Canadian Pacific Kansas City (TSX:CP), or CPKC, formed from the merger of Canadian Pacific Railway and Kansas City Southern, has been a notable player in the North American rail industry. However, its stock performance over the past year has not been as spectacular as some investors might have hoped. With just a 4% increase in the last 12 months, the industrial stock raises the question: should investors buy, sell, or hold it in 2025?
While CPKC has solid growth potential, several key factors will influence its stock trajectory in the year ahead. Let’s break down the opportunities and risks and evaluate what could be the best move for investors in 2025.
The growth opportunity: A North American rail powerhouse
The merger between Canadian Pacific and Kansas City Southern created a North American powerhouse with an extensive rail network spanning Canada, the United States, and Mexico. This strategic combination enhances CPKC’s competitive edge, especially with its access to key trade corridors.
The company is well-positioned to benefit from the cross-border trade between the U.S. and Mexico, along with essential demand for rail transportation, which is needed through the economic cycle. CPKC also benefits from revenue stream diversification, as it serves a diverse range of industries, including automotive, agricultural, and industrial sectors.
This expanded footprint opens new growth opportunities, and management has been focused on integrating the two companies and improving operational synergies, such as optimizing route management. However, there are several factors investors need to consider before making a move in 2025.
Potential challenges: Integration and economic headwinds
While the merger holds substantial promise, the integration of Canadian Pacific and Kansas City Southern is not without challenges. Merging two large rail companies requires seamless coordination, and any hiccups in the process could delay expected synergies. Cultural differences, operational disruptions, and logistical hurdles can all pose risks to the anticipated growth trajectory.
Another concern is the broader economic landscape. Interest rate changes, inflation, and potential recessionary pressures in North America could dampen demand for freight services, particularly in cyclical industries like industrial goods and commodities. While CPKC’s diversified portfolio helps mitigate some of these risks, a downturn in global trade could lead to lower volumes and freight revenues, putting pressure on margins.
Lastly, investors should also keep an eye on government regulations. The rail industry is heavily regulated, and changes to environmental or safety standards could lead to increased costs or operational restrictions. These factors, along with volatile energy prices, could impact CPKC’s profitability in the short term.
The Foolish investor takeaway
Depending on your unique situation, investors could make different decisions.
For long-term investors, CPKC could still be a solid buy. The stock currently trades at a 14% discount from the analyst consensus price target, suggesting that it is undervalued at present levels. If you have a long-term investment horizon and can tolerate some volatility, buying now could position you to capitalize on the company’s expanding footprint and operational synergies as the merger progresses.
If you are risk-averse or looking to lock in profits from earlier gains, selling (at least a partial position) may be a prudent option. While CPKC has long-term potential, short-term volatility from the merger integration or potential economic downturns could weigh on performance in the near term.
For existing shareholders, holding the stock could be the best move. The growth potential is intact, but the journey will likely be bumpy. If you believe in the long-term benefits of the merger and the company’s strategic position in North America, holding onto your position through the next year could yield favourable results in the future. Furthermore, it may be smart to add to your position on dips while ensuring you’re maintaining a diversified portfolio.
