Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Is Canadian Pacific the best Railway Stock?

The venerable Canadian Pacific (NYSE: CP), Canada’s first transcontinental railway, might be the best railway stock around these days. The historic company just turned in a great earnings report that value investors should take note of.

Some of the September 30, 2017, numbers at the CP were really good including:

  • A quarterly profit margin of 31.97%.


  • Diluted earnings per share (EPS) ratio of 9.391.


  • A dividend of 45.08¢ paid on September 28.


  • A return on equity of 35.61%.

  • A growing net income of $1.377 billion.


  • Growing revenues of $4.931 billion.


  • A rising cash from operations figure of $1.721 billion.


  • Assets of $15.66 billion.


  • A market capitalization of $25.16 billion on 8 November 2017.


  • An enterprise value of $31.41 billion on 8 November 2017.

Canadian Pacific is undervalued but it is doing quite well for a railroad. Yet it has even less float that than some of its competitors.

The CP’s cash from operations figure was low at $114.16 million on 30, September 2017. That was more than the $88.40 million reported by the Kansas City Southern (NYSE: KSU) but considerably less than the $704.00 million reported by the CSX (NASDAQ: CSX).

This makes CP overvalued at the $173.255 share price it reached on 8 November 2017. The railroad is overvalued because it lacks the resources to survive any sort of downturn.

The Canadian Pacific’s Resources are Too Limited

That puts it at a disadvantage when dealing with well-capitalized competitors; such as Union Pacific (NYSE: UNP) which reported $1.937 billion in cash from operations on September 30, 2017.

A far greater menace is the Burlington Northern Santa Fe (BNSF) which is owned by Warren Buffett’s Berkshire Hathaway (NYSE: BRK.B). Berkshire had $109.3 billion in the bank on September 30, 2017, which means Buffett is in a position to buy the CP at almost any time – if he wanted to.

This exposes the Canadian Pacific’s greatest problem: its resources are simply too limited. The railway barely seems to make enough money to cover the cost of operations, let alone expand or modernize.

Equally limited is the CP’s geographic footprint which only is limited to Canada and a few states in the Midwest and Great Plains. A gigantic limitation facing the CP is that its track only reaches one ocean port; Vancouver, that makes the railway very vulnerable to strikes and bottlenecks.

Canadian National vs. Canadian Pacific

This puts CP at a terrible disadvantage when compared with its rival the Canadian National (CNI). The CN has tracks that run to two ports on the Gulf of Mexico; Mobile and New Orleans, two Atlantic ports; St. John and Halifax, and two Pacific Ports; Prince Rupert and Vancouver.

A major drawback at the CP is its exposure to the Canadian economy which is heavily dependent on natural resources. An advantage that the CN has is extensive operations in the United States to offset potential Canadian losses.

That being said, the CP has a couple of geographic advantages including a line that runs to Kansas City. That provides a direct connection to the Kansas City Southern’s lines to Mexico and the Pacific Coast port of Lazaro Cardenas. It also provides connections to the Gulf Coast, and connections to the BNSF and UP lines to the West Coast.

There’s also track to Albany, New York, which provides for close connections to New York City, and other Atlantic ports. Not mention a line to America’s second largest city; Chicago. A major problem CP faces is that it has no direction to Atlantic ports, only trackage rights on other railroads.

So why are Railroad Revenues increasing

Some investors will be wondering why railroad revenues are growing, particularly with the anemic gross national product (GNP) growth rates in North America.

The U.S. gross national product (GNP) growth rate was last reported at 3% in June 2017. Canada’s GNP growth rate was even worse at 1.1% during the second quarter of 2017.

The most likely cause of railroad revenue growth is the chronic underinvestment in transportation infrastructure in North America. The amount of track is limited, and highways are increasingly gridlocked by traffic. That makes the few transportation facilities available more valuable.

It also makes a good case for investment in infrastructure, something almost every politician seems to want these days. Not to mention an excellent rationale for investing in next-generation transportation technology such as The Hyperloop.

Even if the investment in infrastructure and new tech comes it will take years to pay off. That means railway operators will have years of revenue growth ahead of them.

Why Investors Should Stay Away from Canadian Pacific

All the railways in North America are pretty good investments right now, but I think there are cheaper better alternatives to the CP out there. Those include the CN which was trading at $79.94 a share on 8 November, the Union Pacific which was trading at $117.26 a share on 8 November 2017, and the CSX which was trading at $50.48 a share on that day.

Stay away from the Canadian Pacific investors because it is overpriced right now. If it ever falls, this railroad’s stock might become a value bargain.