Canadian Pacific’s merger with Kansas City Southern Railway is now complete, the company will now be called Canadian Pacific Kansas City. The merger has boosted its already strong share price. This Canadian railway stock is poised for growth.
This deal is a game-changer for future earnings and share price growth. The firm is an essential part of North America’s transportation sector. Its sound revenue and earnings before, during and after pandemic lockdowns makes it a top buy for those interested in Canadian railway stock.
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It’s returned 5,307.1% to our subscribers since we first recommended it as a buy in January 1995. Key investments have helped lift the stock 66.2% in the last five years, alone, and we expect those gains to continue for this Canadian railway stock.
CANADIAN PACIFIC KANSAS CITY LTD. (Toronto symbol CPKC) is one of our top buys.
The company has now completed its acquisition of U.S.-based railway Kansas City Southern (KCS) and formally changed its name from CP Railway.
CP had originally completed the KCS acquisition in December 2021. It deposited the KCS shares into an independent voting trust, which operated that business while the regulator studied the purchase.
The company paid $31 billion U.S. in cash and shares for KCS. CP investors own 72% of the merged company, with KCS shareholders holding the remaining 28%.
CP began merging the two businesses on April 14, 2023. The new company’s shares trade on both the Toronto and New York exchanges, making it an accessible Canadian railway stock for investors.
CPKC ships freight over a 32,190-kilometre rail network. That line runs mainly between Montreal and Vancouver, with links to hubs in the U.S. Midwest and Northeast. With the addition of KSC, the new company also connects with important hubs and ports on the U.S. Gulf Coast and in Mexico.
Investors can expect cost savings from the merger to add $1 billion U.S. to the company’s annual earnings before interest, taxes, depreciation and amortization (EBITDA) by the end of the third year. In 2022, CP’s EBITDA (excluding KCS) was $5.23 billion (Canadian).
Note that while CP mostly owns the land under its tracks in Canada and the U.S., it operates its lines in Mexico under a government concession that expires in 2047. As a result, it’s vulnerable to changes in Mexico’s transportation policies.
The government of Mexico now wants to expand the availability of passenger rail service within that country, mainly by giving passenger trains priority over cargo on certain rail lines.
However, CP does not expect this demand will have a negative impact on its concession. It has also agreed to work with the government on a plan to let passenger trains run on a 200-kilometre corridor running northwest from Mexico City. What’s more, the company has a long history of sharing its lines in Canada and the U.S. with passenger traffic. Those factors should minimize any disruptions to its operations.
Blue Chip Stocks: CPKC’s earnings grow along with a focus on efficiency
CP’s revenue rose 18.9%, from $6.55 billion in 2017 to $7.79 billion in 2019. However, the COVID-19 pandemic hurt shipments of coal, crude oil, metals and automotive products. As a result, revenue fell 1.1% to $7.71 billion in 2020. Revenue then improved 3.7% to $8.00 billion in 2021 as the economy re-opened. In 2022, revenue climbed a further 10.2%, to $8.81 billion. Revenue then jumped 42.4% in 2023 to $12.56 billion, largely due to the acquisition of KCS.
The company’s strong focus on efficiency helped its earnings before unusual items jump 110.8%, from $1.67 billion in 2017 to $3.52 billion in 2022. Due to more shares outstanding, earnings per share during those six years rose at a slower rate of 65.4%, from $2.28 to $3.78. (Note—all per share amounts are adjusted for a 5-for-1 stock split in April 2021.) In 2023, earnings rose 11.7%, to $3.93 billion, or $4.22 a share.
As a result of the KCS merger, the new company’s revenue in the three months ended March 31, 2024, rose 55.3%, to $3.52 billion from $2.27 billion a year earlier. However, that missed the $3.54 billion consensus forecast.
On a comparable basis, revenue in the quarter improved 1.9%. That increase was mainly due to higher shipments of potash, metals, U.S. grain and automotive goods.
If you exclude costs related to the KCS purchase and other unusual items, earnings in the quarter rose 3.3%, to $0.93 a share (or a total of $866 million) from $0.90 a share (or $840 million). The latest earnings also fell short of the $0.94 consensus estimate.
The company’s operating ratio in the quarter worsened to 64.0% from 63.5% a year earlier. (Operating ratio is calculated by dividing regular operating costs by revenue. The lower that ratio is, the better.) That’s mainly due to higher employee wages and costs associated with using other railways’ freight cars and equipment.
CPKC’s earnings for 2024 are now forecast at $4.22 a share. The stock trades at a reasonable 25.2 times that estimate. The company also expects its earnings per share will rise by at least 10% annually between 2024 and 2028 as it realizes more benefits from the merger. The $0.76 dividend yields 0.7%.
Workers at CPKC, as well as rival CN Rail, could be in a position to strike around August 12. While that would hurt CPKC’s short-term results (as well as CN’s), its longer-term prospects remain intact. The possibility of a protracted job action, if it happens, also seems low given the pressure shippers of goods and commodities would likely place on the federal government to intervene.
In summary, Canadian Pacific Kansas City (CPKC) emerges as a powerhouse in the North American railway sector following the merger of Canadian Pacific and Kansas City Southern. This Canadian railway stock has demonstrated impressive growth, with a 5,307.1% return since 1995 and a 66.2% increase in the last five years alone. The merger, valued at $31 billion U.S., has created a vast 32,190-kilometer rail network connecting key hubs across Canada, the U.S., and Mexico. CPKC’s financial performance remains strong, with revenue jumping 42.4% to $12.56 billion in 2023. The company expects annual earnings growth of at least 10% between 2024 and 2028 as it realizes merger benefits. Despite potential short-term challenges such as a possible worker strike, CPKC’s long-term prospects remain positive. The stock trades at 25.2 times its forecasted 2024 earnings of $4.22 per share, with a dividend yield of 0.7%. Given its strategic position and growth potential, CPKC is recommended as a buy for investors seeking exposure to the transportation sector.
Recommendation in The Successful Investor: CPKC is a buy.
We hope you benefited from this analysis of CPKC Rail. The company is just one of the top-performing stock picks of our Successful Investor newsletter.
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This article was originally published in 2023 and is regularly updated.
