Don’t look now, but shares of CP Rail (TSX:CP) have been pretty much flat so far this year, missing out on the big gains enjoyed by various tech names. Indeed, CP Rail stock has outperformed the broader TSX Index (up 0% year to date), but barely, with shares up just north of 3% in 2023.
Undoubtedly, there’s concern that a Canadian recession will be tough to steer clear of. Fortunately, I do not believe railway investors need to worry about recession risks, as they mostly seem priced in at this juncture. CP stock is off around 6% from its recent all-time high. And though that’s hardly a discount, I do think lingering optimism surrounding the company’s recent merger with Kansas City Southern is more than warranted.
CP Rail (or CPKC as it’s now called) is an exceptionally well-run company. By winning the bidding war with its rival CN Rail (TSX:CNR), the company can now focus its efforts on how to effectively and efficiently integrate. Keith Creel has a plan, and I do think he will be successful in optimizing the new rail network, which now spans into the southern U.S. and even Mexico!
CN and CPKC Rail stock: The railway market cap race is on!
At the time of writing, CN and CP stocks sport market caps of $102.9 billion and $98.3 billion, respectively. The race is getting tight, and it’s really difficult to tell which rail stock will be on top three to five years from now. Given the enhanced growth opportunities that CP Rail’s recent KSU merger can offer, some may be inclined to give CP the edge.
That said, I do think a lot of the value from the KSU deal is already reflected in today’s premium price tag. CP stock trades at more than 26 times trailing price-to-earnings. That’s a heck of a lot higher than its rail peers, most notably CN Rail, which goes for just south of 20 times trailing price-to-earnings. A cheaper stock isn’t always better, though.
In any case, the rail industry seems to be on the right side of a secular trend. At the end of the day, transporting mass quantities of goods is best done via rail. It’s more cost-effective and environmentally friendly. Both CN and CP will benefit from the longer-term transportation trends that still favour the railways.
CPKC’s managers are quite brilliant
I think CP Rail’s premium multiple is worth paying for if you place a high value on the calibre of management. Billionaire investment guru Bill Ackman is a big fan of CP Rail. He’s back in the name and will likely be proven right as CP looks to continue powering forward.
Around a decade ago, CP Rail was an underdog on the scene, with a smaller network (minus KSU rail) and less-than-impressive margin performance. Nowadays, it’s a formidable competitor in the North American rail scene, with some enviable margins. Whether CP can maintain its margin edge over most other rails remains to be seen. All I know is CEO Keith Creel is not a man you want to bet against.
The bottom line on CPKC Rail stock
CP stock is expensive, but it deserves to have a premier price tag. If Creel can keep margins running strong while optimizing its newfound rail network, there’s no telling how much higher CP Rail stock can go. Despite the price, I think it’s a solid buy. I think the path of least resistance is higher.
