Canadian Pacific Kansas City Limited (CP)’s Merger Synergies Set to Fuel Growth

We recently published a list of 10 Best Foreign Stocks To Buy Now. In this article, we are going to take a look at where Canadian Pacific Kansas City Limited (NYSE:CP) stands against the other best foreign stocks to buy now.

The close of 2024 is resulting in a much needed paradigm shift for US and global equities. Ever since the coronavirus pandemic disrupted our way of living in 2020, investors have had to deal with one setback or another. While the immediate effect of the pandemic equities saw technology stocks soar, other sectors, such as energy and travel didn’t. Then, inflation rose in 2022 forcing central banks worldwide to rapidly hike interest rates, which naturally made equities much less attractive than before.

Since then, rates have been high in Europe and the US as well as in the developing world. However, with the European Central Bank’s (ECB) and Bank of England’s (BOE) latest rate cut decision, things appear to be changing. The ECB got the ball rolling in June after it cut interest rates by 25 basis points and then followed up with another 25 point cut in September. These decisions have been influenced to some extent by economic growth concerns. During the press conference after she announced the rate cuts, ECB President Christine Lagarde commented that while her organization had initially expected European economic growth to pick up, this hadn’t been the case.

As per Lagarde, “We have revised downwards the outlook for growth, because the consumption that we had anticipated for now, essentially, because net income has begun to increase, inflation has gone down significantly and we were expecting consumption to pick up, has not picked up. And I think that we will be looking at that carefully when we produce our next growth and GDP numbers.” During Q2 2024, the EU and broader Euro area’s GDP grew sequentially by 0.3%, which was similar to the Q1 figures. On an annual basis, the EU’s GDP marked a 0.8% growth while the Euro area’s growth was 0.6%. Lagarde’s comments were accompanied by the ECB’s updated growth estimates for 2024, 2025, and 2026. While it had expected these to sit at 0.9%, 1.4%, and 1.6%, respectively, the updated estimates reduced all of these by 0.1 percentage point.

With the EU’s economic performance, one country’s under performance is relevant for the broader area as well as an analysis of foreign or exUSA economies. This country is Europe’s largest economy, Germany. The German economy was 2023’s worst performer among major economies as it contracted by 0.3%. In Q2, the GDP contracted by 0.1% sequentially and missed analyst estimates of 0.1%. This slowdown came at a time when inflation jumped by 2.6% in July and accelerated by 0.1 percentage point over June. The economic uncertainty has also affected German investors, as data from the ZEW economic research institute’s economic sentiment index shows that the index fell to a whopping 3.6 points from an earlier 19.2 points. Analysts had expected it to sit at 17 points. Additionally, investor perceptions of the economy fell to levels last seen just as the coronavirus had started to wreak havoc in May 2020 and sat at -84.5.

Germany is struggling because the aftermath of the Russian invasion of Ukraine has cut its supply of cheap Russian gas. While this has increased costs, on the demand side, Germany is suffering from a weak Chinese economy. Data from the Federal Statistical Office shows that Germany’s exports to China in May sat at €7.5 billion for a 14% annual drop. Between January to May, the exports were €40.3 billion, for a 10%+ drop over 2022. With German firms such as LVMH experiencing a 14% Chinese sales drop in Q2 and Swatch witnessing a 30% drop in H1, it’s clear that Chinese consumers are in no mood for discretionary spending.

This has also led to Goldman recommending that investors sell European stocks with Chinese exposure as it is worried about its basket of European stocks. As per the bank, while “a great deal of earnings downgrades have already occurred year-to-date for our luxury basket, we worry that more could take place.” It adds that “Also, the valuation premium of the basket has deflated, but remains on the high side of its history.”

Pessimism about China is evident in the data as well. During Q2, the economy grew by 4.7%, with retail sales whimpering through a 2% growth rate. This was the slowest since December 2022, when the Zero COVID lock downs were still making their impact across the country. In the aftermath of the disappointing data from the world’s second largest economy, Goldman and Citi, which had earlier expected the Chinese economy to grow by 4.9% and 4.8%, slashed their estimates to 4.7%. Goldman commented “We believe the risk that China will miss the ‘around 5%’ full-year GDP growth target is on the rise, and thus the urgency for more demand-side easing measures is also increasing,” while Citi stated, “We believe fiscal policy needs to step up to so as to break the austerity trap and timely deploy growth support.”

Yet, while Germany and China have struggled, the world’s largest economy America has thrived. US GDP grew by 3.1% annually in Q2, lending credence to the argument of American exceptionalism. On a quarterly basis, it was up by 0.7%, despite the fact that interest rates remain at a 24 year high. This growth has created ample room for the Federal Reserve to keep rates high, and now, most expect that an interest rate cut is incoming. Due to America’s dominant role in global economic affairs, the Fed’s decisions have a global impact. For European stocks, it meant that the day before the rate cut decision, the index tracking Europe’s top 600 stocks gained 0.5% while the British stock market jumped by 0.7%.

Our Methodology

To make our list of the best foreign stocks to buy, we ranked the 40 most valuable exUS stocks in terms of market capitalization by the number of hedge funds that had bought their shares in Q2 2024. Out of these, the top stocks were chosen. Care was taken to ensure that stocks that were founded in America but are headquartered in Ireland or other jurisdictions were eliminated.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).

A freight train making its way through a majestic mountain range, snow-capped peaks in the distance.

Canadian Pacific Kansas City Limited (NYSE:CP)

Number of Hedge Fund Holders In Q2 2024: 44

Canadian Pacific Kansas City Limited (NYSE:CP) is a railway company headquartered in Calgary, Canada. The firm transports commodities, containers, and other industrial products across the US, Canada, and Mexico. This means that Canadian Pacific Kansas City Limited (NYSE:CP)’s shares perform well when economic growth is robust as industrial demand leads to a higher demand for freight and logistics solutions. With industrial output being slow in 2023, the firm’s shares have lagged and are up by just 9% over the past 12 months. However, Canadian Pacific Kansas City Limited (NYSE:CP) used the slow environment to set itself up for the future by merging with Kansas City Southern, another railway company. This enabled it to achieve $350 million in synergies in 2023 and opened up the potential for $700 million in additional synergies by 2024 end. Additionally, it also opens up Canadian Pacific Kansas City Limited (NYSE:CP) to revenue growth of as much as 3% by the end of this year.

Pershing Square mentioned Canadian Pacific Kansas City Limited (NYSE:CP) in its Q2 2024 investor letter. Here is what the firm said:

“In 2023, Canadian Pacific’s transformative acquisition of Kansas City Southern established the only railroad with a direct route linking Canada, the United States, and Mexico. The combined network connects shippers to new markets and enables nearshoring in North America while creating significant shareholder value. CPKC celebrated the one-year anniversary of this historic combination in 2024 with strong results, building momentum in the second year of this multi-year growth story.

Volume growth of 6% in the second quarter was well ahead of management’s expectations, driven by synergy wins and solid Canadian grain shipments. CPKC has made considerable progress on realizing revenue synergies despite a challenging freight environment, and now expects to exit 2024 with C$800 million of new business. These wins span a wide variety of end- markets from automotive to corn, demonstrating the unique value proposition of CPKC’s network.

Cost synergies are also tracking ahead of plan as CPKC realizes savings from combining procurement and general and administrative functions. These cost savings together with strong operations across the network led to a 280 basis point year- over-year improvement in CPKC’s adjusted operating ratio in the second quarter.

We believe that CPKC’s one-of-a-kind network and industry-leading management team are well positioned to deliver continued synergy wins and excellent operations, which should generate strong double-digit earnings growth in the coming years.”

Overall CP ranks 10th on our list of best foreign stocks to buy now. While we acknowledge the potential of CP as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

 

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Disclosure: None. This article is originally published at Insider Monkey.