Rail networks are directly linked to the economy. When the economy does well, rail stocks go up. When the economy slows down, rail stocks suffer. There are only two publicly listed rail stocks in Canada: Canadian National Railway and Canadian Pacific Railway (TSX:CP)(NYSE:CP).
CP shares have gone up from just over $52 in November 2009 to $296 today. Long-term investors in this stock would be very happy with their returns. But can CP continue to deliver stellar returns?
CP shares are up 21% since January this year, and its third-quarter results have been good. Revenues increased by 4% to $1.98 billion from $1.90 billion last year.
CP is an analyst favourite. Five out of 19 analysts recommend a “hold” on this stock while 14 recommend a “buy,” and none have a “sell” recommendation. The average price target for CP is almost $313, that’s upside of 5.76%, and the downside is $276, or a 6.75% drop as per the lowest price estimate. This suggests that the stock is more or less fairly valued. The third-quarter 2019 earnings are in line with analyst estimates, and there have been no nasty surprises here.
The price targets also mean that no one is expecting the company to pull a rabbit out of its hat anytime soon. Analysts also expect the company to grow its earnings per share by 16% over the next five years, but this relies on the economy continuing on the same trends as it does currently.
Now that we are done with the positives, let’s look at potential red flags for CP. The dividend yield on the stock is an appalling 1.12%. If the stock does go down, dividend payouts are clearly not going to make up for the loss in share value.
One factor that has to be considered while evaluating CP is that the stock doesn’t do well in a recession. As Fool contributor Ryan Vanzo reported, CP shares fell by 50% during the last two recessions in 2001 and 2008.
A recent survey says over 72% of economists expect the U.S. to go into a recession by 2021. This is not good news for CP, a transcontinental freight railway player in Canada and the United States. CP transports bulk commodities via its 12,500-mile network across its business centres in Quebec and British Columbia in Canada and the northeast and Midwest regions of the United States.
This does not bode well for CP at all. There is a limited upside to the stock but if the economy goes south, there is every chance that CP will struggle. As an investor, you would do well to look at other options until you get a solid understanding of where the economy is headed. If recession fears turn out to be false, CP will still be trading around the same range.
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.
David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of and recommends Canadian National Railway. The Motley Fool recommends Canadian National Railway. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.