Market Mad House

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

Market Insanity

Is Canadian Pacific the Most Overvalued Railroad?

The Canadian Pacific Railway (NYSE: CP) has become the most overvalued railroad stock on the planet.

Shares of the CP; which reported revenues of just $4.754 billion on March 31, 2016, were trading at $159.63 on May 26, 2017. Meanwhile shares of Union Pacific (NYSE: UNP) which reported revenues of $20.24 billion for first quarter 2017, were trading at $107.88 on the same day.

Canadian Pacific’s price even outstripped shares of its closest competitor; the Canadian National Railway (NYSE: CNI), which were selling for $77.08 on May 26, 2017. The CNR reported revenues of $9.348 billion on March 31, 2017, making it almost twice as big as the Canadian Pacific.

Is Canadian National Better than Canadian Pacific?

To most investors the CP will look overvalued, something confirmed by the company’s revenue struggles. In March 2016, Canadian Pacific reported $5.967 billion in revenues; that fell to $5.071 billion a year later, and $4.754 billion two years later.

That decline is matched by revenues at the much cheaper Canadian National or CN. The CN reported revenues of $11.04 billion in March 2015; that fell to $9.534 billion for first quarter 2016, and $9.348 billion in 2017.

To be fair both railroads reported modest revenue growth in first quarter 2017. The CN reported revenues of $9.086 billion at the end of 2016 that grew to $9.348 billion. The CP saw its revenues grow from $4.702 billion to $4.754 billion during the same period.

The two railroads look much the same, except that CN is bigger and cheaper. That seems to justify Bill Gates’ faith in that railroad. The world’s richest man is that company’s biggest shareholder who now has the right to buy 25% of it if he wants, Bloomberg reported.

Do Canadian Railroads and Canadian Pacific Make Money?

This brings us to the most critical question for value investors: do Canadian railroads make money? Is Gates right to assume that Canadian rail is a money-making value investment?

Perhaps, the CP did report a net income of $1.134 billion on March 31, 2017, down slightly from $1.196 billion in March 2016. The CN reported a net income of $2.841 billion on March 31, 2017, up from $2.772 billion in March 2016.

The Canadian National is making more money than the CP and its income is increasing. It looks as if Bill Gates is right, the CN is a better value investment.

There’s a lot of Value at the Canadian Pacific

Despite that the earnings report indicates that there’s a lot of value at the Canadian Pacific. That value included:

  • Assets of $14.55 billion on March 31.


  • Cash and short term investments of $150.72 million at the end of first quarter 2017.

  • A free cash flow of $363.65 million in December 2016.


  • $1.577 billion in cash from operations in December 2016.


  • An enterprise value of $29.38 billion which exceeded the market capitalization of $23.09 billion on May 24, 2017.


It looks as if the CP might be undervalued by the market, perhaps because a limited amount of stock is available. Yet it is also clear that the Canadian National is a better value investment.

The Value at the Canadian National

Some of the value at the Canadian National Railroad includes:

  • A free cash flow of $649.42 million on March 31, 2017.


  • Assets of $27.99 billion on the same day.


  • Cash and short-term investments of $198.71 million for the first quarter.

  • $4.101 billion in cash from operations on March 31, 2017.


  • An enterprise value of $65.12 billion which exceeded the market capitalization of $57.45 billion on May 24, 2017.


Both railroads are value investments, but the Canadian National is a far better value because it is cheaper and has far more value. Investors spend less and get more bang for their buck when they buy CN. That shows Bill Gates is almost as shrewd a value investor as his buddy Warren Buffett.

Which is the better Stock Canadian National or Canadian Pacific?

Even with its lower price Canadian National is a very good stock. It is scheduled to reward investors with a dividend of 30.4¢ on June 7, 2017. That’s down slightly from 30.7¢ on March 8, but up from 28.2¢ on December 7, 2016. So Bill Gates is also a pretty good dividend picker as well as a value investor.

To add icing to the cake CNI investors were rewarded with a return on equity of 25.15% on March 31, 2017. That makes the Canadian National a really good stock, but what about the Canadian Pacific?

CP investors are scheduled to receive a dividend of 41¢ on June 28, 2017, that’s a good increase over the 37.4¢ a share paid out on March 29, 2017. Yet it is only over 10¢ more a share than Canadian National. Spending an extra $80 a share to get 10¢ in dividends strikes me as an extremely lousy investment strategy.

Canadian Pacific shareholders did enjoy a 30.71% return on equity on March 31, 2017. Yet that was only around 5% better than Canadian National.

It is clear that Canadian National is the better stock and the better value. Canadian Pacific is simply too over valued to be a good investment.