Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP), one of the largest rail network operators in North America, has watched its stock outperform the overall market in 2015, rising over 3.6%, and it could continue to do so for the next several years. Let’s take a look at three of the top reasons why you should consider establishing a position today.
1. Record earnings to support a higher stock price
Canadian Pacific released record fourth-quarter earnings results on January 22, and its stock has responded by rising over 2% in the weeks since. Here’s a breakdown of 10 of the most notable statistics from the report compared to the year-ago period:
- Adjusted net income increased 36.1% to $460 million
- Adjusted earnings per share increased 40.3% to $2.68
- Total revenues increased 9.5% to $1.76 billion
- Freight revenues increased 9.5% to $1.72 billion
- Total carloads transported increased 0.6% to 690,000
- Revenue per carload increased 8.6% to $2,489
- 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
- Repurchased 5,205,700 shares of its common stock for approximately $1.1 billion
- Weighted average number of diluted shares outstanding decreased 2.1% to 174.4 million
2. A very positive outlook on fiscal 2015
In its earnings report on January 22, Canadian Pacific also provided its outlook on fiscal 2015, and is calling for a record-setting yearly performance. Here’s a breakdown of what it expects to accomplish:
- 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% from the $6.62 billion reported in fiscal 2014
- Operating ratio below 62% compared to the 64.7% ratio reported in fiscal 2014
3. The stock trades at inexpensive forward valuations
At today’s levels, Canadian Pacific’s stock trades at 27.3 times fiscal 2014’s adjusted earnings per share of $8.50, which seems sustainable, but it trades at just 21.3 times fiscal 2015’s estimated earnings per share of $10.91 and only 18.2 times fiscal 2016’s estimated earnings per share of $12.75, both of which are very inexpensive compared to its five-year average price-to-earnings multiple of 25.2.
I think Canadian Pacific’s stock could consistently command a fair multiple of at least 25, which would place its shares around $272.75 by the conclusion of fiscal 2015 and around $318.75 by the conclusion of fiscal 2016, representing upside of more than 17.5% and 37%, respectively, from current levels.
Should you invest in Canadian Pacific Railway today?
Canadian Pacific Railway Limited represents one of the best long-term investment opportunities in the market today. It has the support of record earnings from fiscal 2014; its outlook on fiscal 2015 calls for another record-setting performance; and its stock trades at very inexpensive forward valuations. Foolish investors should take a closer look and strongly consider making Canadian Pacific a core holding today.
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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 Joseph Solitro has no position in any stocks mentioned.