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Why is It Better to Ditch Canadian Pacific (CP) Stock Now?

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·4 min read
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Shares of Canadian Pacific Railway Limited CP have gained 8.5% in the past year, underperforming its industry’s 11.9% uptick in the same time frame.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Let’s look at the reasons behind this underperformance.

Canadian Pacific's decision to trim its volume growth outlook for 2021 is alarming. The outlook was trimmed due to the reduced expectations for Canadian grain in the 2021-2022 crop year, the prevalent supply-chain challenges and unfavorable weather conditions in British Columbia. Volumes, measured in revenue ton miles, are expected to be roughly flat in 2021 with the 2020 reported levels (previous expectation: low single-digit growth).

Management also slashed the earnings growth view for 2021. Canadian Pacific now anticipates adjusted earnings per share to increase in the high single-digits during 2021 from the 2020 adjusted diluted EPS of $3.53 (previous expectation: double-digit growth).

With Canadian Pacific investing significantly in its facilities’ upgrade, it is incurring significant amount of capital expenses. Capital expenditures increased 6.2% year over year to C$1.65 billion in 2019. It was roughly similar in 2020. Capital expenditures are projected to be C$1.55 billion in 2021. Such high capital expenditures amid adversities can massively affect the bottom line.

Canadian Pacific’s total operating expenses increased 8% to $3,581 year over year in the first nine months of 2021. This rise was mainly due to the 24% escalation in fuel costs in the first nine months of the year. With fuel costs flaring up as oil prices move north, operating expenses are likely to have been high in fourth-quarter 2021 too (Detailed results will be out on Jan 27). This, in turn, is likely to have hurt the bottom line.

Canadian Pacific’s liquidity position also does not bode well. CP exited the third quarter of 2021 with a current ratio (a measure of liquidity) of only 0.39. A liquidity ratio of less than 1 is not desirable as it implies that the company may have problems in meeting its short-term obligations.

Other Bearish Factors: The Zacks Consensus Estimate for 2022 earnings has been revised 4.1% downward over the past 60 days. Given the wealth of information at their disposal, brokers' advice and the direction of their estimate revisions should essentially benefit investors. This is because the same serves as an important parameter in ascertaining the stock price.

In addition, Canadian Pacific currently carries a Zacks Rank #5 (Strong Sell). Moreover, CP’s Momentum Score of F further highlights its short-term unattractiveness.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Key Picks

Investors interested in the Zacks Transportation sector are J.B. Hunt Transport Services JBHT and FedEx Corporation FDX.

The expected long-term earnings per share (three-to-five years) growth rate for J.B. Hunt is pegged at 15%. J.B. Hunt is benefiting from strong segmental performances. The Dedicated Contract Services unit is being aided by fleet-productivity improvement and a rise in average revenue-producing trucks. The Integrated Capacity Solutions unit is gaining from a favorable customer freight mix as well as higher contractual and spot rates.

JBHT’s measures to reward its shareholders are encouraging. Driven by the tailwinds, the stock has rallied 33.4% in the past year. J.B. Hunt currently carries a Zacks Rank #2 (Buy).

The expected long-term earnings per share (three-to-five years) growth rate for FedEx is pegged at 12%. FDX is benefiting from surging e-commerce demand amid the pandemic.

FedEx exited first-quarter fiscal 2022 with cash and equivalents of $6,853 million, much higher than its current debt of $125 million. The stock has moved up 1.5% in the past year. FedEx currently carries a Zacks Rank of 2.

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Canadian Pacific Railway Limited (CP) : Free Stock Analysis Report

J.B. Hunt Transport Services, Inc. (JBHT) : Free Stock Analysis Report

FedEx Corporation (FDX) : Free Stock Analysis Report

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