Executive Summary / Key Takeaways

• Resilient Network and Strategic Growth: Canadian National Railway (CNI) leverages its extensive, tri-coastal North American network and a diversified business model to drive growth, even in a volatile macroeconomic and trade environment. Its strategic bypass of Chicago congestion and high control over freight origination and termination provide a distinct competitive advantage.
• Operational Excellence and Technological Edge: CNI's scheduled operating model, coupled with continuous investment in technology like DC to AC locomotive modernization and predictive maintenance, translates into superior operational efficiency, cost control, and enhanced service reliability for customers.
• Adapting to Macroeconomic and Tariff Headwinds: Despite a challenging Q2 2025 with a 1% revenue decline and flat RTMs due to tariffs and a weaker industrial economy, CNI delivered 2% adjusted EPS growth and a 50 basis point margin improvement by aggressively managing costs and adjusting resources.
• Revised Outlook with Targeted Initiatives: CNI has adjusted its 2025 guidance to mid- to high single-digit EPS growth on low single-digit RTM growth, reflecting ongoing market uncertainties. Over half of this volume growth is expected from CN-specific initiatives in areas like energy exports, frac sand, and renewables.
• Commitment to Shareholder Returns: The company maintains a strong financial position with over $1.5 billion in free cash flow through June 2025 and a commitment to a 2.5x adjusted debt to adjusted EBITDA target. This supports a 5% dividend increase for 2025, marking 29 consecutive years of growth, alongside a new share buyback program.

The Unrivaled Network of Canadian National Railway: A Foundation for Growth

Canadian National Railway Company, incorporated in 1919, has established itself as a cornerstone of North American trade. Operating a nearly 20,000-mile rail network, CNI uniquely connects Canada’s Eastern and Western coasts with the U.S. Midwest and the U.S. Gulf Coast. This extensive reach and strategic positioning are fundamental to its business model, which encompasses rail, intermodal, trucking, and related transportation services for a diverse range of commodities including petroleum and chemicals, grain and fertilizers, coal, metals and minerals, forest products, and automotive goods.

CNI's overarching strategy is built upon a scheduled operating model that prioritizes efficiency, customer service, and resilience. This model has repeatedly demonstrated its ability to recover quickly from disruptions, as evidenced by its performance following wildfires and labor-related shutdowns. A key differentiator is CNI's ability to bypass the often-congested Chicago rail hub through its EJ&E railway acquisition, enabling faster and more reliable freight movement. Furthermore, CNI originates over 85% of its freight and both originates and terminates more than 65% of its business, a higher proportion than any other Class I railroad. This allows CNI greater control over service quality and efficiency at both ends of the supply chain.

The current global trade landscape is marked by increasing uncertainty, particularly concerning tariffs and evolving macroeconomic conditions. These shifts are prompting customers to rethink their supply chains, creating both challenges and opportunities for CNI. CNI's diversified service offerings, including vessel and dock operations, transloading/distribution centers, and comprehensive supply chain solutions, position it as a critical link in numerous sectors.

Technological Differentiation and Operational Excellence

CNI's operational strength is deeply rooted in its technological advancements and disciplined execution. The company's core differentiated technology lies in its sophisticated scheduled operating model, which optimizes train schedules and traffic flow to minimize delays and maximize capacity. This is complemented by continuous investment in its fleet and infrastructure.

A significant technological initiative is the DC to AC locomotive modernization program, which has converted 160 older DC units to modern AC propulsion units. This upgrade provides tangible benefits: two modernized AC units deliver the pulling power of three older DC units, enhancing fleet reliability, fuel efficiency, and overall availability with fewer failures. This directly contributes to an 8% reduction in locomotive unit costs year-over-year.

CNI also leverages predictive maintenance capabilities, which have led to an 11% reduction in locomotive failures year-over-year and a 5% reduction in locomotive parts inventory. In its engineering division, moving more work in-house has resulted in a 7% increase in tie gang productivity, a 5% lower unit cost, and a reduction in work block delays across the network. The company is exploring emerging technologies, including a small pilot program with Knoxville Locomotive Works for a medium-horsepower hybrid unit to be tested in yard and branch line service. Furthermore, CNI is transitioning its legacy technology infrastructure to the cloud, a move that contributed to a 25% increase in software and support costs in Q2 2025.

For investors, these technological differentiators and operational improvements are critical. They form a competitive moat by enhancing service reliability, controlling costs, and providing the capacity needed for future growth. The ability to achieve a 92.5% locomotive availability and an 11% improvement in train and engine (T&E) labor productivity underscores CNI's commitment to efficiency. This operational discipline allows CNI to maintain strong margins and adapt quickly to volume and mix shifts, reinforcing its market positioning and long-term growth strategy.

Competitive Landscape: A North American Powerhouse

CNI operates within the highly capital-intensive North American rail industry, competing directly with other Class I railroads such as Canadian Pacific Railway (CP), Union Pacific Corporation , CSX Corporation , and Norfolk Southern Corporation (NSC). CNI's competitive advantages are multifaceted, stemming from its strategic network, operational efficiency, and integrated service offerings.

CNI's transcontinental network, which connects three major coasts and bypasses Chicago congestion, provides a significant edge over competitors by offering direct access across major regions and reducing transit times. This extensive network reach and diversified service offerings, including vessel and dock operations, transloading/distribution centers, and comprehensive supply chain solutions, are difficult for rivals to replicate. CNI's operational efficiency is a hallmark, driven by its scheduled operating model and technological investments, which enable it to offer competitive pricing and maintain profitability.

In direct comparisons, CNI's ability to originate over 85% of its volume and both originate and terminate over 65% of its business provides greater control over service quality than its peers. This control is a key factor in its success in domestic intermodal, where it has secured new business based on its service performance. CNI's Falcon Premium intermodal service, a partnership with Union Pacific and Ferromex (FMX), offers a consistent five-day transit time from Mexico to Eastern Canada, acting as a single-line service and earning industry recognition. Similarly, the Crowley short sea service from Mexico into Gulfport, connecting with CNI, is a unique offering that runs on an expedited schedule into Chicago.

While CNI demonstrates strong operational efficiency, its profitability margins, such as EBITDA and net income margins of 51% and 27% respectively, are comparable to its peers. CNI's return on equity of 22% also sits between that of Union Pacific (UNP) and CSX (CSX). However, CNI faces vulnerabilities, including exposure to economic cycles and dependencies on specific supply chains, which can lead to increased costs during disruptions. The domestic intermodal business, for instance, is impacted by an oversupply of truck capacity.

The industry also faces ongoing merger discussions, particularly in the U.S. rail sector. CNI's management believes that similar benefits can be achieved through commercial arrangements without the disruptive effects of major mergers, and the company is committed to rigorously defending its competitive access in any such scenario. The increasing congestion at U.S. ports, such as LA Long Beach, further highlights the strategic value of CNI's Prince Rupert and Vancouver gateways as efficient routes to the Midwest.

Financial Performance: Resilience Amidst Headwinds

Canadian National Railway demonstrated resilience in its financial performance despite a challenging external environment. In the second quarter of 2025, the company reported 2% adjusted EPS growth, even as year-over-year carloads remained flat and Revenue Ton Miles (RTMs) saw a 1% reduction. Total revenues for Q2 2025 decreased by 1% to C$4,272 million, primarily due to weaker market fundamentals and ongoing U.S. trade and tariff actions. This also included an unfavorable mix shift, with less merchandise business from Forest Products, refined petroleum products, chemicals, and metals, which contributed to flat revenue per RTM despite same-store pricing exceeding rail cost inflation. The repeal of the Canadian carbon tax surcharge on April 1, 2025, also impacted Q2 revenues by approximately $70 million.

Despite these revenue pressures, CNI achieved a 50 basis point year-over-year improvement in its operating ratio to 61.7% in Q2 2025, and a 150 basis point improvement spanning over Q1. This was driven by proactive adjustments to the operating plan and tight cost management. Labor and purchased services and materials expenses remained essentially flat year-over-year in Q2 2025, while fuel expense decreased by 25% due to the elimination of the carbon tax and a 23% decrease in price per gallon. However, other costs increased by approximately $40 million, or 25%, largely due to higher incident costs and increased software and support costs associated with transitioning technology infrastructure to the cloud.

Looking back at the first quarter of 2025, CNI reported 8% EPS growth and a 20 basis-point improvement in the operating ratio, despite a more normalized winter weather pattern. RTM growth was 1%, with revenues up 4%, benefiting from a 3.5% foreign exchange tailwind, partially offset by a 3% fuel price headwind. The full-year 2024 adjusted EPS was $7.10, with an operating ratio of 62.9%. Management acknowledged that 2024 was impacted by "one-off challenges," including labor disputes, rail shutdowns, and port strikes, which collectively affected the operating ratio by roughly 200 basis points.

From a liquidity perspective, CNI generated over $1.5 billion of free cash flow through June 2025, a 5% increase year-over-year, primarily driven by lower capital expenditures. The company's leverage at the end of Q2 2025 stood at 2.5x, aligning with its target adjusted debt to adjusted EBITDA ratio. CNI is actively managing its capital expenditures, reducing its 2025 CapEx envelope by approximately $50 million and seeking further opportunities to tighten spending for both 2025 and 2026. The Board of Directors approved a 5% dividend increase for 2025, marking the 29th consecutive year of dividend growth, and authorized a new share buyback program of up to 20 million shares. This consistent return of capital to shareholders is supported by a conservative payout ratio, which was 48% in Q2 2025.

Segment Deep Dive: Mixed Signals, Targeted Growth

CNI's diverse portfolio of freight segments experienced mixed performance in the second quarter of 2025, reflecting the broader economic and trade environment. However, the company continues to drive growth through specific initiatives tailored to its network strengths.

Intermodal faced headwinds from increased blank sailings, leading to a 4% decline in units through Vancouver. Conversely, Prince Rupert units saw a robust 14% increase, driven by new Gemini volumes. Domestic wholesale volumes also showed strength, particularly in TransCon and Eastern Canada lanes. The outlook for international intermodal remains tempered by the tariff situation and recent inventory pull-forward, though solid year-over-year growth is still anticipated in the second half of 2025 as the company laps last year's labor disruptions.

Petroleum and Chemicals volumes were impacted by extended turnarounds at approximately 50% of Western Canadian refineries, an unprecedented situation. Policy changes in the U.S. and Canada also led to lower renewables shipments, as producers shifted to domestic sourcing. Despite these pressures, the segment is projected to grow in the balance of 2025, with refinery issues expected to resolve by Q4, and a ramp-up in volumes into the Toronto fuel distribution facility as Phase 2 comes online. Continued growth in export propane through the AltaGas (ALA) facility is also expected.

In Metals and Minerals, iron ore shipments were affected by weaker demand and a mine closure, while frac sand volumes declined due to a bridge fire and reduced drilling activity from lower gas prices. Steel and aluminum shipments faced significant pressure from U.S. tariffs, which escalated to 50% in June. CNI actively mitigated some of these losses by facilitating intra-Canada and intra-U.S. moves for customers. The company is cautious on the metals outlook but anticipates support from new frac sand terminals in Northeast British Columbia.

Forest Products continued to be unfavorably impacted by challenging market fundamentals, including higher softwood duties for Canadian imports, the lingering threat of the U.S. Section 232 lumber investigation, and a slower-than-expected housing recovery. Lumber mill curtailments are directly affecting other forest products, such as wood pulp.

Coal saw Canadian metallurgical coal exports increase due to the Quintette mine restart. However, U.S. coal volumes were impacted by longwall moves at two Illinois Basin thermal coal mines. The segment is expected to benefit from new production in Northeast British Columbia.

Grain and Fertilizers emerged as a "real bright spot" in Q2 2025, with a 12% increase in revenues. This was driven by stronger grain shipments, up 6% in Canada and almost 30% in the U.S., benefiting from higher corn exports, new ethanol projects, and volumes from the Iowa Northern acquisition. Potash RTMs surged by almost 30% due to strong exports to the Port of St. John. While a smaller domestic potash fill program is forecasted for Q3, higher export shipments to St. John are expected in Q4.

Automotive experienced lower volumes for both finished vehicles and parts compared to the prior year, with production shifts leading to increased Mexico to Canada flows and decreased Canada to U.S. volumes. CNI is actively working with customers to adapt to these changing supply chains.

Outlook and Guidance: Adapting to a Volatile Horizon

CNI has adjusted its financial outlook for 2025 to reflect the evolving macroeconomic and trade environment. The company now anticipates mid- to high single-digit EPS growth for 2025, a revision from its earlier expectation of 10% to 15%. This revised EPS guidance is based on an updated full-year volume assumption of low single-digit RTM growth, a softening from previous projections.

Key assumptions underpinning this revised outlook include West Texas Intermediate (WTI) crude oil prices remaining in the range of USD 60 to USD 70 per barrel. The foreign exchange rate for the Canadian dollar to the U.S. dollar is now assumed to be between $0.75 for the balance of the year, an increase from the previously assumed $0.70. The effective tax rate is expected to remain consistent, in the range of 24% to 25%.

Management's rationale for these adjustments centers on the "increasing uncertainty around the tariff and trade environment" and a "weakening macroeconomic environment," which are expected to cause current softness in certain sectors to persist in the near term. The "on again, off again tariffs" are compelling customers to rethink their supply chains, making volume predictions more challenging.

Despite these headwinds, CNI expects volume growth in the second half of 2025 as it laps labor disruptions from 2024. More than 50% of the projected volume growth is anticipated to come from CN-specific initiatives, which leverage the company's unique network advantages and customer partnerships. These initiatives include growth in intermodal volumes through Prince Rupert, energy exports from Northern Canada, frac sand improvements, and expanded canola crush facilities.

CNI is also intensely focused on cost control and operational efficiency to protect margins. The company is reducing its 2025 capital expenditure (CapEx) envelope by approximately $50 million from its initial $3.4 billion plan, actively seeking further opportunities to tighten spending. Most of this growth capital is strategically directed towards the western part of the network, tied to energy exports and frac sand improvements, often underpinned by commercial contracts that protect returns. While the multi-year guidance for 2024-2026 has been removed due to the short remaining runway and high macroeconomic volatility, CNI continues to aim for year-over-year margin improvement in 2025.

Key Risks and Challenges: External Pressures and Internal Vigilance

Canadian National Railway operates in an environment characterized by several significant risks and challenges, requiring continuous vigilance and strategic adaptability. A primary concern is the increasing uncertainty surrounding the tariff and trade environment, particularly between Canada and the U.S.. The escalation of U.S. tariffs on Canadian-made steel and aluminum to 50% in June 2025 exemplifies this volatility, directly impacting CNI's metals business and forcing customers to rethink their supply chains. This uncertainty makes forecasting merchandise and intermodal volumes for the latter half of 2025 particularly challenging, with a broader range of potential outcomes and a likely persistence of softness in certain sectors.

The weakening macroeconomic environment and a heightened risk of recession in both Canada and the U.S. also pose significant headwinds. This impacts demand across various segments, including Forest Products, metals, and automotive. CNI's exposure to commodity-specific risks is evident in the lumber market, which faces continued pressure from higher softwood duties, the U.S. Section 232 lumber investigation, and a slower-than-expected housing recovery. Lumber mill curtailments directly affect other forest products, such as wood pulp.

Operational challenges can arise from environmental factors, such as the early wildfire season in 2025, which caused several branch line outages. While CNI's main line impact has been minimal, such events can disrupt operations and incur additional costs. Furthermore, labor uncertainty persists at some Canadian ports, including the longshoremen supervisors union on the West Coast and the Port of Montreal, which can create headwinds for international customers and impact intermodal volumes.

The competitive landscape also presents challenges, particularly the oversupply of truck capacity impacting the domestic intermodal business. While CNI is proactively addressing these issues through service performance and cost management, these external pressures necessitate a nimble and responsive strategy. Management acknowledges that while they cannot predict the exact trajectory of tariffs or the economy, their focus remains on "controlling what we can control," including leveraging their diversified book of business and working closely with customers to adapt to changing market conditions.

Conclusion

Canadian National Railway stands as a robust and strategically positioned entity within the North American transportation landscape. Its extensive, tri-coastal network, coupled with a disciplined scheduled operating model and continuous technological innovation, forms a formidable competitive moat. Despite a challenging macroeconomic backdrop marked by trade uncertainties and a softening industrial economy, CNI has demonstrated operational resilience and a proactive approach to cost management, as evidenced by its Q2 2025 adjusted EPS growth and margin improvements.

The company's revised 2025 guidance reflects a realistic assessment of the current environment, with a clear focus on driving growth through CN-specific initiatives and leveraging its unique network advantages. CNI's commitment to shareholder returns, through consistent dividend increases and share buybacks, underscores its financial discipline. While external risks such as geopolitical trade tensions and economic volatility persist, CNI's strategic investments in capacity, its technological leadership in areas like locomotive modernization and predictive maintenance, and its unwavering focus on customer service position it to capitalize on future opportunities and sustain long-term value creation.