Here's Why Investors Should Retain Canadian Pacific KC (CP)
Canadian Pacific Kansas City CP is experiencing a boost in freight revenues and deserves recognition for actively rewarding shareholders through dividends. However, CP faces substantial challenges, with high operating expenses and low liquidity posing significant obstacles.
Factors Favoring CP
In December 2021, Canadian Pacific Kansas City completed the $31 billion acquisition of Kansas City Southern, including $3.8 billion in outstanding debt. After a two-year review, the STB approved CP's takeover, creating the first rail network connecting Canada, the United States and Mexico. This milestone marks the first major U.S. railroad merger in more than two decades, forming the merged entity, Canadian Pacific Kansas City Limited. With an expanded product portfolio, management anticipates high-single-digit annual revenue growth from 2024 to 2028.
Canadian Pacific demonstrates sustained momentum and optimism, showcasing its robust performance in the evolving freight market with a substantial 42% increase in 2023 and a projected 14.8% rise in 2024. Despite supply-chain challenges, CP's revenues grew by 4% in 2021 and 10% in 2022, with active operational efficiency seen in increased total freight revenues per revenue ton-miles (11%) and per carload (9%) in 2022. Key sub-groups also actively expanded during this period
The company's decision to pay dividends amid uncertainties indicates confidence in its financial strength. With dividends increasing from C$507 million in 2021 to C$707 million in 2022 and 2023, it reflects sustained financial growth and a proactive approach to rewarding shareholders. This underscores Canadian Pacific Kansas City's ability to generate strong earnings and maintain a robust financial position.
Key Risks
In 2021, the railroad operator's total operating expenses rose 9% to C$4,789, primarily due to a 31% increase in fuel costs. This trend continued in 2022, with operating expenses up 15% as fuel costs rose with increasing oil prices. In 2023, a 20% increase in fuel expenses led to a significant 48.9% surge in overall operating costs. Managing these escalating costs, especially related to fuel, remains a critical challenge in the face of fluctuating oil prices.
Canadian Pacific Kansas City ended the fourth quarter of 2023 with C$464 million in cash, up from C$451 million in the fourth quarter of 2022. Long-term debt increased to C$19.35 billion from C$18.14 billion in the fourth quarter of 2022, highlighting the company's high leverage. CPs’ high capital expenditures, totaling C$2.7 billion in 2023, may impede its free cash flow generation. In 2024, the company plans to allocate C$2.75 billion to capital expenditures.
Zacks Rank
CP currently carries a Zacks Rank #3 (Hold).
Stocks to Consider
Some better-ranked stocks for investors’ consideration from the Zacks Transportation sector include GATX Corporation GATX and SkyWest Inc. SKYW.
GATX currently carries a Zacks Rank #2 (Buy) and has an encouraging track record with respect to earnings surprise, having surpassed the Zacks Consensus Estimate in three of the past four quarters (missing the mark in the remaining one). The average beat is 16.47%.
The Zacks Consensus Estimate for 2024 earnings has been revised 9% upward over the past 90 days. GATX has an expected earnings growth rate of 6.5% for 2024. Shares of GATX have risen 31.7% in the past year.
SkyWest's fleet modernization efforts are commendable. The Zacks Consensus Estimate for SKYW’s 2024 earnings has improved 27.2% over the past 90 days. Shares of SkyWest have surged 249.8% in the past year. SKYW currently sports a Zacks Rank #1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.
The company has an expected earnings growth rate of more than 100% for 2024. SKYW delivered a trailing four-quarter earnings surprise of 128.02%, on average.
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Canadian Pacific Kansas City Limited (CP) : Free Stock Analysis Report
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