Canada has multiple highly consolidated industries, and the railway is one of them. It’s dominated by just two giants, each with its strengths. The benefit of being part of a consolidated industry is that there is limited competition threatening the operations and growth of existing players.
Canadian Pacific Kansas City (TSX:CP), or what was once CP Rail, might be a more appealing buyout of the two railway giants in Canada.
The company
Canadian Pacific has increased its reach significantly, thanks to a merger with the U.S.-based Kansas City Southern. Its railroad now combines three countries: U.S., Canada, and Mexico, making it ideal for businesses looking for stable, low-cost, and high-volume cargo services in all three countries.
Its massive railway network now combines 11 ports in three countries. It also connects to 23 auto parts manufacturers, with a collective reach of over 200 million consumers in the three countries. It was already a core component of the North American agricultural supply chain, hauling grains and fertilizer across the two countries. It has now expanded its reach to several new markets.
The stock
CP Rail stock was already one of the best growers among the blue-chip stocks in the country. It rose almost 300% in the last decade, and the overall returns were even higher if you throw in the dividends. Apart from a few bumps along the way, the growth pattern has continued over the years, even though the current relatively weak/uncertain market.
The stock has risen by about 14.7% in the last 12 months, outperforming the TSX over the same period by a significant margin. The stock would have also been worth considering as a long-standing Dividend Aristocrat. Still, dividends do not make a significant enough segment of its overall returns to become a more impactful factor compared to its growth potential.
The 14% rally in the last 12 months, while market beating, is not significantly strong considering the stock’s long-term growth history. However, it’s important to understand that with this acquisition, the company has increased its fundamental strengths and has access to newer markets and new growth opportunities.
This may augment its already compelling growth potential in the long run. The stock stands to offer you over three-fold capital growth in the next 10 years, assuming it repeats the performance of the past decade. However, if the growth potential has been enhanced, the number might become even more attractive.
Foolish takeaway
Arguments can be made both in favour of and against the purchase of this stock in July 2023. The stock is modestly discounted right now, but the payout ratio is slightly higher. The next earnings report might not push it into the undervalued stocks pool of the TSX, though it may make the valuation more attractive.
However, a bullish TSX may push the stock up by a decent margin by then, and you will miss out on the growth that happens between now and then.
