Ever since Hunter Harrison took over as CEO, it has been a fabulous ride for Canadian Pacific Railway Limited (TSX: CP)(NYSE: CP). The shares, which traded below $50 in September of 2011, have skyrocketed since then, and currently trade at $225.
The real key to the company’s success has been Mr. Harrison, who has aggressively cut costs and made the railway more efficient. This morning offered a perfect example, when CP reported its results for the third quarter of this year.
More strong results
In Q3 of 2014, CP reported a net income of $2.31 per diluted share, up 26% from a year earlier. This was partly driven by the top line; revenue increased 8.7% year-over-year. But the real key, once again, was lower costs – CP’s operating ratio, which measures operating expenses as a percentage of revenue, fell to a record low 62.8%, a decline of 3.1 percentage points. Despite softening commodity prices, CP is firing on all cylinders.
Still some problems
Despite these impressive results, the week may still have been a sombre one for CP. On Monday, the company confirmed that merger talks with Florida-based CSX Corporation (NYSE: CSX) had gone nowhere, denying CP the chance to expand its network.
If the merger had gone through, it could have been very advantageous for CP, whose track network is inferior to that of rival Canadian National Railway Company (TSX: CNR)(NYSE: CNI). Two problems stand out. One is a lack of access to the East Coast and Gulf Coast. The other problem is CP’s reliance on the Chicago hub, where delays can be very lengthy. Thus CP loses critical market share, especially in the growing crude-by-rail business. Adding the CSX network could have fixed those problems.
Is now the time to invest in CP?
Despite these disadvantages, CP has very high expectations. To illustrate, its impressive quarterly results actually fell short of estimates. If expectations were met, then revenue and earnings per share would have grown by 10% and 28%, respectively.
These expectations are why CP trades at such high multiples. More specifically, the stock trades at roughly $225 per share, despite making less than $6 per share so far this year. This is partly why the company has a dividend yield under 0.7%.
Today’s results were very solid, and Mr. Harrison deserves much credit, even if CP didn’t meet its expectations. That being said, the company is far too expensive given its track network deficiencies. If you are insistent on owning a railway stock, CN Rail is the much better bet.
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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 Benjamin Sinclair has no position in any stocks mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. Canadian National Railway is a recommendation of Stock Advisor Canada.