When it comes to investing in stocks for the long term, blue-chip stocks have proven to be a reliable choice. These stocks are known for their stability, strong financials, and historical performance.
In this article, we’ll explore why Canadian Pacific Kansas City (TSX:CP) stock could be the growth stock of the next decade. We’ll delve into CP stock’s impressive history over the past decade, discuss its recent game-changing acquisition, and examine its prospects for continued growth.
Why CP Stock is a great option
CP stock has undergone a remarkable transformation over the last decade. This transformation began with the appointment of railroading legend Hunter Harrison as CEO in 2012. Harrison initiated a profitability turnaround that proved highly successful. He made strategic moves like closing intermodal terminals, selling nonessential rail lines, and optimizing the workforce and assets. His successor, Keith Creel, continued this trajectory by infusing CP’s culture with precision scheduled railroading principles.
CP’s efforts paid off. The move propelled the company from being one of the worst Class I margin performers to among the best. In 2019, CP surpassed its historical rival Canadian National (TSX:CNR) with a remarkable 60% operating ratio (OR). CP stock’s freight mix, rich in bulk commodities like grain, fertilizer, potash, and metallurgical coal, provides a stable revenue base. Moreover, its significant presence in the intermodal business further strengthens its position, making up over 20% of revenue.
The past decade has witnessed CP’s continuous growth, driven by service enhancements and a stronger competitive footing. The company is well-poised to maintain average core pricing at or above cost inflation. This is an expected rise of around 3%. Intermodal pricing, though slightly lower due to truck competition, remains a significant contributor to CP stock’s revenue.
Why the next decade looks strong
One of the most pivotal developments for CP stock in recent years has been its acquisition of Kansas City Southern. After a multiyear regulatory review, Surface Transportation Board (STB) approval in March 2023 paved the way for the merger. It came down to a staggering US$31 billion
This merger essentially creates a North American super-railway, connecting Canada, the U.S., and Mexico through CPKC (Canadian Pacific Kansas City). While CPKC will remain the smallest of the six U.S. Class 1 railroads by revenue, the combined entity will operate a vast network, spanning approximately 20,000 miles of rail and employing nearly 20,000 people. The full integration of CP stock and KCS over the next three years promises significant synergies and growth potential.
Near-term growth ahead
CPKC President and CEO Keith Creel emphasizes the company’s readiness to move Canada’s grain crop to market in the upcoming years. With a unique position as the first transnational railway connecting the three North American nations, CP stock provides unparalleled access to markets across the continent. The recent investment of over $500 million in new higher-capacity grain hopper cars further underscores CP stock’s commitment to serving the agricultural sector.
As of now, Canadian Pacific stock stands out as an attractive investment opportunity. Trading at 22.8 times earnings, the stock presents a compelling valuation. Additionally, its 0.72% dividend yield offers income potential, and its shares have demonstrated strong performance, climbing 7% in the last year alone.
In conclusion, CP stock’s history of successful transformation, strategic acquisition of Kansas City Southern, and position as a transnational railway make it a blue-chip stock with immense growth potential for the next decade. Investors seeking stability, long-term growth, and a competitive edge should undoubtedly watch for CP stock.