Yahoo Finance Here's Why Investors Should Retain Canadian Pacific KC (CP)
Canadian Pacific Kansas City CP is experiencing a boost in freight revenues and its proactive commitment to rewarding shareholders through dividends is commendable. However, elevated operating expenses and low liquidity pose a significant threat to the company’s operations.
Factors Favoring CP
The 2021 acquisition of Kansas City Southern by CP, valued at $31 billion with $3.8 billion in debt, marked a significant moment. Following a two-year review, the STB approved the merger, creating the inaugural rail network linking Canada, the United States and Mexico. This historic event, the first major U.S. railroad merger in over two decades, formed the entity, Canadian Pacific Kansas City Limited. Management forecasts high single-digit annual revenue growth from 2024 to 2028, buoyed by an expanded product range.
CP's freight revenues have consistently risen, exemplifying resilience amid supply-chain disruptions and market fluctuations. In 2021, revenues grew 4%, followed by a significant rise of 10% in 2022, driven by key sub-groups like Grain, Potash and Forest products. Revenues from Fertilizers and sulfur also saw a 9% rise. In 2023, freight revenues soared 42%, with projected growth of 14.8% for 2024.
The company's dividend payments amid uncertainties reflect its financial confidence. With dividend payouts increasing from C$507 million in 2021 to C$707 million in 2022 and 2023, its financial growth and a proactive approach to rewarding shareholders is underscored.
Key Risks
Operating expenses for the railroad operator increased 9% to C$4.78 billion in 2021, primarily due to a 31% escalation in fuel costs. This trend continued in 2022 and 2023, with operating expenses remaining high as fuel costs rose, resulting in a 48.9% increase in operating costs by 2023.
CP exited the first quarter of 2024 with $385 million in cash and cash equivalents while carrying a current debt load of $2.9 billion. This discrepancy suggests that the company does not have enough cash to meet its short-term obligations. The company’s current ratio (a measure of liquidity) at the end of first-quarter 2024 was 0.49. A current ratio of less than 1 indicates that the company is likely to struggle to meet its short-term obligations.
Zacks Rank
CP currently carries a Zacks Rank #3 (Hold).
Stocks to Consider
Some better-ranked stocks from the Zacks Transportation sector are SkyWest SKYW and GATX GATX.
SkyWest currently sports a Zacks Rank #1 (Strong Buy) and has an expected earnings growth rate of 784.4% for the current year. You can see the complete list of today’s Zacks #1 Rank stocks here.
SKYW delivered a trailing four-quarter earnings surprise of 128.1%, on average. Shares of SkyWest have surged 130.9% in the past year.
GATX currently carries a Zacks Rank #2 (Buy) and has an expected earnings growth rate of 7.6% for the current year.
The company has an encouraging track record with respect to earnings surprise, having surpassed the Zacks Consensus Estimate in three of the last four quarters and missed once. The average beat is 7.5%. Shares of GATX have gained 12% in the past year.
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Canadian Pacific Kansas City Limited (CP) : Free Stock Analysis Report
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