CP Rail Is on the Growth Track, But I’m Not Buying the Stock Over CN Rail

CP Rail (TSX:CP) stock is an exciting growth play, but I’m not yet ready to hit the buy button.

| More on:
rail train

Image source: Getty Images

Shares of CP Rail (TSX:CP) are poised to kick its growth into high gear over the coming years following its acquisition of Kansas City Southern. Undoubtedly, CP Rail found itself in a bitter bidding war with its Canadian rival CN Rail (TSX:CNR).

Ultimately, CP walked away as the winner without having to sweeten up the pot considerably, as federal regulators shot down CN’s acquisition hopes. Indeed, CN Rail was already too dominant a railway with its huge presence in Canada and the United States. I’d predicted that CP was likelier to be successful with its deal, and the fact that CP didn’t have to pay a great deal more following CN’s involvement bodes well for CP shareholders.

Still, the price for Kansas City Southern assets didn’t come cheap at US$31 billion. The deal came at a 34% premium to the market price. Often, overpaying for deals can lead to destruction for shareholders. In the case of CP, though, I think it got a relative bargain, as it’s tough to make deals in the rail space, given the amount of regulation out there. Further, it’s not like up-and-coming railways are popping up across left, right, and centre like in the tech scene!

CP Rail: Superb managers and a prized new asset could power many years’ worth of gains

It’s rare to find a rail deal that fits so nicely into an existing network. Indeed, Kansas City Southern appears to be the missing piece to the CP puzzle. CP Rail was a predominantly Canadian railway. Now, it’s a true North American railway and the first to span Mexico, the U.S., and Canada. With that will come a huge advantage over rivals.

For now, CP Rail has a lot of work (and investments) to do to make its Kansas City Southern deal worth it. With Chief Executive Officer Keith Creel at the helm, I also view CP as having exceptional managers. It’s been a long time since Hunter Harrison was at the firm, but he’s made his mark. Today, CP is one of the best-run rails out there, and that gives me a jolt of confidence as the firm looks to make the most of Kansas City Southern.

Over the past year, CP has hired thousands of workers ahead of an STB (Surface Transportation Board) milestone. Undoubtedly, CP has had to pass various regulatory hurdles, but it’s almost out of the woods, with a decision expected in a matter of weeks.

In any case, CP Rail is ready to go. Once it gets the green light, it may be tough to stop the stock’s recent bout of momentum built on the back of recent quarters. Canadian grain shipments are continuing to fuel bullishness on the part of investors. Even with a recession potentially on the horizon, I think CP remains one of the most exciting stories in the rail scene today.

CP Rail: What about valuation?

CP Rail is a wonderful business with magnificent prospects, and a management team that knows how to get the job done. My only concern is with the valuation. At 27.7 times trailing price to earnings, you’re paying a hefty multiple.

Meanwhile, CN Rail sports a 21.1 times trailing price-to-earnings multiple. It may not have Kansas City Southern to look forward to. However, it does share the same industry tailwinds that could be fierce on the other side of a 2023 recession. Between CP and CN, I prefer CN due to its more palatable valuation.

I’m not against owning CN and CP. However, I’d much rather opt for the former or wait for a pullback in the latter.

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 Joey Frenette has positions in Canadian National Railway. The Motley Fool recommends Canadian National Railway and Canadian Pacific Railway. The Motley Fool has a disclosure policy.

More on Investing

A plant grows from coins.
Dividend Stocks

Invest $10,000 in 2 TSX Stocks for $606/Year in Passive Income

Shares of these two fundamentally strong companies can start a worry-free passive income stream.

Read more »

dividends grow over time
Dividend Stocks

2 Top Dividend Stocks That Keep Raising Their Payouts

In addition to their solid dividend growth track record, these top dividend stocks also offer strong growth potential for the…

Read more »

Various Canadian dollars in gray pants pocket

3 No-Brainer Stocks to Buy Under $50

Investing in a core portfolio needs no-brainer stocks you can invest in at any time. These stocks you can buy for…

Read more »

data analytics, chart and graph icons with female hands typing on laptop in background

RRSP Pension: 2 Dividend Stocks to Buy on the Latest Dip

These top TSX dividend stocks now offer high yields.

Read more »

People walk into a dark underground mine.
Metals and Mining Stocks

How to Turn Your TFSA Into a Gold (or Copper) Mine Starting With $10,000  

These two top stocks can turn any TFSA into a gold mine -- or a copper mine, if you really…

Read more »

Dots over the earth connecting the world
Stocks for Beginners

Emerging Markets: Opportunities for High Returns in 2024

Are you looking for growth this year? Emerging markets could be one of the best areas to seek out high…

Read more »


My Top 5 TSX Stocks to Buy Right Now for Massive Returns in a Decade

These five TSX stocks have impressive operations and solid growth potential, making them five of the best to buy now.

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Bank Stocks

TFSA Income Stream: 2 Top Dividend Stocks to Own for Decades

By adding these two top dividend stocks from the bank sector to your TFSA now, you can expect to receive…

Read more »