Investing in quality growth stocks can help you deliver outsized gains over time. Given the current macro environment is uncertain and volatile, it’s advisable to gain exposure to blue-chip growth stocks that are equipped with strong balance sheets, pricing power, and a wide competitive moat.
One such TSX growth stock is Canadian Pacific Kansas City (TSX: CP), valued at over $90 billion by market cap. The Canadian growth stock has returned close to 1,700% in dividend-adjusted gains since December 2003, outpacing the broader indices by a wide margin. It’s also down 11% from all-time highs, allowing you to buy the dip. Let’s see why.
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An overview of Canadian Pacific Kansas City
Canadian Pacific Kansas City (CPKC) owns and operates a transcontinental freight railway in Canada and the United States. It transports bulk commodities, including grain, coal, potash, fertilizers, and merchandise freight, such as chemicals, automotive, and forest products.
CPKC transports intermodal traffic, which consists of retail goods in overseas containers. Further, it offers rail and intermodal transportation services through a wide network of roughly 13,000 miles, serving business centres in Canada, Mexico, and the U.S.
Earlier this year, Canadian Pacific completed its US$31 billion acquisition of Kansas City Southern, allowing it to increase revenue by 44% year over year in the third quarter (Q3) of 2023. The combined entity is the only railway connecting North America with unrivalled port access on coasts from Vancouver to Atlantic Canada and Mexico.
While it is still the smallest of the six U.S. class-one railroads by revenue, CPKC has a much larger and more competitive network. The complete integration of CP and KCS is expected to take place over the next three years, unlocking benefits in terms of costs and scale.
CPKC will also usher in a new safety standard to North America’s rail landscape. For instance, Canadian Pacific was already the safest railroad in North America for 17 years, as measured by the train accident frequency ratio. It reported an all-time best frequency of 0.93 in 2022, which was 69% lower than the class-one average and 50% lower than what the company produced a decade back.
Is Canadian Pacific Kansas City stock undervalued?
Analysts tracking CPKC expect sales to grow by 54.5% to $13.6 billion in fiscal 2023 and by 9.9% to $15 billion in 2024. Comparatively, adjusted earnings are forecast to expand from $3.6 per share in 2023 to $4.5 per share in 2025.
The company is optimistic about delivering high single-digit revenue growth between 2024 and 2028. Moreover, it expects earnings per share to grow by double digits annually in this period on the back of yearly capital expenditures of $2.7 billion.
Valued at six times forward sales and 22 times forward earnings, CPKC is not too expensive, given its robust growth estimates. Its expanding cash flows and earnings also allow the company to pay shareholders an annual dividend of $0.76 per share, translating to a forward yield of 0.77%.
While not too attractive, CPKC has raised these payouts by 11% each year since 2005, which is exceptional for a blue-chip stock.
Analysts remain bullish and expect shares of the TSX giant to surge over 15% in the next 12 months.
