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 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.
True Blue Chips pay off
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Canadian Blue Chip Stocks: Bank of Nova Scotia Stock, CP Rail Stock, CAE Inc. Stock and more.
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.
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.
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.
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.
Of course, not all our picks over the years have produced these kind of spectacular gains. Some, in fact, have led to losses. But all portfolios need superstar stocks like this to offset those inevitable losses.
This article was originally published in 2023 and is regularly updated.
Comments
Paul
I’ve been a long term subscriber to the Successful Investor. Before Covid I always received the print version. Included were Portfolios for income / growth etc. Presently, TSI has reduced the information as I don’t see on the website where I can access the Portfolios. In addition, Covid has been over for 2 years now and I feel it’s time to resume the print version. Please respond.
Thanks for your feedback, Paul. The portfolio for each newsletter issue can be accessed on the site. Please click “download” at the top of the first page of any issue. If that doesn’t work, our customer service team stands ready with guidance. Please reach out to them on the phone.
Thanks again.
As a retired senior at 75 counting on dividends to support my lifestyle I question why I would load up on the equity. When I need 3 or 4% minimum, 0.7% doesn’t cut it. The manufacturing/Industrial part of my portfolio is at what I consider at max. I get the feeling that CPKS is not a stock that will perform like others that I own like Couche Tard and CGI that offer little or no dividend.
Scott, I forgot to mention that the share price has been moving steadily South since I started to add to my meagre holdings. Disappointing to say the least.
Thanks for your question. We consider Canadian Pacific Kansas City to be more of a growth stock, rather than a dividend income stock (and as such, it’s not included in our Dividend Advisor newsletter).
Going forward, while the company could pay a higher dividend, based on its cash flow, it appears likely it will continue to reinvest that cash instead in its business–including integrating its major acquisition, and paying down debt.
Meanwhile, the stock is trading just 9.9% below its all-time high—so investors have gained in capital gains perhaps what they have lacked in dividend payments,
We still see Canadian Pacific Kansas City as a buy.
Lance
This write up on CP has been emailed out a few times. However, there’s no real updates to it. For example a coming rail strike his huge news for the stock, for the continent!
Yet, there is not one single mention of the strike.
The Free Dailies aim to educate investors on best practices in investing and on how we pick stocks.
At the same time, they are not meant as up-to-date advice for subscribers like yourself.
Instead, please consult the monthly newsletters and weekly Hotlines for that up-to-date advice.
That’s where you’ll get the full, up-to-minute stories and where we think those stocks are headed—and that includes the latest comments on the strike mandate.
I was impressed with the performance of the stock based on the past 20 years or so for both CNR and CP and so stepped in to CP a while back. I looked at it a safe investment but not for income. I am in a loss position at the moment but I see in many of my the equities the same is playing out. YTD numbers are discouraging, but that’s the market. At 76 yo I haven’t the luxury of waiting another twenty or so years. Diversification is the answer. Thanks Pat.
When I read the title and saw a pic of CP I knew it was a not about an integrated oil stock ( maybe IOL ), so I opened it and proceeded to read what was a rehash of an outdatd article on.CP. I have listened to individuals pounding the table on this stock and telling me how well it has done over the last 25 to 30 years. That is great for those who held the stock over that period. For me, I am down 2.5% even though the stock is up 3.31% YTD. At 76 yo maybe I shouldn’t have stepped heavily into this one. So much for growth in the short term, looking in the rear-view mirror doesn’t always predict the future.
When you indicate that an article that was previously issued and has been recently updated would it be possible to highlight the new or revised info so we wouldn’t have to read the entire article.
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I’ve been a long term subscriber to the Successful Investor. Before Covid I always received the print version. Included were Portfolios for income / growth etc. Presently, TSI has reduced the information as I don’t see on the website where I can access the Portfolios. In addition, Covid has been over for 2 years now and I feel it’s time to resume the print version. Please respond.
Thanks for your feedback, Paul. The portfolio for each newsletter issue can be accessed on the site. Please click “download” at the top of the first page of any issue. If that doesn’t work, our customer service team stands ready with guidance. Please reach out to them on the phone.
Thanks again.
As a retired senior at 75 counting on dividends to support my lifestyle I question why I would load up on the equity. When I need 3 or 4% minimum, 0.7% doesn’t cut it. The manufacturing/Industrial part of my portfolio is at what I consider at max. I get the feeling that CPKS is not a stock that will perform like others that I own like Couche Tard and CGI that offer little or no dividend.
Thanks for your comment! — TSI Research
Scott, I forgot to mention that the share price has been moving steadily South since I started to add to my meagre holdings. Disappointing to say the least.
Thanks for the follow-up on your earlier comment on Canadian Pacific Kansas City Ltd.
Will we ever see a decent dividend from this company? This isn’t a stock you buy for the dividend is it?
Thanks for your question. We consider Canadian Pacific Kansas City to be more of a growth stock, rather than a dividend income stock (and as such, it’s not included in our Dividend Advisor newsletter).
Going forward, while the company could pay a higher dividend, based on its cash flow, it appears likely it will continue to reinvest that cash instead in its business–including integrating its major acquisition, and paying down debt.
Meanwhile, the stock is trading just 9.9% below its all-time high—so investors have gained in capital gains perhaps what they have lacked in dividend payments,
We still see Canadian Pacific Kansas City as a buy.
This write up on CP has been emailed out a few times. However, there’s no real updates to it. For example a coming rail strike his huge news for the stock, for the continent!
Yet, there is not one single mention of the strike.
Thanks for your comment.
The Free Dailies aim to educate investors on best practices in investing and on how we pick stocks.
At the same time, they are not meant as up-to-date advice for subscribers like yourself.
Instead, please consult the monthly newsletters and weekly Hotlines for that up-to-date advice.
That’s where you’ll get the full, up-to-minute stories and where we think those stocks are headed—and that includes the latest comments on the strike mandate.
I was impressed with the performance of the stock based on the past 20 years or so for both CNR and CP and so stepped in to CP a while back. I looked at it a safe investment but not for income. I am in a loss position at the moment but I see in many of my the equities the same is playing out. YTD numbers are discouraging, but that’s the market. At 76 yo I haven’t the luxury of waiting another twenty or so years. Diversification is the answer. Thanks Pat.
Thanks for your feedback!
When I read the title and saw a pic of CP I knew it was a not about an integrated oil stock ( maybe IOL ), so I opened it and proceeded to read what was a rehash of an outdatd article on.CP. I have listened to individuals pounding the table on this stock and telling me how well it has done over the last 25 to 30 years. That is great for those who held the stock over that period. For me, I am down 2.5% even though the stock is up 3.31% YTD. At 76 yo maybe I shouldn’t have stepped heavily into this one. So much for growth in the short term, looking in the rear-view mirror doesn’t always predict the future.
Thanks for your feedback.
When you indicate that an article that was previously issued and has been recently updated would it be possible to highlight the new or revised info so we wouldn’t have to read the entire article.
Thanks for your comment.
The Free Dailies you refer to aim to educate investors on best practices in investing and on how we pick stocks.
At the same time, they are not meant as up-to-date advice for subscribers like yourself.
Instead, please consult the monthly newsletters and weekly Hotlines for that up-to-date advice.
That’s where you’ll get the full, up-to-minute stories and where we think those stocks are headed.
Note: In short, there’s nothing new in the Free Dailies that hasn’t already been in a newsletter analysis or Hotline for subscribers.