Deutsche Bank Markets Research North America Canada Industrials Railroads Industry Canadian Rails Flipping the Script - Buy CP, Sell CNI Initiating Coverage of Canadian Rails We are expanding our coverage of Transportation companies with initiation of coverage of the Canadian railroad industry. We are positive on Canadian Pacific (CP, Buy) and cautious on Canadian National (CNI, Sell), as we see overall market share and earnings trajectory driving a reversal in recent relative value trends. All told we forecast CP to grow EPS at double the rate of CNI (+3CP/0 for CP vs. +15% for CNI cumulatively through 2019), which together with capex and free cash trends should drive re-rating at CP and de-rating for CNI. In this report we present a primer on the Canadian rail industry, with deep dives on Canadian Pacific and Canadian National. CANADIAN NATIONAL (CNI): A Victim of Its Own Success; Initiate SeIl$73 PT We see 10%+ downside in CNI shares as the company's strong outperformance starts to slow- driven by both the law of large numbers (the company already achieves a mid 40's operating margin, up from the high 30's five years ago) as well as catch-up performance from CP. For example, we note that from 2012-2016 CNI increased volumes at more than double the rate of CP, reflecting mix as well as market share gains during CP's implementation of Precision Railroading. The combination of CNI's slower prospective earnings growth and high capex (20% of sales) implies 15.5x PIE under our DCF-derived methodology, implying potential for 3.5 turns (20%) valuation de-rating vs. current trading levels. Initiate Sell. CANADIAN PACIFIC (CP). Shifting Gears: Initiate Buy:$209 PT Following its multi-year implementation of Precision Railroading, CP is shifting gears from cost take-out to top-line growth. As such, we see at least 15% upside in shares as CP leverages its reduced cost base, improved service levels, and recent capacity investments to retake mar