Where Will Canadian Pacific Kansas City Stock Be in 3 Years?

Down 13% from all-time highs, Canadian Pacific Kansas City trades at reasonable valuation and should beat the TSX index in 2025 and beyond.

| More on:
Train cars pass over trestle bridge in the mountains

Source: Getty Images

Valued at a market cap of $99.5 billion, Canadian Pacific Kansas City (TSX:CP) is a railroad giant that operates a 13,000-mile freight railway network across Canada and the United States. It transports bulk commodities like grain and potash, merchandise freight including automotive and forest products, and intermodal retail goods in containers. The company connects major business centers from Quebec to British Columbia and the U.S. Northeast and Midwest.

CPKC stock is down 13.5% from all-time highs and has trailed the broader markets in the past year. However, since its initial public offering in August 2001, the TSX stock has returned 2,300% to shareholders after adjusting for dividends.

As past returns don’t matter much to current investors, let’s see where CPKC stock will be in three years.

Is CPKC stock a good investment right now?

Canadian Pacific Kansas City delivered strong results despite labour challenges in recent months. In the third quarter (Q3) of 2024, it reported revenue of $3.5 billion, up 6% year over year. Its operating ratio stood at 62.9%, while adjusted earnings per share grew 8% to $0.99.

The operating ratio is an efficiency metric used in the railroad industry and showcases the relationship between revenue and operating expenses. An operating ratio of 62.9% suggests that CPKC spends $0.63 for every dollar in revenue, leaving $0.37 as the operating profit.

Canadian Pacific Kansas City emphasized that the auto segment drove the top line, growing 27% year over year as volumes rose by 37%. Other commodities that experienced strong demand were energy, chemicals, plastics, and grains.

The bull case for Canadian Pacific Kansas City stock

Canadian Pacific Kansas City has forecast core adjusted earnings to grow by double-digits year over year in 2024. It also expects mid-single-digit volume growth and aims to maintain a leverage ratio target of 2.5 times by the end of Q1 of 2025.

The key driver of a company’s stock price is its steady earnings and cash flow growth, which depend on margin improvements. CPKC’s gross margins have expanded from 45% in 2014 to 53.6% in the last 12 months. In this period, the operating margin has grown from 35.3% to 39.7%, while the free cash flow margin has risen from 10.2% to 14.4%.

Analysts tracking the TSX stock expect adjusted earnings to grow from $3.84 per share in 2023 to $5.7 per share in 2026. Comparatively, free cash flow is estimated to climb to $4.5 billion in 2026, up from $1.66 billion in 2023.

Today, CPKC stock is priced at 27.5 times trailing earnings. If it maintains a similar multiple, it will trade around $154 in January 2028, indicating an upside potential of almost 50% in three years.

In addition to capital gains, investors will benefit from regular dividend payouts. Currently, CPKC pays shareholders an annual dividend of $0.76 per share. Its dividend payout has more than doubled in the past decade. Given its outstanding share count, CPKC’s dividend payout ratio in 2024 is less than 40%, which is sustainable across market cycles.

The Foolish takeaway

Canadian Pacific continues to demonstrate why it’s a compelling investment in the railroad space. Its vast network allows the company to enjoy a wide competitive moat. Further, focusing on operational efficiency improvements and strategic growth initiatives provides multiple avenues for long-term growth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends Canadian Pacific Kansas City. The Motley Fool has a disclosure policy.

More on Stock Market

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Friday, March 28

Alongside any trade policy news, U.S. personal consumption expenditure data will stay in focus for TSX investors today.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Thursday, March 27

TSX stocks may remain volatile today as investors digest the implications of U.S. trade policy shifts and await fresh cues…

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Wednesday, March 26

Despite lingering macro concerns and trade uncertainties, the TSX Composite has climbed 4.5% over the past 10 sessions.

Read more »

rising arrow with flames
Stock Market

The Canadian Stocks That Led Their Sectors in 2024

Some mid-cap stocks outperformed large-cap stocks and led their sector’s growth in 2024. Are the outperformers of 2024 still buys?

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Tuesday, March 25

The U.S. consumer confidence and new home sales data will remain on TSX investors’ radar today as uncertainty about trade…

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Monday, March 24

With a strong 1.7% gain, the TSX Composite Index just posted its best weekly performance since November 2024.

Read more »

stocks climbing green bull market
Tech Stocks

Market Volatility? A Canadian Investor’s Guide to Turning Uncertainty Into Profit

Volatile stock markets are a long-term wealth-building opportunity. Here's how you can profit from uncertainty.

Read more »

a sign flashes global stock data
Stock Market

My Zaniest Stock Market Predictions for 2025 

Understand the economic prediction for 2025 and the potential rebound in sectors hit by tariffs. Read more for analysis.

Read more »