We've been asking ourselves recently if the market has placed a fair valuation on Canadian Pacific Railway. Let's dive into some of the fundamental values of this large-cap Industrials company to determine if there might be an opportunity here for value-minded investors.
A Lower P/B Ratio Than Its Sector Average but Trades Above Its Graham Number:
Canadian Pacific Kansas City Limited, together with its subsidiaries, owns and operates a transcontinental freight railway in Canada and the United States. The company belongs to the Industrials sector, which has an average price to earnings (P/E) ratio of 20.49 and an average price to book (P/B) ratio of 3.78. In contrast, Canadian Pacific Railway has a trailing 12 month P/E ratio of 26.0 and a P/B ratio of 1.85.
Canadian Pacific Railway's PEG ratio is 3.42, which shows that the stock is probably overvalued in terms of its estimated growth. For reference, a PEG ratio near or below 1 is a potential signal that a company is undervalued.
Growing Revenues With a Flat Capital Expenditure Trend:
| 2019-12-31 | 2020-12-31 | 2021-12-31 | 2022-12-31 | |
|---|---|---|---|---|
| Revenue (MM) | $7,792 | $7,710 | $7,995 | $8,814 |
| Gross Margins | 55.4% | 56.6% | 55.3% | 52.1% |
| Operating Margins | 40.1% | 42.9% | 40.1% | 37.8% |
| Net Margins | 31.31% | 31.7% | 35.67% | 39.9% |
| Net Income (MM) | $2,440 | $2,444 | $2,852 | $3,517 |
| Net Interest Expense (MM) | -448 | -458 | -440 | -652 |
| Net Interest Expense (MM) | -$448 | -$458 | -$440 | -$652 |
| Depreciation & Amort. (MM) | -$706 | -$779 | -$811 | -$853 |
| Earnings Per Share | $3.5 | $3.59 | $4.18 | $3.01 |
| EPS Growth | n/a | 2.57% | 16.43% | -27.99% |
| Diluted Shares (MM) | 696 | 680 | 683 | 931 |
| Free Cash Flow (MM) | $1,343 | $1,131 | $2,156 | $2,585 |
| Capital Expenditures (MM) | -$1,647 | -$1,671 | -$1,532 | -$1,557 |
| Net Current Assets (MM) | -$14,088 | -$15,000 | -$32,996 | -$32,720 |
| Current Ratio | 0.53 | 0.5 | 0.43 | 0.59 |
| Long Term Debt (MM) | $8,158 | $8,585 | $18,577 | $18,141 |
| Net Debt / EBITDA | 2.01 | 2.17 | 4.12 | 3.4 |
Canadian Pacific Railway has growing revenues and a flat capital expenditure trend, average operating margins with a stable trend, and consistent free cash flow. However, the firm suffers from slimmer gross margins than its peers and declining EPS growth. Finally, we note that Canadian Pacific Railway has significant leverage.
