It’s been a rough road over the last few years for Canadian railroad companies. Really, North American railroad companies in general. But ahead of 2024, one analyst recently came out stating that the railroad sector could be the best-performing transportation sector in the next year.
Yet above them all, in my view, Canadian Pacific Kansas City (TSX: CP) has the most to gain. Let’s get into why this sector could soar and why CP stock should be on your list.
Back to normal
In the last two years, there has been a huge amount of reinvestment into the service of these railroads. Service that was to create volume growth after serious lapses during the pandemic. Now, these companies are finally getting back to normal. And that normal should come with far higher operating income than what investors have become used to.
Demand across consumer and industrial markets has created a situation that should lead to large volume growth for railroad stocks in general. That should continue throughout 2024 and beyond. And honestly, it’s already started.
Earlier in the year, the analyst stated with others that they were already beginning to predict some higher volume and growth for the railroad sector. Now, as we get nearer to 2024, that’s already started to shine through.
Solid summer
During the summer, rail volumes increased significantly. In fact, year-over-year growth for November saw positive volume growth across the sector for the first time in a year. Analysts now believe this will continue and even accelerate into 2024.
While the analyst did predict that there will be a stronger performance from United States railroads over Canadian ones, earnings expectations are still set to climb. In fact, there’s one railroad stock that should see the highest year-over-year earnings per share (EPS) growth of the U.S. rails — and that rail is a Canadian one.
Why CP stock?
CP stock is set up for huge success in the coming year, with a major opportunity for investors. The company has experienced a pullback in share price during the last few months, and this has put value right into the hands of investors.
The pullback came after CP stock announced that estimates would be lower than investors hoped for, but now these are becoming more valuable once more. In fact, the stock could even be setting itself up to beat out estimates. This is why the analyst predicts the most year-over-year EPS growth among North American rail companies for CP stock.
So, while there should be lower-than-expected volumes in the coming fourth quarter as well as lower 2024 expectations, this could create value for today’s investors. For 2024, CP stock could hit double-digit EPS growth, and this would support the company’s long-term trajectory.
For now, CP stock remains a solid buy from many analysts out there. And the value has already arrived. The company continues to announce more opportunities for cash flow, including a passenger train in Mexico. It trades 2.27 times book value, with shares down 5% in the last year. Yet with shares already up 5% in the last month alone, more could be on the way for CP stock.
