CP Stock Jumps 8% on Board Approval of KCS Purchase

It’s official. CP (TSX:CP) stock received the go ahead to finally merge with KCS, creating the first single-line North American railway.

Amy Legate-Wolfe

Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Before joining Motley Fool Canada, she wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote: “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published March 15, 2023 12:46 pm EDT

| More on: CP

Canadian Pacific Railway (TSX:CP) shares jumped as much as 8% on March 15, after news came from the United States Surface Transportation Board (STB) that the acquisition of Kansas City Southern (KCS) was approved.

Meeting handshake — Image source: Getty Images

What happened?

The news that CP stock finally receive STB approval has been long awaited. It ends the multi-year drama between CP stock and fellow Canadian railway Canadian National Railway, which also sought to purchase KCS.

However, the STB had come out leaning towards CP stock years back, stating that CNR stock already had multiple lines that covered the same area as KCS. So, even though they came in at a far higher number than CP stock for the purchase, CP stock looked like it would be the winner.

And today, that was finally put down in writing. The merger creates the first single rail line to run from Canada through the United States and down to Mexico as Canadian Pacific Kansas City.

The details

Of course, it’s all in the details, but CP stock has been waiting some time to start up this new venture. Ever since Dec. 14, 2021, to be exact. But as of Apr. 14, 2023, CP stock aims to have full control of KCS. It’s at this time they would combine to make the new CPKC company.

All together, the STB stated that ultimately, the goal would be the “enhance safety and benefit the environment” from such a combination. This was seen to be the case for the CP merger over the CNR option.

This move would thereby shift 64,000 truckloads from roads across North America to rail, according to a statement. This certainly helped since there are little to no track redundancies or overlapping routes.

Even with a hefty price tag of US$31 billion, the STB and all those involved believe the move is worth it.

“The Transaction will make possible improved single-line service for many shippers and will result in merger synergies that are likely to allow CPKC to be a vigorous competitor to other Class I’s by providing improved service at lower cost.”
Surface Transportation Board

Now what?

The market reacted positively, even amid shares and markets falling pretty much across the board. The clear long-term benefits shone through. Now, investors will merely have to lie in wait about what’s next for the company.

Of course, if the April 14th deadlines is to arrive, that will also likely be the introduction of a new company and, therefore, new stock. So, investors should keep their eyes out for news as to when and how that should arrive.

For now, investors can still be happy picking up the stock for immense long-term value. It currently trades at 28.55 times earnings, which is out of value territory, unless you’re thinking long term. It holds a 0.75% dividend yield, and shares remain where they were a year ago at this point.

However, shares exploded over the last few years, as news of a deal came closer. Shares of CP stock are up about 130% in the last five years alone, as of writing. And that’s not even at all-time highs. So, if you’re looking for returns to climb as steadily as a rail, definitely consider CP stock today.