Canadian Pacific Railway Limited’s (TSX:CP)(NYSE:CP) railway network of about 23,800 km of tracks spans across the border from Canada to the United States. The network provides North American customers direct access to eight major ports, including Vancouver and Montreal.
Canadian Pacific Railway has come down a long way from a 52-week high of $245 to $172. That’s a fall of almost 30%. The shares are now attractively priced at a price-to-earnings ratio (P/E) of about 17 and a forward P/E of about 15.
After all, the railroad has delivered double-digit earnings-per-share (EPS) growth since 2012 after Hunter Harrison came on board as president and chief executive officer of the company.
Business mix
Canadian Pacific Railway hauls a range of bulk commodities, including grain, coal, potash, and fertilizers and sulfurs. They made up 42% of the railroad’s 2014 freight revenue.
The railroad also hauls a diversified range of merchandises that made up 37% of 2014 freight revenue. Those merchandises included forest products (3%), automotives (6%), crude (7%), chemicals and plastics (10%), and metals, minerals, and consumer products (11%).
Canadian Pacific Railway’s intermodal business contributed 21% of 2014’s freight revenue.
Competitiveness
Canadian Pacific Railway’s network of tracks creates a strong barrier to entry. Its Class I rail assets cannot be replicated.
Other than its valuable network system, Canadian Pacific Railway also has cost advantages against other forms of transportation such as trucks.
On the Canadian Pacific Railway website, it states that “rail-based transportation is [the] safest, most cost effective, and most environmentally sensitive way to ship … Railroads are 1.9-5.5 times more fuel efficient than trucks, depending on the commodity and length of the haul.”
Rail cars have greater capacity than trucks. Adding in the freight length, transportation by rail becomes more cost efficient than transportation by truck.
Valuation
From 2012 to 2014, Canadian Pacific Railway delivered amazing EPS growth of 28%, 48%, and 32%, respectively. In the past year it has reduced its share count by about 5%, which boosts earnings growth. EPS growth for 2015 is expected to be around 20%, despite some exposure to crude and metals.
Now that the railroad is trading around a multiple of 17 at roughly $172 per share, the railroad is undervalued for long-term investments, even if its EPS growth lowers to 15%.
Conclusion
Although Canadian Pacific Railway pays a dividend, its yield is only 0.80% at about $172 per share. So, interested investors should expect most returns to come from capital gains.
The shares are reasonably priced, and if the more conservative EPS growth of 15% per year materializes, investors starting a position around these levels should expect returns of 15% or higher.
