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Investing.com -- Canadian National Railway Co (TSX:CNR) is showing signs of a margin recovery heading into the second quarter of 2025, with recent operating data highlighting a sustained improvement in car velocity. Analysts at CIBC (TSX:CM) Capital Markets see the potential for the railroad operator to outperform on margins, even as volume pressures persist.

Car velocity, a key operating efficiency metric, has climbed above 200 car miles per day for six consecutive weeks, a level not achieved since the fourth quarter of 2024. "CN reported week 20 operating data with car velocity coming in at 213 car miles per day," Kevin Chiang, analyst at CIBC, noted, marking a significant bounce from a February low of 141.

Using regression analysis going back to Q4 2018, CIBC identified a meaningful negative correlation between car velocity and the company’s operating ratio (OR), a key profitability gauge. The analysis showed a -59% correlation and suggested that if CN maintains its current QTD car velocity of 214, its Q2 2025 OR could improve to 59.8%, compared with consensus of 61.4% and CIBC’s own estimate of 61.6%.

“Based on this data and assuming CN’s QTD car velocity of 214 car miles per day holds, this suggests an OR of 59.8% in Q2/25,” Chiang wrote. Should CN sustain this performance through quarter end, it would mark a ~360 basis point sequential improvement, aligning with historical Q1-to-Q2 improvement ranges.

Still, volumes present a headwind, with quarter-to-date data showing a 0.9% year-over-year decline. The railroad has flagged slowing Chinese imports and broader trade friction as key factors, leading CIBC to forecast Q2 revenue ton-miles (RTMs) to fall 2.2% compared to the same period last year.

Despite mixed fundamentals, CIBC reiterated a “Neutral” rating on CN, with a 12-to-18-month price target of C$155.00, implying modest upside from the current price of C$148.31. Valuations remain supportive relative to peers, with CN trading at 17.2x expected 2025 earnings, below Canadian Pacific’s 21.1x.

In the upside scenario, CIBC sees potential for the stock to reach C$190.00, assuming a lower OR of 58% and stronger 10% revenue growth in 2026. However, a downside case of C$123 is possible if macro pressures constrain revenue growth and the OR retraces to 61%, underscoring the importance of continued operating discipline.

This content was originally published on http://Investing.com