Canadian Pacific: A Canadian And US Railroad Giant Benefiting From Secular Growth

Image Source: In early September, the Bank of Canada lowered its benchmark interest rate by 25 basis points to 4.25%, the third consecutive drop since June. As the central bank continues to pursue a more-accommodative stance with interest rates, we believe that select Canadian companies offer investment opportunities. One is Canadian Pacific Kansas City Ltd. (), advises John Eade, president of .The central bank noted overall weakness in the economy and progress on inflation. Canadian unemployment rose to 6.6% in August from 6.4% the month before, with population growth outpacing jobs growth.Meanwhile, GDP growth averaged only about 2% in the first and second quarters of 2024, and the Canadian economy added a modest 22,000 jobs in August, down from a much higher 90,000 in April. Consumer price inflation eased to 2.5% in July, closer to the central bank’s 2% target.Similar to the US, shelter inflation in Canada remains elevated, though lower interest rates have started to help as mortgages renew at better levels and rent increases ease. The governor of the Bank of Canada remarked as follows: “With inflation getting closer to the target, we need to increasingly guard against the risk that the economy is too weak and inflation falls too much.”Canadian Pacific operates a transcontinental railway in Canada and in the Northeast and Midwest US. The company is among the most-efficient operators in the rail industry, which has been on more of a secular growth trend than other transport options (such as water, pipelines, and trucks) for the past 20 years.Having emerged victorious in a bidding war for Kansas City Southern Railway, management now can focus on earnings and dividend growth. Recent results have been solid, given economic conditions.Freight revenue per ton-mile (volume) rose 6% in Q2, led by greater shipments of Potash, and 2024 guidance calls for double-digit adjusted EPS growth versus 2023. On valuation, Canadian Pacific has recently been trading at 21 times our 2025 EPS estimate, near the high end of the five-year historical range of 14-24 and above the North American peer average of 19.We think this is a reasonable valuation, given the company’s long-term record of industry outperformance. Our 12-month target price is $87.My recommended action would be to consider purchasing shares of Canadian Pacific.

About the Author
John Eade is CEO and President of Argus Research Corporation. He has been with Argus since 1989 and has worked as an analyst, director of research, market strategist, and director of portfolio strategies at the firm.Mr. Eade has an MBA in finance from New York University’s Stern School of Business and a Bachelor’s degree in journalism from Northwestern University’s Medill School of Journalism. He has been involved with Argus’s new product development team, which has kept the company at the forefront of the independent research industry.Mr. Eade is a founder and board member of the Investorside Research Association, an industry trade organization. He is also a member of the New York Society of Security Analysts and the CFA Institute.Mr. Eade has been interviewed and quoted extensively in The New York Times, The Wall Street Journal, Forbes, Time, Fortune and Money magazines, and has been a frequent guest on Fox Business News, CNBC, CNN, CBS News, ABC News and the Bloomberg Radio and Television networks.More By This Author:The Big Mac Index Proves It: Inflation Is Getting BetterLEU: A Nuclear Power Play In A Market Set To Prosper From Fed Cuts KVYO: A Promising E-Commerce Tech Play Whose Shares Are On The Move