of the industrial economy.

• Chemicals: A high-value, stable business driven by industrial production. Low natural gas prices are a tailwind for U.S. chemical producers, boosting volumes.³
• Automotive: Involves transporting both finished vehicles from assembly plants and parts to those plants. Volumes are tied directly to auto sales and production schedules.
• Forest Products, Metals, and Minerals: These are tied to construction and housing activity, as well as general industrial demand.

• Agricultural Products: Primarily consists of hauling bulk grains (corn, soybeans, wheat) from production areas to domestic processors, feedlots, and export terminals. Volumes are highly seasonal, peaking after the fall harvest, and are influenced by crop yields, global demand, and trade policy.¹ BNSF, UP, and CN are the largest grain haulers.
• Coal: Once the dominant commodity, coal is in a long-term secular decline due to the shift towards natural gas and renewables for electricity generation.³ It remains a significant, though shrinking, part of the revenue mix for eastern carriers like CSX and NS, and for UP and BNSF, which serve the Powder River Basin. Volumes are sensitive to natural gas prices; when gas prices rise, demand for coal-fired power can temporarily increase.

Each railroad has a unique commodity mix based on the geography of its network. For example, CPKC’s 2024 revenue was heavily weighted toward bulk commodities like grain and potash (38% of freight revenue), while intermodal was 18%.⁴⁸ In contrast, BNSF’s consumer products (largely intermodal) represented 37% of its 2024 freight revenue.⁵³ Analyzing this mix is crucial to understanding a carrier’s specific exposures.

Operational Strategy

The dominant operational strategy across the entire industry is Precision Scheduled Railroading (PSR). Pioneered by Hunter Harrison at Illinois Central and later implemented at CN, CP, CSX, and now embraced by UP and NS, PSR is a philosophy centered on maximizing asset utilization and efficiency. Key principles include ⁶⁶:

• Shifting focus from moving trains to moving cars: The goal is to get individual railcars to their destination as quickly and with as few handlings as possible.
• Operating on a fixed schedule: Trains depart at their scheduled time, regardless of whether they are full, which enforces discipline and predictability throughout the network.
• Balancing the network: Ensuring that locomotives, crews, and railcars are in the right place at the right time to prevent congestion and improve asset velocity.
• Minimizing terminal dwell and car classifications: Reducing the time cars spend idle in yards is a primary driver of efficiency.

The successful implementation of PSR has allowed railroads to handle more volume with fewer assets. For example, in 2020, Norfolk Southern disposed of more than 700 locomotives while improving train weight and length.⁸⁰ Now that the model is mature, the focus is on leveraging the more reliable service product to win business and improve the customer experience.

Technology is a critical enabler of modern operational strategy.

• Positive Train Control (PTC): This GPS-based safety system, now fully deployed across the Class I network, is designed to prevent train-to-train collisions, derailments caused by excessive speed, and other human-factor incidents. It represents one of the most significant technological upgrades in the industry’s history.
• Automation and AI: Railroads are increasingly investing in automation and data analytics to drive the next wave of efficiency. Union Pacific is a leader in this space, using machine vision portals and AI algorithms to inspect railcars and track components in real-time, allowing for predictive maintenance that reduces in-service failures.¹⁷ Railinc, the industry’s technology subsidiary, is working on projects to use AI to improve the analysis of alerts from wayside defect detectors.⁸¹
• Network and Asset Management: Advanced software is used to optimize train routing, manage locomotive fuel consumption, and track assets across the network. These systems are essential for the complex logistical challenge of running a scheduled railroad.⁸¹

5. Growth Drivers & Opportunities

With the primary cost-cutting phase of PSR largely complete, the North American rail industry is now focused on leveraging its enhanced efficiency to drive sustainable top-line growth. Several key opportunities exist to expand market share and capitalize on secular economic trends.

Market Share Expansion from Trucking

The single largest growth opportunity for the rail industry is converting freight from the nation’s highways to its railways. The long-haul trucking market is massive, and rail currently captures only a fraction of it. The value proposition for conversion is compelling and multifaceted:

• Fuel Efficiency and Cost: Rail is approximately three to four times more fuel-efficient than trucking. This provides a significant cost advantage, particularly on long-haul routes and in periods of high fuel prices. A single intermodal train can move a ton of freight over 470 miles on a single gallon of fuel.³⁰
• Environmental Sustainability: The superior fuel efficiency of rail translates directly into a smaller carbon footprint. Moving freight by rail instead of truck can reduce greenhouse gas emissions by up to 75%.³¹ As shippers face increasing pressure from investors and consumers to improve the sustainability of their supply chains, the environmental benefits of rail become a powerful selling point.²⁹
• Highway Congestion and Driver Shortages: A single double-stack intermodal train can remove several hundred long-haul trucks from the highway, easing traffic congestion, reducing wear-and-tear on public infrastructure, and mitigating the impacts of the chronic shortage of long-haul truck drivers.³⁰

The key to unlocking this opportunity is service. To convince shippers to switch from the flexibility of trucking, railroads must provide a consistent, reliable, and “truck-like” service product. The operational improvements driven by PSR are making this a reality, and as service levels continue to improve, the potential to gain share from trucking will grow.²⁹

Increased Intermodal Penetration

Intermodal is the primary vehicle for capturing freight from trucks and is poised for continued long-term growth. This growth is underpinned by several powerful trends:

• Global Trade and E-commerce: The growth of international trade, particularly with Asia, drives volume through West Coast ports, where goods are transferred to intermodal trains for distribution across the continent. The rise of e-commerce has also increased demand for the efficient long-haul movement of consumer goods to inland distribution centers.³⁰
• Investment in Infrastructure: Railroads are investing billions of dollars to expand intermodal capacity. This includes building new inland terminals, expanding existing facilities, and investing in on-dock and near-dock rail capabilities at major ports to streamline the transfer of containers from ship to train.³⁰ BNSF, for example, is completing a multi-year expansion of its Cicero Intermodal Facility in Chicago and developing a planned Barstow International Gateway in California to handle growing import volumes.⁸³
• Technology: New gate technologies and optical scanning systems are speeding up truck processing times at intermodal terminals, reducing congestion and improving turn times for drayage drivers, which makes the entire intermodal process more efficient and attractive.³⁰

Cross-Border Trade (USMCA)

The strengthening of North American supply chains and the trend of “nearshoring” manufacturing from Asia to Mexico have made cross-border trade a premier secular growth opportunity. The United States-Mexico-Canada Agreement (USMCA) provides a stable framework for this trade, and railroads are the most efficient way to move goods across the continent’s vast distances.

This trend is so powerful that it has driven the two most significant strategic moves in the industry in a generation:

• The Creation of CPKC: The merger of Canadian Pacific and Kansas City Southern was executed for the express purpose of creating a single-line rail network connecting all three USMCA nations. This unique franchise allows CPKC to offer a seamless service for goods moving from manufacturing centers in Mexico to consumer markets in the U.S. and Canada, a powerful competitive advantage.⁴¹
• The Proposed UP-NS Merger: A primary strategic rationale for combining the largest western and a major eastern U.S. railroad is to create a more effective competitor for this north-south traffic. The merged entity would connect Union Pacific’s six Mexico gateways directly to the industrial and consumer heartland of the eastern U.S., unlocking new, more efficient routes for cross-border freight.²⁴

The intense strategic focus on creating and enhancing these north-south corridors by the industry’s largest players is a clear signal that USMCA trade is expected to be a primary engine of rail volume growth for the foreseeable future.

Infrastructure & Capacity Expansion

To capitalize on these growth opportunities, railroads are continuously investing in their networks to increase capacity, improve fluidity, and eliminate bottlenecks. These projects are carefully selected to provide attractive returns on invested capital. Key areas of investment include:

• Adding Mainline Track: In high-density corridors, adding a second, third, or even fourth mainline track can dramatically increase capacity and improve service reliability by allowing for smoother overtakes and reducing delays. BNSF, for example, is continuing a multi-year project to add a third main line on a portion of its critical Southern Transcon route in California.⁸³
• Lengthening Sidings: Extending the length of passing sidings on single-track lines allows for longer trains to meet and pass without one having to stop, which increases the effective capacity of the line and improves velocity.
• Yard and Terminal Optimization: Investments in expanding intermodal terminals, reconfiguring yards for greater efficiency, and deploying new technologies like automated cranes and gates are essential for handling growing volumes and reducing terminal dwell times.³⁰
• Bridge and Tunnel Clearances: Upgrading infrastructure to accommodate double-stack intermodal trains is a critical investment that unlocks significant efficiency gains and is a prerequisite for competing in the modern intermodal market.³⁰

6. Risk Factors & Challenges

Despite the industry’s strong fundamentals and growth opportunities, investors must be aware of a range of significant risks and challenges that could impact financial performance. These risks stem from the industry’s cyclical nature, its extensive regulatory oversight, and its critical role in the broader economy.

Economic Sensitivity

The fortunes of the railroad industry are inextricably linked to the health of the broader economy. As haulers of the fundamental building blocks of economic activity, from raw materials to finished goods, rail volumes are highly correlated with indicators like Gross Domestic Product (GDP) and Industrial Production.⁶

• Cyclical Downturns: A recession or significant economic slowdown would lead to a broad-based decline in freight volumes across nearly all commodity segments. This operational deleverage, combined with the industry’s high fixed costs, can lead to sharp declines in profitability during downturns.
• Exposure to Cyclical Industries: Railroads are heavily exposed to cyclical sectors such as manufacturing, housing, and automotive. A slowdown in these areas directly impacts volumes of steel, lumber, chemicals, and finished vehicles. The current weakness in the ISM Manufacturing PMI is a tangible example of this risk.¹
• Energy Price Fluctuations: While fuel surcharges allow railroads to pass through most of the direct cost of higher diesel prices, energy price volatility has a broader impact. High natural gas prices can increase demand for coal, a positive for coal volumes. Conversely, a sharp drop in oil prices can reduce shipments of crude-by-rail and frac sand, and can also lower the operating costs for competing trucks, making them more price-competitive against intermodal.
• Trade Volumes and Policy: A significant portion of rail traffic, particularly intermodal, is tied to international trade. A global recession, changes in trade policy, or geopolitical disruptions that impact import and export flows can have a direct and immediate impact on rail volumes.

Regulatory & Environmental Risks

As a vital piece of public infrastructure with an oligopolistic market structure, the rail industry operates under intense regulatory scrutiny.

• STB Oversight: The Surface Transportation Board has the authority to regulate rates and service. While the industry has been largely deregulated since the Staggers Act, the STB retains “market dominance” jurisdiction, which allows it to cap rates for shippers deemed to be captive to a single railroad.²⁰ A more aggressive regulatory stance by the STB could limit the industry’s pricing power and profitability. The outcome of the STB’s review of the proposed UP-NS merger is a major regulatory risk; a rejection would upend the strategic landscape, while an approval with onerous conditions could limit the deal’s value.
• Environmental Regulations: Railroads face a complex web of environmental laws. The most significant future risk is the potential for carbon pricing or stricter greenhouse gas emissions standards.⁸⁵ While this would increase operating costs (e.g., for more fuel-efficient locomotives), it would also likely improve rail’s competitive position relative to the less-efficient trucking industry. Regulations concerning the transport of hazardous materials are also a key area of focus, with any major incident potentially leading to stricter rules and higher costs.
• Safety Requirements: The industry is subject to stringent safety regulations from the Federal Railroad Administration (FRA). Compliance with these rules, including the mandate to implement Positive Train Control (PTC), requires significant and ongoing capital investment.
• Labor Relations: The railroad workforce is heavily unionized. Collective bargaining negotiations are governed by the Railway Labor Act and can be contentious. The potential for a work stoppage or strike during contract disputes is a recurring risk that can disrupt not only the railroads but the entire national supply chain, often prompting federal intervention.

Infrastructure and Maintenance Obligations

Railroads own, operate, and are solely responsible for maintaining their vast infrastructure network. This is a key differentiator from the trucking industry, which operates on publicly funded highways. This responsibility entails a massive and non-discretionary maintenance obligation. Each year, railroads must spend billions of dollars replacing rail, ties, and ballast, and maintaining bridges, tunnels, and signals simply to keep the network in a state of good repair.³² This creates a high fixed-cost base and a continuous need for capital, which can strain finances during periods of weak demand.

7. Capital Allocation Strategy

For mature, capital-intensive businesses like railroads, a disciplined and shareholder-focused capital allocation strategy is a critical driver of long-term value. With the bulk of major network expansion completed decades ago, the primary financial challenge for management is to balance the need for sustained reinvestment in the business with providing attractive returns to shareholders.

Shareholder Returns

Class I railroads have a long and consistent history of returning significant amounts of capital to shareholders through a combination of dividends and share repurchase programs.

• Dividend Policy: All of the publicly traded Class I carriers pay a regular quarterly dividend. They generally target a dividend payout ratio (dividends as a percentage of net income) that is sustainable through economic cycles, typically in the range of 35-45%. Dividend growth is a key component of the total return proposition for rail stocks, with companies often announcing annual increases.⁶³
• Share Repurchase Programs: Share buybacks are a major component of capital return strategies. Railroads use their substantial free cash flow to repurchase their own stock on the open market, which reduces the share count and increases earnings per share (EPS) for the remaining shareholders. These programs can be substantial; in 2024, Union Pacific repurchased $1.5 billion of its shares and has targeted $4.0 to $4.5 billion in repurchases for 2025.⁶¹ The decision to pause share repurchases is a key consideration in large M&A transactions, as seen in the UP-NS merger plan, which anticipates a temporary halt to buybacks to focus cash flow on debt reduction.⁸⁴

The balance between reinvesting for growth and returning capital to shareholders is a key strategic decision. A company’s capital allocation philosophy, as articulated by management, provides important insight into their priorities and their confidence in future growth opportunities.

Debt Management

Railroads utilize debt capital to finance a portion of their significant infrastructure and equipment investments. Maintaining a strong balance sheet and access to capital markets at attractive rates is essential.

• Debt Levels and Credit Ratings: Carriers manage their debt levels to maintain strong investment-grade credit ratings (typically in the ‘A’ or ‘BBB’ categories). This ensures a low cost of capital and financial flexibility. Key metrics monitored by investors and rating agencies include leverage ratios such as Debt-to-EBITDA and Debt-to-Total Capitalization.²⁸ The proposed UP-NS merger, for instance, is projected to have a pro-forma Debt-to-EBITDA ratio of approximately 3.3x at closing, with a stated commitment to rapid deleveraging back toward a target of ~2.8x within two years.²⁷
• Maturity Profiles: Management aims to maintain a well-staggered debt maturity profile to avoid having a large amount of debt come due in any single year, which could pose a refinancing risk, particularly during periods of market stress.
• Long-Term Obligations: In addition to debt, investors must also analyze other long-term obligations, such as pension and post-retirement benefit liabilities, which can be significant and represent a claim on future cash flows.

8. Valuation Analysis

Valuation analysis for the North American railroad industry requires a multi-faceted approach, combining analysis of trading multiples against historical and peer benchmarks with a fundamental assessment of earning power and asset value. This provides a comprehensive view of both relative and intrinsic value.

Trading Multiples

Comparing current valuation multiples to historical ranges and peer averages is a standard method for assessing whether a stock is cheap or expensive relative to its own history and its competitors.

• Price-to-Earnings (P/E) Ratio: This is the most common valuation metric. We will analyze both trailing twelve-month (TTM) and forward P/E ratios. Railroads typically trade at a slight premium to the broader market, reflecting their stable earnings and strong competitive moats.
• Enterprise Value to EBITDA (EV/EBITDA): This multiple is often preferred for capital-intensive industries as it is independent of capital structure (debt levels) and depreciation policy. It provides a cleaner comparison of the underlying operational value of the businesses.
• Price-to-Free Cash Flow (P/FCF): This metric is particularly relevant for railroads given their strong and consistent cash generation. It measures how much investors are paying for each dollar of free cash flow.
• Dividend Yield: For income-oriented investors, the dividend yield (annual dividend per share / current stock price) is a key valuation metric.

Carrier	Ticker	LTM P/E	FWD P/E	5-Yr Avg P/E	LTM EV/EBITDA	5-Yr Avg EV/EBITDA	Dividend Yield
Union Pacific	UNP	19.8x	18.5x	21.0x	12.5x	13.0x	2.4%
CSX Corp.	CSX	19.7x	18.2x	20.5x	12.2x	12.8x	1.3%
Norfolk Southern	NSC	23.9x	19.0x	20.0x	13.5x	13.2x	2.0%
Canadian National	CNI	18.3x	17.5x	21.5x	12.8x	14.0x	1.9%
CPKC	CP	25.8x	21.0x	23.0x	15.0x	15.5x	0.8%

Table 3: Peer Valuation Matrix. Data as of late July 2025. LTM = Last Twelve Months. FWD = Forward Twelve Months. Multiples are based on consensus analyst estimates and historical data from financial data providers.

Fundamental Valuation

Beyond relative multiples, a fundamental valuation approach seeks to determine the intrinsic worth of the business.

• Earnings Quality and Sustainability: The earnings of railroads are generally considered high quality, backed by real assets and strong cash flows. The key to assessing sustainability is to look at normalized earnings power through an economic cycle, smoothing out the peaks and troughs of demand. The industry’s ability to maintain pricing power even during downturns supports the sustainability of its margins.
• Asset Value: The replacement cost of the North American rail network is astronomical and practically infinite. While not a direct driver of stock prices, this massive underlying asset value provides a significant margin of safety and a theoretical floor to the companies’ valuations.
• Sum-of-the-Parts Analysis: For a railroad, this is less about divesting disparate businesses and more about understanding the value of specific corridors or franchises within the larger network. For example, the value of UP’s Mexico franchise or CPKC’s transnational route could be assessed as unique assets that may not be fully reflected in the consolidated valuation.

Relative Value

Comparing the valuation metrics across the peer group reveals important insights into market sentiment and expectations.

• Premiums and Discounts: Historically, CN and CP have traded at a premium to their U.S. peers, reflecting their superior operating ratios and returns on capital. Currently, CPKC commands the highest multiples in the group, as the market prices in significant future growth and synergy realization from its unique transnational network.
• Identifying Value Gaps: Union Pacific and CSX currently trade at a slight discount to their historical averages and to the premium multiple of CPKC. This could suggest a potential value opportunity if they can demonstrate a clear path to accelerating growth, either organically or, in UP’s case, through the successful acquisition of NS. Norfolk Southern’s valuation appears elevated on a trailing basis due to a recent dip in earnings, but its forward multiple is more in line with peers, reflecting expectations of a recovery.
• Impact of Consolidation: The announcement of the UP-NS merger will cause a significant re-rating across the sector. The stocks of the acquirer and target will trade based on the perceived probability of the deal’s approval and the value of the expected synergies. The stocks of competitors like CSX and BNSF (through Berkshire Hathaway) will also react as the market assesses their strategic response and competitive positioning in a newly consolidated industry.

9. Management Quality & Corporate Governance

In an industry where operational execution and disciplined capital allocation are paramount, the quality and strategic vision of the management team are critical determinants of long-term investment success.

Leadership Assessment

The current roster of Class I CEOs is largely composed of seasoned operators with deep experience in implementing Precision Scheduled Railroading.

• Track Record and Strategic Vision: The track record of a management team in delivering on its promises is a key indicator of its quality. For example, the market has high confidence in CPKC CEO Keith Creel, who was a protégé of PSR pioneer Hunter Harrison and successfully executed the transformative acquisition of KCS. Similarly, the return of Jim Vena, another Harrison disciple, to the CEO role at Union Pacific was well-received by investors, who credit him with driving significant operational improvements during his previous tenure as COO. His bold strategic move to acquire Norfolk Southern demonstrates a clear vision for reshaping the company and the industry.
• Capital Allocation Decisions: The most important decisions management makes are how to allocate capital. A history of disciplined, high-return investments in the core network, coupled with a consistent and prudent approach to shareholder returns, is the hallmark of a high-quality management team. Conversely, value-destructive M&A or a failure to invest adequately in the network are significant red flags.
• Communication and Transparency: Effective management teams communicate their strategy clearly and transparently to investors. They set realistic financial targets, provide detailed guidance, and are candid about challenges. The quality of a company’s investor day presentations and quarterly earnings calls can be a good indicator of management’s strategic clarity and credibility.

Governance Structure

Strong corporate governance is essential to ensure that management’s interests are aligned with those of long-term shareholders.

• Board Composition: An effective board of directors should be composed of a majority of independent directors with a diverse range of skills and experience relevant to the company’s business. The board’s role is to provide oversight and strategic guidance to management.
• Executive Compensation: Executive compensation plans should be heavily weighted towards performance-based incentives that are tied to key long-term value drivers, such as earnings per share growth, return on invested capital, and total shareholder return relative to peers. This ensures that management is rewarded for creating sustainable shareholder value.
• Insider Ownership: Significant stock ownership by management and the board of directors is a positive sign, as it aligns their financial interests directly with those of public shareholders.
• Financial Reporting: A commitment to transparent and conservative accounting practices is a cornerstone of good governance. Clear and detailed financial reporting in SEC filings allows investors to accurately assess the company’s performance and financial health.

10. Investment Thesis & Recommendations

The North American rail industry is at a strategic crossroads, presenting a compelling but complex opportunity for equity investors. The sector’s foundational strengths—its oligopolistic structure, immense barriers to entry, and inherent pricing power—provide a durable moat that underpins its ability to generate substantial and consistent free cash flow through economic cycles. However, the industry is now in a state of dynamic change, driven by the maturation of the PSR operating model and a new, potentially final, wave of transformative consolidation.

The investment thesis is no longer simply about which railroad can cut costs most effectively. With PSR now the industry standard, the key differentiator for future value creation will be the ability to leverage operational efficiency into sustainable, profitable growth. This involves providing a service product reliable enough to win significant market share from the trucking industry, capitalizing on the secular growth of intermodal and cross-border USMCA trade, and making disciplined, high-return investments in technology and capacity.

The competitive landscape is being fundamentally reshaped. The creation of CPKC has established a unique north-south franchise that is perfectly positioned to benefit from the nearshoring trend. The proposed merger of Union Pacific and Norfolk Southern, if approved, would be an even more seismic event, creating the first U.S. transcontinental railroad and likely forcing a strategic combination of its primary rivals, BNSF and CSX. This would usher in an era of two dominant, coast-to-coast rail systems competing for the nation’s freight.

In this environment, investment opportunities must be assessed based on network positioning, operational prowess, and valuation.

Ranking the Rails & Recommendations

1. Canadian Pacific Kansas City (CPKC) – BUY

• Thesis: CPKC possesses the most compelling and unique growth story in the industry. Its single-line network connecting Canada, the U.S., and Mexico is a one-of-a-kind strategic asset that is directly aligned with the powerful secular trend of USMCA trade and nearshoring. While it currently trades at a premium valuation, this is justified by its superior long-term growth prospects as it integrates its network and rolls out new cross-border services. The synergies from the KCS merger are still in their early innings, providing a clear runway for earnings growth that should outpace its peers for several years.
• Price Target: Based on superior growth prospects, a premium forward P/E multiple is warranted.

2. Union Pacific (UNP) – BUY

• Thesis: Union Pacific offers a compelling combination of scale, operational excellence, and a transformative strategic catalyst. Under CEO Jim Vena, the company has re-established itself as a leader in PSR execution, driving its operating ratio to industry-leading levels. Its dominant franchise in the western U.S. and unparalleled access to all six Mexico gateways provide a strong foundation. The proposed acquisition of Norfolk Southern is a bold, strategic move that, if successful, would create an unmatched transcontinental network with significant revenue and cost synergies. While the deal carries regulatory risk, the potential reward is substantial. Even on a standalone basis, UNP’s strong performance and reasonable valuation make it an attractive investment.
• Price Target: Valuation should reflect both standalone operational improvements and a probability-weighted outcome of the NS merger.

3. CSX Corporation (CSX) – HOLD

• Thesis: CSX is a high-quality, well-run railroad that has been a successful PSR turnaround story. It has a strong franchise in the eastern U.S. and has demonstrated a proactive strategic mindset with its CPKC partnership. However, it faces the most significant strategic uncertainty from the proposed UP-NS merger. A successful UP-NS combination would leave CSX at a competitive disadvantage. While a potential responsive merger with BNSF would be a logical and powerful countermove, this outcome is speculative. At its current valuation, which is in line with historical averages, the risk/reward profile appears balanced.
• Price Target: Valued in line with historical multiples, reflecting solid operations but significant strategic uncertainty.

4. Canadian National (CNI) – HOLD

• Thesis: CN remains one of the best-run railroads in North America, with a unique tri-coastal network that provides significant geographic diversification. It has a long history of operational excellence and strong returns on capital. However, in the current environment, its growth profile appears less dynamic than that of CPKC and a potentially merged UP-NS. Its failed bid for KCS left it on the sidelines of the consolidation wave, and while its franchise is strong, it lacks a clear, transformative catalyst in the near term. The stock is fairly valued, reflecting its high quality and stable but more modest growth outlook.
• Price Target: Valued as a high-quality, stable operator, but with a lower growth premium than its consolidating peers.

5. Norfolk Southern (NSC) – HOLD (Merger Arbitrage)

• Thesis: As the target of a proposed acquisition by Union Pacific, the investment case for Norfolk Southern is now primarily a merger arbitrage play. The stock price will be driven by the perceived likelihood of the deal closing and the spread between the current price and the implied deal value of $320 per share (composed of $88.82 in cash and 1.0 share of UNP).²⁵ The standalone fundamentals, which have shown improvement but still lag peers, are now a secondary consideration. Given the significant regulatory hurdles and the long timeline to a potential closing in early 2027, there is considerable uncertainty. A hold rating is appropriate for investors not specializing in merger arbitrage.
• Price Target: Will trade based on the implied deal value and the market’s assessment of regulatory approval probability.

Works cited

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