Should You Buy Canadian Pacific Railway Ltd. (TSX:CP) Right Now?

Canadian Pacific Railway Ltd. (TSX:CP)(NYSE:CP) is on a roll. Should this stock be in your portfolio?

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Canadian Pacific Railway (TSX:CP)(NYSE:CP) recently hit a new all-time high.

Let’s take a look at the current situation to see if this is a good time to add the rail carrier to your portfolio.

Impressive rally

CP traded for close to $150 per share in early 2016. Since then, the stock has enjoyed a nice recovery and now trades above $260. Strong economies in Canada and the United States are certainly providing a boost to demand for the company’s services.

Q2 results

CP reported Q2 revenue of $1.75 billion, representing a 7% increase from the second quarter last year. Volumes rose 4% and carloads improved by 2% on a year-over-year basis. Adjusted diluted earnings per share came in at $3.16 compared to $2.77 in Q2 2017. Free cash flow was $331 million for the quarter compared to $274 million last year.

Freight revenue rose in most of the company’s segments, with solid improvements in grain, potash, energy and chemicals, metals, consumer products, automotive, and intermodal. Coal and forestry products revenue was pretty much in line with the previous year, and CP saw a dip in revenue from fertilizer and sulphur shipments.

The company had a rough start to 2018 with difficult weather and uncertainty regarding contract negotiations with employees. Strike notices and labour negotiations had an impact on operations, but CP eventually reached long-term agreements with two unions that represent the workers.

Opportunities

CP is investing $500 million over the next four years on new high-capacity grain hopper cars to address backlogs in the system. In addition, crude-by-rail demand remains high, and CP has an opportunity to boost its oil shipments. Crude-by-rail volumes are already at record levels, according to a recent National Energy Board report for the month of May.

Completion of major pipelines would reduce demand for oil-by-rail capacity, but the timing for Keystone XL and Trans Mountain is still up in the air. Line 3 could be in service by the end of 2019.

Risks

Trade disputes could put some of CP’s segments at risk, and a prolonged trade battle would likely be negative for the Canadian economy. The worst-case-scenario is unlikely to materialize, but it is important to keep in mind when evaluating CP as a stock pick.

Dividends

CP recently raised its quarterly dividend from $0.5625 per share to $0.65. That translates into an annualized yield of 1%.

Should you buy?

At the current price, the stock isn’t on sale, and investors should prepare for some potential volatility in the near term. As such, I would keep an initial position small and use dips as opportunities to add to your holdings. Overall, CP should be a solid pick for a buy-and-hold portfolio.

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 Andrew Walker has no position in any stock mentioned.

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