Every Tuesday we bring you “Best Canadian Stocks” from one of our three newsletters featuring Canadian stocks—The Successful Investor, Stock Pickers Digest and Canadian Wealth Advisor.
CANADIAN PACIFIC RAILWAY LTD. (Toronto symbol CP; www.cpr.ca) transports freight over a 22,000-kilometre rail network between Montreal and Vancouver, as well as hubs in the U.S. Midwest and Northeast. The U.S. supplies 40% of its revenue.
CP’s shares have soared 242.4% since we made it our Stock of the Year for 2012, when it was trading at $69. That’s mainly due to a major restructuring that has improved its efficiency with new locomotives, better tracks and software that optimizes train loads and speeds.
Faster, more reliable service has also helped CP attract more customers. As a result, the company’s revenue rose 32.9%, from $5.0 billion in 2010 to $6.6 billion in 2014.
Earnings fell 18.2%, from $3.85 a share (or a total of $651 million) in 2010 to $3.15 a share (or $538 million) in 2011. That’s mainly because flooding in Western Canada delayed CP’s trains. But thanks to its restructuring, earnings rebounded to $4.34 a share (or $753 million) in 2012 and jumped to $8.50 a share (or $1.5 billion) in 2014. CP’s operating ratio improved to 64.7% in 2014 from 69.9% in 2013. (Operating ratio is calculated by dividing regular operating costs by revenue. The lower the ratio, the better.)
Lower crude prices will probably prompt oil producers to cut production this year. That will hurt CP’s oil-by-rail volumes, which accounted for 7% of its 2014 revenue. However, the railway’s falling fuel costs will also spur its earnings.
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Blue chip stocks: Joint venture with DREAM Unlimited to unlock CP property values
CP is also unlocking the hidden value of its extensive real estate holdings. It recently formed a 50/50 joint venture with DREAM Unlimited (Toronto symbol DRM). This new business—called DREAM Van Horne Properties—will redevelop CP’s surplus land near its rail lines in Toronto, Montreal, Edmonton and Chicago.
In addition, CP plans to spend $1.5 billion to upgrade and maintain its operations in 2015, up from $1.4 billion in 2014. That will help it comply with new safety rules in Canada and the U.S. following the July 2013 crash and explosion of an oil-carrying train in Lac-Mégantic, Quebec.
CP’s sound balance sheet will help support this spending. Its long-term debt of $5.7 billion (as of December 31, 2014) is a moderate 15% of its market cap. It also held cash of $226 million.
CP expects big earnings jump by 2018 The company’s 2015 earnings should rise to $10.91 a share, and the stock trades at a stillreasonable 21.3 times that forecast. CP’s improving service and efficiency should help it reach its goal of increasing its earnings per share to $17.00 by 2018. The $1.40 dividend yields 0.6%.
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