TFSA Investors: Canada’s Best Stock Is Trading at Half-Price

Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP) is one of Canada’s greatest turnaround stories, which was led by the late Hunter Harrison. With Keith Creel, his protégé, at the helm, is this stock a buy-and-hold-forever holding?

| More on:
Hand writing Time for Action concept with red marker on transparent wipe board.

Image source: Getty Images

Canadian Pacific Railway (TSX:CP)(NYSE:CP) manages a transcontinental freight railway in Canada and the United States. The company transports bulk commodities, merchandise freight, and intermodal traffic. The company operates a network of approximately 13,000 miles and serves business centres in Canada and the United States. Canadian Pacific Railway Limited was incorporated over 130 years ago and is headquartered in Calgary.

The company has a price-to-earnings ratio of 18.89, a price-to-book ratio of 5.95, and market capitalization of $42.83 billion. Leverage is higher at Canadian Pacific than the company’s railroad peers, as evidenced by a higher than usual debt-to-equity ratio of 1.29. The company has excellent performance metrics with an operating margin of 45.27% and a return on equity of 32.36%.

The company’s long-term strategy is to utilize precision railroading to leverage the company’s lower cost base, network strengths, and provide improved service to drive sustainable, profitable growth. The company aspires to become North America’s most efficient railroad with the lowest operating ratio.

In 2018, Canadian Pacific was an aggressive re-purchaser of shares after announcing a normal course issuer bid to purchase 5.68 million common shares for cancellation.

The company has faced regular labour disruptions — in 2018, Canadian Pacific received a 72-hour strike notice from the Teamsters Canada Rail Conference – Train & Engine (TCRC), representing approximately 3,000 conductors and locomotive engineers, and the International Brotherhood of Electrical Workers (IBEW), representing approximately 360 signal maintainers, of their respective plans to strike.

At that time, Canadian Pacific commenced work stoppage contingency plan and ensured a smooth, efficient, and safe
wind-down of operations. Keith Creel, Canadian Pacific’s CEO and one of the best railroad operators in North America, tactfully led successful negotiations with the union. On April 20, 2018, Canadian Pacific reached an agreement with the unions and rail operations resumed.

In the most recent quarter, Canadian Pacific said the company’s operating ratio, a closely watched productivity metric that measures expenses as a percentage of revenue, fell 2.2% to a record low of 56.1% Q3 2019. This is a phenomenal result that demonstrates the improvement in company operations. The lower the ratio, the more efficient a railroad. Canadian Pacific had an operating ratio of +80% in 2011 and, at the time, was North America’s worst-run railroad.

Canadian Pacific is Canada’s second-largest railroad operator after rival Canadian National Railway. The company is also focused on improving efficiency by lowering the average fuel price, which fell 10% to $2.41 per gallon in the third quarter, leading to a 7.1% fall in fuel expenses.

Canadian Pacific’s diverse revenue sources in another huge advantage in comparison to other railroad carriers. In Q3 2019, revenue in the energy, chemicals, and plastics segment, which also contains crude-by-rail shipments, rose 13% to $382 million in the quarter.

Canadian Pacific is an iconic Canadian company with a rich legacy. The company has made huge progress over the last nine years under the leadership of the late Hunter Harrison, who was succeeded by his protégé Keith Creel. Canadian Pacific looks set to continue to outperform the Canadian stock market index over the next several years and appears to be a great buy at current prices.

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 Nikhil Kumar owns shares of CANADIAN PACIFIC RAILWAY LIMITED. 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.

More on Investing

Nuclear power station cooling tower
Metals and Mining Stocks

If You’d Invested $1,000 in Cameco Stock 5 Years Ago, This Is How Much You’d Have Now

Cameco (TSX:CCO) stock still looks undervalued, despite a 258% rally. Can the uranium miner deliver more capital gains to shareholders?

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

potted green plant grows up in arrow shape
Stocks for Beginners

3 Growth Stocks I’m Buying in April

These three growth stocks are up in the last year, and that is likely to continue on as we keep…

Read more »

clock time
Tech Stocks

Long-Term Investing: 3 Top Canadian Stocks You Can Buy for Under $20 a Share

These three under-$20 stocks offer excellent buying opportunities for long-term investors.

Read more »

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »