Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP), Canada’s second-largest rail network operator, announced its third-quarter earnings results and raised its full-year guidance after the market closed on Tuesday. Let’s break down the company’s results, its updated guidance, and the fundamentals of its stock to determine if we should be long-term buyers today.
A solid quarterly performance
Here’s a quick breakdown of 10 of the most notable financial statistics from Canadian Pacific’s three-month period ended September 30, 2017, compared with the same period in 2016:
| Metric | Q3 2017 | Q3 2016 | Change |
| Freight revenues | $1,547 million | $1,510 million | 2.5% |
| Non-freight revenues | $48 million | $44 million | 9.1% |
| Total revenues | $1,595 million | $1,554 million | 2.6% |
| Adjusted net income | $422 million | $405 million | 4.2% |
| Adjusted diluted earnings per share (EPS) | $2.90 | $2.73 | 6.2% |
| Operating income | $690 million | $657 million | 5% |
| Operating ratio | 56.7% | 57.7% | 100-basis-point improvement |
| Free cash flow | $214 million | 315 million | (32.1%) |
| Carloads | 666,400 | 648,200 | 2.8% |
| Freight revenue per carload | $2,321 | $2,328 | (0.3%) |
Raised outlook? Yes, please!
In the press release, Canadian Pacific’s CEO stated the following:
“Thanks to the hard work of our CP family and a disciplined, balanced approach in the marketplace and to our operations, we were able to produce another quarter of exceptional results … Volume momentum grew over the course of the quarter, setting us up for a strong finish to the year. As a result, we are raising our 2017 guidance.”
The company now expects double-digit percentage growth in adjusted diluted EPS from the $10.29 earned in 2016, which is up from its previous outlook that called for high single-digit percentage growth.
What should you do with Canadian Pacific’s stock?
It was a fantastic quarter overall for Canadian Pacific, and its raised guidance is icing on the cake, so I think the market will respond by sending its stock higher in today’s trading session.
Regardless of the price action in the stock today, I think it will move higher in the months and quarters ahead as it attracts buyers, because it trades at inexpensive valuations, including just 18.2 times fiscal 2017’s estimated EPS of $11.52 and only 16.2 times fiscal 2018’s estimated EPS of $12.95, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 26.9; these multiples are also very attractive given the company’s earnings-growth rate, including its 12.5% growth in the first nine months of 2017, its projected 12.4% growth in 2018, and its projected 12.7% long-term earnings-growth rate.
With all of the information provided above in mind, I think all Foolish investors should strongly consider making Canadian Pacific a long-term core holding.
