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 deal is a game-changer for future earnings and share price growth. The approved merger of the two operations can be completed.
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 our #1 Conservative Buy for 2023.
It’s returned 5,225.9% to our subscribers since we first recommended it as a buy in January 1995. Key investments have helped lift the stock 108.8% in the last five years, alone, and we expect those gains to continue.
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Canadian Blue Chip Stocks: Bank of Nova Scotia Stock, CP Rail Stock, CAE Inc. Stock and more.
CANADIAN PACIFIC KANSAS CITY LTD. (Toronto symbol CPKC) is your #1 Conservative Buy for 2023.
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.
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).
Blue Chip Stocks: CPKC’s earnings should grow significantly thanks to multiple factors
The company’s purchase of KCS should lift its earnings by roughly 20% to $4.55 a share in 2023. The stock trades at a reasonable 22.9 times that estimate. The higher earnings will also let CP resume regular dividend increases. The company’s current annual rate of $0.76 yields 0.7%.
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.
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 $3.77. (Note—all per share amounts are adjusted for a 5-for-1 stock split in April 2021.)
CPKC’s revenue in the three months ended March 31, 2023, rose 23.3%, to $2.27 billion from $1.84 billion a year earlier.
The revenue gain was mainly due to higher volumes of grain, fertilizers, metals and automotive products.
If you exclude costs related to the KCS purchase and other unusual items, earnings in the quarter jumped 34.3%, to $0.90 a share (or a total of $840 million) from $0.67 a share (or $628 million).
The company’s operating ratio improved to 62.9% from 69.8% a year earlier. (Operating ratio is calculated by dividing regular operating costs by revenue. The lower that ratio is, the better.)
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