Canadian Pacific Railway Limited Posts Strong Q3 Results, Raises Outlook: Buy Now?

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.

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Fool contributor Joseph Solitro has no position in the companies mentioned.

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