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Does Canadian Pacific Railway Limited’s Record Q1 Earnings Signal a Buying Opportunity?

Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP), one of the largest rail network operators in North America, announced record first-quarter earnings on the morning of April 21 that also surpassed analysts’ expectations, but its stock has responded by making a slight move to the downside. Let’s take a closer look at the quarterly results to determine if we should consider using this weakness as a long-term buying opportunity, or a warning sign.

Breaking down the record-setting results

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

Metric Reported Expected Year-Ago
Adjusted Earnings Per Share $2.26 $2.14 $1.42
Revenue $1.67 billion $1.65 billion $1.51 billion

Source: Financial Times

Canadian Pacific’s adjusted earnings per share increased 59.2% and its revenue increased 10.3% compared with the first quarter of fiscal 2014. The company’s immense earnings-per-share growth can be attributed to its adjusted net income increasing 49.4% to an all-time quarterly high of $375 million. It was helped by its operating ratio improving 880 basis points to a first-quarter record 63.2%. Its double-digit revenue growth can be attributed its total number of carloads increasing 3.9% to 642,000 and its revenue per carload increasing 6.5% to $2,541, which led to total freight revenues increasing 10.6% to $1.63 billion.

Here’s a quick breakdown of six other notable statistics from the report compared to the year-ago period:

  1. Freight gross ton-miles increased 5% to 65.19 million
  2. Revenue ton-miles increased 3.9% to 36.06 million
  3. Operating income increased 44.7% to $612 million
  4. Cash provided by operating activities increased 93.4% to $555 million
  5. Free cash flow increased 1,980% to $312 million
  6. Weighted average number of diluted shares outstanding decreased 6% to 166.3 million

Is today the day to buy shares of Canadian Pacific?

I do not think the post-earnings drop in Canadian Pacific’s stock is warranted and actually represents a very attractive long-term buying opportunity. I think this because the stock trades at very inexpensive valuations, including just 21.6 times fiscal 2015’s estimated earnings per share of $10.92 and only 18.4 times fiscal 2016’s estimated earnings per share of $12.79, both of which are very inexpensive compared to its five-year average price-to-earnings multiple of 25.2.

With all of the information provided above in mind, I think Canadian Pacific Railway represents one of the best long-term investment opportunities in the market today. Foolish investors should take a closer look and strongly consider using today’s weakness as a buying opportunity.

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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.

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