Why Canadian Pacific Railway Limited’s Stock Is up 1% Today

Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP) released its second-quarter earnings results this morning, and its stock has responded by rising about 1%. What should you do now?

| More on:
The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP), Canada’s second-largest rail network operator, announced its second-quarter earnings results this morning, and its stock has responded by rising about 1%. Let’s break down the results and the fundamentals of its stock to determine if we should be long-term buyers today or if we should wait for a better entry point in the trading sessions ahead.

A dismal quarter of negative top- and bottom-line growth

Here’s a breakdown of 12 of the most notable statistics from Canadian Pacific’s three-month period ended on June 30, 2016 compared with the same period in 2015:

Metric Q2 2016 Q2 2015 Change
Adjusted net earnings $312 million $404 million (22.8%)
Adjusted earnings per share $2.05 $2.45 (16.3%)
Freight revenues $1.41 billion $1.61 billion (12.7%)
Non-freight revenues $44 million $41 million 7.3%
Total revenues $1.45 billion $1.61 billion (12.2%)
Operating income $551 million $646 million (14.7%)
Operating ratio 62% 60.9% 110 basis points
Operating cash flow $512 million $585 million (12.5%)
Free cash flow $137 million $173 million (20.8%)
Carloads 614,000 668,000 (8.1%)
Freight revenue per carload $2,291 $2,409 (4.9%)
Weighted-average number of diluted shares outstanding 151.7 million 163.7 million (7.3%)

What should you do with Canadian Pacific’s stock now? 

Canadian Pacific faced numerous headwinds in the second quarter, including lower-than-expected volumes, the wildfires in Alberta, and a strengthening Canadian dollar, and it led to a horrible financial performance. With this being said, I don’t think the market has reacted correctly by sending its stock higher today, but I do think it represents a great investment opportunity for the long term for three reasons.

First, it’s undervalued. Canadian Pacific’s stock trades at just 17.8 times fiscal 2016’s estimated earnings per share of $10.50 and only 15.6 times fiscal 2017’s estimated earnings per share of $11.98, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 27 and the industry average multiple of 25.2. These multiples are also inexpensive given its estimated 10.5% long-term earnings-growth rate.

Second, it has been repurchasing its shares. Canadian Pacific repurchased 5.13 million of its common shares for a total cost of $867 million in the second quarter. These repurchases were part of its normal course issuer bid that was announced earlier this year, in which it can repurchase up to 6.91 million of its common shares beginning on May 2, 2016, and ending no later than May 1, 2017. This activity shows that Canadian Pacific’s management team believes its stock is undervalued at current levels and that it is fully dedicated to maximizing shareholder value.

Third, it has a safe dividend. Canadian Pacific pays a quarterly dividend of $0.50 per share, or $2.00 per share annually, giving its stock a yield of about 1.1%, and this yield is easily supported by its free cash flow. A 1.1% yield is far from high, but it will amplify shareholders’ returns going forward, especially if they are reinvested.

With all of the information provided above in mind, I think Canadian Pacific represents a great long-term investment opportunity. Foolish investors who do not already have exposure to the rail industry should strongly consider beginning to scale in to positions today.

Should you invest $1,000 in Equinox Gold Corp. right now?

Before you buy stock in Equinox Gold Corp., consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Equinox Gold Corp. wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

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 Joseph Solitro has no position in any stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Investing

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Dividend Stocks

1 Practically Perfect Canadian Stock Down 24% to Buy Now and Hold for Life!

CNR stock is a top Canadian stock for investors, especially with shares down on the TSX today.

Read more »

a man relaxes with his feet on a pile of books
Investing

Got $7,000? How I’d Spread It Across 5 Blue-Chip Stocks for an Investing Foundation

Spreading $7,000 across these five blue-chip stocks provides a solid foundation for long-term financial success.

Read more »

The letters AI glowing on a circuit board processor.
Tech Stocks

How I’d Allocate $10,000 to AI Stocks in Today’s Market

Shopify (TSX:SHOP) is one of Canada's most compelling AI stocks.

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Retirement

Top Canadian Value Stocks I’d Hold in My TFSA for the Next Decade

These Canadian value stocks have significant growth potential and will enhance your TFSA portfolio’s return in the long run.

Read more »

Canada national flag waving in wind on clear day
Dividend Stocks

The Best Canadian Stocks to Buy Right Away With $30,000

If you have $30,000 you're willing to invest, these are some of the first Canadian stocks to consider on your…

Read more »

rail train
Dividend Stocks

What to Know About Canadian Pacific Railway Stock for 2025

CP stock has now gone through a major merger, so what do investors have to look forward to?

Read more »

ways to boost income
Dividend Stocks

Top Canadian Value Stocks I’d Buy for Dividend Growth and Appreciation

If you are looking for income and capital appreciation, here are three Canadian value stocks for a great total return…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Canadian Stock to Buy With $2,000 Right Now

The company’s powerful combination of growth, income, and value, positions it well to deliver solid returns, making it a smart…

Read more »