Valuation Scorecard: Stock Rating B-Positive (3/21/24)-Canadian Pacific Railway Ltd (CP).

Over the next 6 years, Canadian Pacific Railway shares will need to reach $147 to achieve average annual stock market performance of 9.0%. To achieve Upper quartile performance, Canadian Pacific Railway’s stock price will need to reach $172 by 2029. At the current price of $87, what are market expectations regarding Canadian Pacific Railway’s future operating performance?

Executive Summary

• Canadian Pacific Railway’s important characteristics: high expected growth, above average financial strength, instability, and very low profitability. A big positive influence on Canadian Pacific Railway’s valuation is its superior Growth.
• Very low valuation, below market shareholder returns. Current valuation levels are very low relative to the Canadian Pacific Railway Peer Group. Recent market returns have underperformed the Canadian Pacific Railway Peer Group. Total shareholder returns expected to significantly beat the overall equity market. Based on current investor expectations, Canadian Pacific Railway shares should reach a level of $455 by 2029 — an 32.2% per year total shareholder return. A 2029 stock price of $147 would reflect median performance and a price of $172 would be required to reach upper quartile performance.
• Growth has been Canadian Pacific Railway’s biggest valuation strength. Historical growth has been very high relative to the Canadian Pacific Railway Peer Group and forecasted growth is relatively very high. Asset Growth, Equity Growth, and Revenue Growth have been superior. EPS Growth has lagged. Canadian Pacific Railway’s historical income statement growth has been lower than balance sheet growth. Revenue growth has fallen short of asset growth; earnings growth has fallen short of equity growth driving erosion in return on equity. Canadian Pacific Railway’s consensus growth expectations are lower than historical growth.
• Asset Turnover, Pretax ROA, Pretax Margin, and Return on Equity are all group lagging. These factors have negatively affected market perceptions of Canadian Pacific Railway. The company has very low cash and will have to work to generate attractive investments and improve valuation.
• Canadian Pacific Railway’s risk profile is neutral. Overall variability has been very high with very high revenue variability, above average E.P.S. variability, and relatively low stock price volatility. Financial Strength is relatively high and earnings’ expectations are very low. The debt/capital ratio has declined very significantly.

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