Canadian Pacific Kansas City (TSX:CP) is up about 2% this year compared to a gain of more than 20% for the TSX. Contrarian investors are wondering if CPKC stock is undervalued and good to buy right now for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
CPKC stock price
CPKC trades near $107 at the time of writing compared to $123 earlier this year. The stock has trended higher in the past two weeks after dipping to $103.
Over the past five years, the stock is up about 65%, driven by the strong economic rebound after the pandemic.
Earnings
CPKC reported solid third-quarter (Q3) 2024 results. Revenue rose by 6% to $3.5 billion compared to the same period last year. Reported diluted earnings per share increased to $0.90 from $0.84 in Q3 2023. Railways in Canada have had a rough ride in 2024, with labour issues and port strikes impacting operations. Wildfires and bad weather have also caused disruptions.
Despite the challenges, results have been pretty good. For the first nine months of 2024, total freight revenue came in at $10.42 billion compared to $8.69 billion in 2023. All segments saw increases, led by a 25% in grain shipment revenue, a 33% increase in energy, chemicals, and plastics, a 19% increase in metals, minerals, and consumer products, a 23% rise for forest products, and a jump of 48% for automotive. Coal, potash, fertilizer, and intermodal shipments all had revenue gains as well.
Management maintained the financial guidance for the year. Canadian Pacific purchased Kansas City Southern in late 2021 in a US$31 billion deal that expanded CP’s rail network from Canada to the U.S. and Mexico. The deal gave CP an advantage in the rail market as it is the only rail operator that connects the three countries.
Risks
Trade growth between the North American markets should be good news for CPKC in the coming years, but the recent threat by Donald Trump to implement tariffs on all goods entering the U.S. poses near-term risks.
Donald Trump says he will put 25% tariffs on goods entering the U.S. from Canada and Mexico when he gets into office in late January. He says the tariffs are required to force Canada and Mexico to stop illegal migrants and drugs from crossing the border into the United States. If the tariffs go into effect and remain in place for several months, there could be an impact on the volume of goods that get shipped along CPKC’s routes. The company is also dealing with tax audits on CPKC Mexico that have a potential hit of $430 million.
Should you buy CPKC now?
The broader market is due for a pullback after the strong 2024 rally. With so much uncertainty on the trade front heading into the first part of 2025, it might be a good idea for cautious investors to wait to see how things play out with the Trump tariffs.
That being said, buying CP stock on material dips has historically proven to be a savvy decision. Contrarian investors might want to start nibbling on CPKC at this level and look to add to the position on any additional downside. Over the long haul, this stock should deliver decent returns.
