Canadian Pacific Railway Limited Misses Q4 Estimates: What Should You Do Now?

Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP) fell short of fourth-quarter earnings estimates, and its stock has reacted by falling. What should you do now?

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Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP), Canada’s second-largest railway operator, announced weaker-than-expected fourth-quarter earnings results on the morning of January 21, and its stock has responded by moving lower. Let’s take a closer look at the results to determine if this weakness represents a long-term buying opportunity or if we should wait for an even better entry point in the trading sessions ahead.

The results that fell short of expectations

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

Metric Q4 2015 Actual Q4 2015 Expected Q4 2014 Actual
Adjusted Earnings Per Share $2.72 $2.80 $2.68
Revenue $1.69 billion $1.75 billion $1.76 billion

Source: Financial Times 

Canadian Pacific’s adjusted earnings per share increased 1.5% and its revenue decreased 4.1% compared with the fourth quarter of fiscal 2014. The company’s slight earnings-per-share growth can be attributed to its weighted average number of diluted shares outstanding decreasing 9.9% to 154 million, which was able to more than offset its 8.9% decline in adjusted net income to $419 million.

Its slight decline in revenue can be attributed to its total carloads decreasing 5.9% to 649,000, which could only be partially offset by its freight revenue per carload increasing 1.8% to $2,534.

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

  1. Freight revenues decreased 4.3% to $1.65 billion
  2. Other revenues increased 2.4% to $42 million
  3. Adjusted operating income decreased 4.4% to $677 million
  4. Operating ratio remained unchanged at 59.8%
  5. Free cash flow increased 53% to $176 million
  6. Repurchased 577,800 shares at a weighted-average price of $196.30 per share for a total cost of approximately $113 million

Canadian Pacific also provided its outlook on fiscal 2016. The company is calling for double-digit earnings-per-share growth compared to the adjusted $10.10 earned in fiscal 2015, an operating ratio below 59%, and capital expenditures of approximately $1.1 billion.

What should you do with Canadian Pacific’s stock today?

It was a solid quarter overall for Canadian Pacific given the many headwinds facing the rail industry and the weak economic climate, but the results did fall short of expectations, so I think the weakness in its stock is warranted. With this being said, I think today’s decline represents a great long-term buying opportunity for three reasons.

First, Canadian Pacific’s stock now trades at just 14.6 times fiscal 2015’s adjusted earnings per share of $10.10 and only 12.9 times fiscal 2016’s estimated earnings per share of $11.36, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 26.9 and the industry average multiple of 19.3.

With the multiples above and its estimated 16.5% long-term earnings growth rate in mind, I think its stock should consistently trade at a fair multiple of at least 18, which would place its shares upwards of $204 by the conclusion of fiscal 2016, representing upside of more than 38% from today’s levels.

Second, Canadian Pacific has been actively repurchasing its shares, including 13.55 million shares for a total cost of approximately $2.75 billion in fiscal 2015, and this activity has continued to play a primary role in its earnings-per-share growth. I think the company will accelerate repurchases in 2016 due to its severely depressed stock price, and this will make its remaining shares more valuable than ever.

Third, Canadian Pacific pays a quarterly dividend of $0.35 per share, or $1.40 per share annually, which gives its stock a 0.9% yield. A 0.9% yield is not high by any means, but the fact that the company pays a dividend and has been repurchasing its shares shows that it is fully dedicated to maximizing shareholder value, and I think its increased amount of free cash flow, including 59.3% year-over-year growth to a record $1.16 billion in fiscal 2015, could allow it to increase returns to shareholders in 2016.

With all of the information provided above in mind, I think Canadian Pacific Railway Limited represents one of the best long-term investment opportunities in the market. All Foolish investors should strongly consider beginning to scale in to long-term positions today.

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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