Canadian Pacific Railway Limited: Should Investors Hop on This Train?

Here’s what investors need to know about Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP).

| More on:
The Motley Fool

Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP) has dropped 20% in the past six months, and investors who missed the big rally in 2013-14 are wondering if this is a good time to start a position in the stock.

Let’s take a look at the current situation to see if CP deserves to be in your portfolio right now.

Earnings

CP delivered strong second-quarter adjusted earnings of $2.45 per share. That’s a 16% increase over the same period last year and is a good indication to investors that the railway is chugging along quite well despite the slowdown in oil shipments.

The oil-by-rail business has boomed over the past few years and that growth is partly responsible for CP’s outsized earnings and share-price gains. Some pundits are concerned that the crude boom in now bust, and CP will continue to suffer as a result.

The insane growth rate of crude-by-rail shipments is certainly slowing down, but the segment isn’t going to disappear. Western Canadian producers are still pumping and mining as much oil as they can, and they still face severe pipeline bottlenecks.

Keystone XL will have to wait for a new U.S. administration before it gets approved, and Energy East doesn’t look like it will be built in the next five years as originally hoped.

This means CP’s oil-transport business should continue to do well, even though the rapid growth has leveled off.

The company’s other segments are doing well. CP delivered year-over-year gains in its forestry, chemical, and crop nutrients shipments, and the overall freight numbers were in line with Q2 2014.

Improvements in efficiency

CP used to be one of North America’s most inefficient railways. That has changed under the leadership of Hunter Harrison, who has worked hard to get the operating ratio down from 80% to a very impressive 62% in the most recent quarter.

The metric is important because it indicates the amount of revenue the railway is actually using to run the business.

The big efficiency gains are the second reason earnings have rocketed higher over the past three years. At this point, most of the easy wins have already been achieved on the expense side, and CP will have to work a lot harder to squeeze out more gains.

Risks?

Western Canadian farmers are having a tough year, and one estimate puts the crop decline as high as 25%. That could impact CP’s agriculture revenues in the coming months.

Another item to consider is the new regulations put in place to improve oil-by-rail transport safety. CP and its peers are required to upgrade rail cars to meet new standards, and the costs associated with that process could impact earnings if the company is unable to pass the expenses on to its customers.

Should you buy Canadian Pacific Railway?

Railway companies are great long-term holdings because they operate in an industry with huge barriers to entry. There simply isn’t going to be a new rail network built to compete along CP’s existing routes.

The shares trade at a reasonable 15.8 times forward earnings, so current stockholders should be comfortable maintaining their positions. New investors could see a better entry point in the coming months, but the stock is probably a safe long-term buy at the current price.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Walker has no position in any stocks mentioned.

More on Investing

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Investing

3 Roaring Stocks to Hold for the Next 20 Years

These top TSX stocks are excellent long-term buys, given their multi-year growth potential and solid underlying businesses.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »

Businessman holding AI cloud
Tech Stocks

Could Investing $20,000 in Nvidia Make You a Millionaire?

Nvidia stock has made investors millionaires in the last 10 years. Is it too late to invest to become a…

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

money cash dividends
Stocks for Beginners

Have $500? 3 Absurdly Cheap Stocks Long-Term Investors Should Buy Right Now

If you're looking for cheap stocks, these three have a huge future ahead of them, all while costing far less…

Read more »