Should You Be a Long-Term Buyer of Canadian Pacific Railway Limited Today?

Canadian Pacific Railway Limited’s (TSX:CP)(NYSE:CP) reported fourth-quarter earnings today and its stock has reacted by rising over 1%. Should you be a long-term buyer?

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The Motley Fool

Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP), one of the largest rail network operators in North America, announced record fourth-quarter earnings this morning and its stock has responded by rising over 1%. Let’s take a closer look at the results to determine if we should consider initiating long-term positions today or wait for a better entry point in the days ahead instead.

The record-setting results

Here’s a breakdown of Canadian Pacific’s fourth-quarter earnings compared to what analysts had expected and its results in the same period a year ago.

Metric Reported Expected Year-Ago
Earnings Per Share $2.68 $2.54 $1.91
Revenue $1.76 billion $1.74 billion $1.61 billion

Source: Financial Times

Canadian Pacific’s adjusted earnings per share increased 40.3% and its revenue increased 9.5% compared to the fourth quarter of fiscal 2013. These results were driven by adjusted net income increasing 36.1% to $460 million and freight revenues increasing 9.5% to $1.72 billion. The company also noted that it transported 690,000 carloads during the quarter, an increase of 0.6% from the year-ago period, and its revenue per carload increased 8.6% to $2,489.

Here’s a summary of six other important statistics from the report:

  • Adjusted operating profit increased 29.4% to $708 million.
  • Adjusted operating ratio improved 610 basis points to 59.8%, the lowest quarterly ratio in the company’s history.
  • Generated $115 million of free cash flow.
  • Repurchase 5,205,700 shares of its common stock for approximately $1.1 billion.
  • Paid out a quarterly dividend of $0.35 per share for a total cost of approximately $60 million.
  • Ended the quarter with $226 million in cash and cash equivalents.

Lastly, Canadian Pacific provided its outlook on fiscal 2015, calling for the following performance:

  • Adjusted earnings per share growth of more than 25% from the $8.50 earned in fiscal 2014.
  • Revenue growth in the range of 7%-8%.
  • Operating ratio below 62%.

Should you buy shares of Canadian Pacific today?

Canadian Pacific owns one of the largest rail networks in North America, and increased demand for its services led it to a record-setting financial performance in the fourth quarter. The company reported year-over-year growth of more than 9% in earnings per share, revenue, and operating profit, while reporting a record operating ratio, generating $115 million of free cash flow, and providing solid outlook on fiscal 2015, and its stock has responded accordingly by rising more than 1%.

Even after the slight post-earnings pop in Canadian Pacific’s stock, I think it represents a great long-term investment opportunity, because it trades at favorable forward valuations, including 27 times fiscal 2014’s earnings per share of $8.50 and just 20.9 times analysts’ estimated earnings per share of $10.98 for fiscal 2015, both of which are very inexpensive compared to its five-year average price-to-earnings multiple of 28.3.

With all of this information in mind, I think Canadian Pacific Railway represents one of the best long-term investment opportunities in the market today, so Foolish investors should take a closer look and strongly consider initiating a position.

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 any stocks mentioned.

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