Canadian Pacific Railway Limited Posts Strong Q3 Results, Raises Outlook: Buy Now?

Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP) released strong Q3 results and raised its outlook. Should you buy now? Let’s find out.

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Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP), Canada’s second-largest rail network operator, announced its third-quarter earnings results and raised its full-year guidance after the market closed on Tuesday. Let’s break down the company’s results, its updated guidance, and the fundamentals of its stock to determine if we should be long-term buyers today.

A solid quarterly performance

Here’s a quick breakdown of 10 of the most notable financial statistics from Canadian Pacific’s three-month period ended September 30, 2017, compared with the same period in 2016:

Metric Q3 2017 Q3 2016 Change
Freight revenues $1,547 million $1,510 million 2.5%
Non-freight revenues $48 million $44 million 9.1%
Total revenues $1,595 million $1,554 million 2.6%
Adjusted net income $422 million $405 million 4.2%
Adjusted diluted earnings per share (EPS) $2.90 $2.73 6.2%
Operating income $690 million $657 million 5%
Operating ratio 56.7% 57.7% 100-basis-point improvement
Free cash flow $214 million 315 million (32.1%)
Carloads 666,400 648,200 2.8%
Freight revenue per carload $2,321 $2,328 (0.3%)

Raised outlook? Yes, please! 

In the press release, Canadian Pacific’s CEO stated the following:

“Thanks to the hard work of our CP family and a disciplined, balanced approach in the marketplace and to our operations, we were able to produce another quarter of exceptional results … Volume momentum grew over the course of the quarter, setting us up for a strong finish to the year. As a result, we are raising our 2017 guidance.”

The company now expects double-digit percentage growth in adjusted diluted EPS from the $10.29 earned in 2016, which is up from its previous outlook that called for high single-digit percentage growth.

What should you do with Canadian Pacific’s stock?

It was a fantastic quarter overall for Canadian Pacific, and its raised guidance is icing on the cake, so I think the market will respond by sending its stock higher in today’s trading session.

Regardless of the price action in the stock today, I think it will move higher in the months and quarters ahead as it attracts buyers, because it trades at inexpensive valuations, including just 18.2 times fiscal 2017’s estimated EPS of $11.52 and only 16.2 times fiscal 2018’s estimated EPS of $12.95, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 26.9; these multiples are also very attractive given the company’s earnings-growth rate, including its 12.5% growth in the first nine months of 2017, its projected 12.4% growth in 2018, and its projected 12.7% long-term earnings-growth rate.

With all of the information provided above in mind, I think all Foolish investors should strongly consider making Canadian Pacific a long-term core holding.

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 Joseph Solitro has no position in the companies mentioned.

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