Don't Take a Position in CP Before Reading This!

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.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.