Is Canadian Pacific Railway Limited a Buy After Falling 23%?

Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP) is down 23% from a year ago. This majorly underperforms its close competitor Canadian National Railway Company, whose stock price essentially is unchanged compared with a year ago.

Reasons for the pullback

The 2% pullback on June 21 is because Canadian Pacific Railway is expecting its revenues to fall 12% in the second quarter. Lower revenues are due to softer demands in bulk commodity transportation, the fire in the Fort McMurray area, and a strengthening Canadian dollar.

However, the company believes that these are temporary factors. It also believes that cost-reduction opportunities and potentially stronger volumes in the second half of the year should still allow the company to deliver double-digit earnings per share (EPS) growth.

When Canadian Pacific Railway traded at $230 per share in February 2015, it was priced at a price-to-earnings ratio (P/E) of over 26. However, its EPS growth was 19% in 2015. So arguably, the high multiple was warranted at the time.

Now that there are softer demands, EPS is expected to be lower than 19%, so Canadian Pacific Railway has been experiencing multiple contractions that have brought the shares lower.

Is Canadian Pacific Railway a good investment today?

Since investing is a forward-looking activity, we should determine whether or not Canadian Pacific Railway is a good investment today.

In fact, the pullback of 23% from a year ago is an opportunity to buy the top railroad at a lower price. You see, the railroads operate in an oligopoly, so there’s limited competition. And the economy always requires the transportation of raw materials and products.

Canadian Pacific Railway’s tracks connect Canada and the United States, linking eight major ports, including Vancouver and Montreal, allowing customers to access key markets around the globe.

At $159 per share, the railroad leader looks expensive, but based on its P/E of 15.2, it is priced at a decent value because EPS growth is expected to be 13% per year in the medium term.

For the last decade or so, Canadian Pacific Railway’s normal multiple was 18.7. Based on that multiple, the company would trade at $204 per share. Using a more conservative multiple of 17, the company would trade at $186 per share.

So, the Canadian Pacific Railway is discounted by 14-22%, which is a decent entry point compared to when the company was trading at a multiple of 26 in early 2015.


At $159 per share, Canadian Pacific Railway is priced at a decent discount of 14-22%. The company continues to believe that it can deliver double-digit EPS growth this year.

Couple that with multiple expansion in the future when the EPS growth rate increases again, investors with a long-term view can expect double-digit returns.

Let’s not forget that the company offers a yield of almost 1.3%, which is better than the interest paid by putting your money in savings accounts. Plus, owning a piece of Canada’s top railroad has the potential to grow your investment at a double-digit rate.

Stock buy alert hits astounding 96% success rate!

The hand-picked investing team inside Stock Advisor Canada, recently issued a buy alert for one special type of “bread-and-butter” stock where The Motley Fool U.S. has banked profits on 23 out of 24 recommendations. Frankly, with an astounding 96% success rate that has delivered average returns of 260%, chances are this new pick could deliver life-changing returns as well. Because the team at Stock Advisor Canada fully embraces the same time-tested investing philosophies that have led to countless Motley Fool winners globally. So simply  click here to unlock the full details behind this new recommendation and join Stock Advisor Canada.

*96% accuracy includes restaurant stock recommendations from Motley Fool U.S. services Stock Advisor, Rule Breakers, Hidden Gems, Income Investor and Inside Value since each services inception. Returns as of 5/27/16.

Fool contributor Kay Ng owns shares of Canadian National Railway and Canadian Pacific Railway. 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.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.