Canadian Pacific’s (CP) stock has corrected ~10% since mid-April despite posting good last-quarter results. While the company’s revenues were in line, its Q1 EPS of C$2.26 was better than estimates by C$0.07. CP's operating ratio was an impressive 63.2% in Q1. The main reason behind the recent correction is cautious commentary by other railroad companies. I believe it is incorrect to club Canadian Pacific with other rail road companies as it is really doing a good job in terms of improving its operations. Billionaire hedge fund manager Bill Ackman (Trades, Portfolio), who has a sizable stake in the company, recently called CP’s management best in the industry. Here’s a look at the company in detail.
Canadian Pacific is a Class I Railroad company based in Canada. CP owns approximately 9,900 miles of track. An additional 3,800 miles of track are owned jointly, leased or operated under trackage rights. The company has shown good growth in its earnings in the past and its EPS has more than doubled over the last few years.
Canadian Pacific is showing strong improvements in its operating metrics. The company is posting improvements in safety, velocity, train length and fuel efficiency. The company is also doing a good job in terms of generating cash, improving its credit ratings and rewarding its shareholders. Last year, the company generated free cash flow of $725 million which is a 37% increase from the last year. This healthy performance on the cash flow front helped its credit metrics and the company's credit ratings improved two notches in 2014. The company also bought back 10.5 million shares over the course of 2014 at an average price of about $199 and distributed over $250 million to shareholders through dividends.
Going forward, Canadian Pacific expects 7%-8% revenue growth in 2015. A lower Canadian dollar is expected to improve Canadian exports by making them more competitive. This will simulate the demand for the company's transport services. In addition, the company has two facilities coming online this year which will help its topline. The company's target is to reach $10 billion in revenues by 2018. Management also seems to be optimistic about the company's longer term prospects. Recently, Canadian Pacific's board of directors authorized the repurchase of up to 9.14 million of its common shares representing approximately 6 percent of Canadian Pacific's public float of common shares.
Canadian Pacific is trading at 16 time FY2015 EPS. Its EPS estimate for the current year is 11.01 and next year is 12.94. According to sell side estimates, the company's topline is expected to grow 7.80% in the current year and 8.80% next year. Out of 27 analysts covering the company 17 are positive and have buy ratings, nine have hold ratings and one has a sell rating. I believe the stock is a good buy given the company's solid execution, good growth prospects and reasonable valuations.
