Canadian Pacific RailwayCP77,67 $
Today we will continue to analyze the North American rail industry, previously reviewed by Norfolk Southern Corporation, CSX Corporation, Union Pacific Corporation and Canadian National Railway. Now it's the turn to talk about the Canadian Pacific Railway.
About company
Canadian Pacific Railway (NYSE: CP) - a large Canadian transport company, whose network in the local market stretches from Vancouver to Montreal, Besides, the carrier has access to major cities in the northeastern United States, e.g. Chicago, Milwaukee and Minneapolis.
Main activity of the company, like the rest of the industry, is the rail transport of goods. Conventionally, Canadian Pacific Railway divides its transportation revenues into three business units: Wholesale, industrial and intermodal transport.
Total revenue structure of the Canadian Pacific Railway:
- Wholesale transportation - 40%.
- Industrial transportation — 38%.
- Intermodal transportation - 22%.
Wholesale transportation. Main segment, which is engaged in the transportation of large volumes of grain, coal, potassium, fertilizers and sulfur. Grain and coal are mainly delivered to the local Canadian market, and fertilizers, vice versa, are exported to the USA.
Revenue structure of the wholesale segment:
- Grain - 55%.
- Coal - 20%.
- Potassium - 15%.
- Fertilizers 10%.
Industrial transportation. Second largest division of the company, which transports energy products, mainly oil and oil products, Chemicals, Plastic, forestry and consumer goods, Cars, metals and other minerals.
Revenue structure of the industrial transportation segment:
- Energy Products, chemicals and plastic 52%.
- Metals, minerals, consumer goods - 24%.
- Cars - 12%.
- Forest products - 12%.
Intermodal transportation. Smallest segment, which delivers intermodal containers to the local market and to the USA, and is also engaged in the transportation of maritime cargo by land. The main income the company receives from the transportation of local goods.
Revenue structure of the intermodal transport segment:
- Domestic Canadian Intermodal Business − 56%.
- International Intermodal Business (transportation by land of maritime cargo) — 37%.
- Domestic intermodal business in the USA - 5%.
- Other — 2%.
Sales structure of the company, billion Canadian dollars
| 2021 | share | |
|---|---|---|
| Intermodal transportation | 1,724 | 21% |
| Grain | 1,684 | 21% |
| Energy Products, chemicals and plastic | 1,563 | 20% |
| Metals, minerals, consumer goods | 0,728 | 9% |
| Coal | 0,625 | 8% |
| Potassium | 0,463 | 6% |
| Automotive products | 0,376 | 5% |
| Forest products | 0,348 | 4% |
| Fertilizers | 0,305 | 4% |
| Other income | 0,179 | 2% |
| total revenues | 7,995 | 100% |
Kansas City Southern
In the analysis of the Canadian Pacific Railway, one cannot ignore the story of the purchase of Kansas City Southern, which was described in more detail in the analysis of the competitor - Canadian National Railway. Here we will omit many details., related to Canadian National Railway, and only present the relevant facts..
In 2021, two Canadian rail companies - Canadian Pacific Railway (CP) и Canadian National Railway (CN) — Tried to buy American rival Kansas City Southern (KCS). The deal was initially very difficult., as companies needed to get approvals from multiple regulatory bodies, such as the Land Transport Council in the United States, Federal Commission on Economic Competition in the United States and the Federal Institute of Telecommunications in Mexico.
Chronology of major events:
- 21 Martha 2021 CP and KCS reach merger agreement. The American company was valued at $29 billion.
- 21 May 2021 CN interrupts past proposal, offering $33.6 billion for Kansas City Southern.
- 10 August CP raises its bid to $31bn for KCS.
- 15 On September 2021, CN and KCS announced the termination of the merger agreement amid significant changes in the US regulatory framework.
- 15 September 2021 CP and KCS sign a new $31 billion merger agreement.
- 14 December 2021 Canadian Pacific Railway closes purchase of Kansas City Southern.
Despite closing the deal, Kansas City Southern currently operates independently of the Canadian Pacific Railway and will continue to do so until then., until the U.S. Surface Transportation Board issues all permits. CP management expects, that it will happen in the fourth quarter of 2022.
Profit sharing and comparison with competitors
Like the rest of the railway sector, Canadian Pacific Railway has a standard profit sharing policy., paying dividends and by making buybacks, except last year due to purchase of Kansas City Southern.
As for financial results, the Canadian Pacific Railway has been showing solid performance since 2016, earning an average of $2.5-3 billion in EBITDA annually. In 2022, this trend, probably, continue, and in 2023, vice versa, will be interrupted amid the closing of the transaction and the consolidation of the results of Kansas City Southern, which previously earned about $1.5 billion in EBITDA annually.
Financial results of the company, billion US dollars
| 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |
|---|---|---|---|---|---|---|
| Revenue | 4,616 | 5,120 | 5,460 | 5,903 | 5,931 | 6,345 |
| EBITDA | 2,425 | 2,464 | 2,783 | 2,916 | 3,105 | 3,415 |
| Net profit | 1,184 | 1,879 | 1,456 | 1,848 | 1,880 | 2,263 |
| net debt | 6,781 | 6,547 | 6,931 | 7,024 | 7,895 | 16,352 |
Comparison with competitors
| EV / EBITDA | P / E | net debt / EBITDA | |
|---|---|---|---|
| Canadian Pacific Railway | 28,45 | 32,85 | 5,13 |
| Canadian National Railway | 14,62 | 18,83 | 1,85 |
| Union Pacific Corporation | 16,91 | 25,51 | 2,49 |
| CSX Corporation | 13,37 | 21,06 | 2,01 |
| Norfolk Southern Corporation | 14,02 | 21,93 | 2,31 |
Arguments for
Purchase of Kansas City Southern . If the US railway regulator approves this deal, then the Canadian Pacific Railway will be the only company in North America, which will be able to operate railways in all parts of the continent: In Canada, USA and Mexico.
Growing dividend payments. Including share split 5 to 1, which the company held in early May 2021, it can be argued, that Canadian Pacific Railway has been increasing its dividend payments annually for the past six years. Coefficient 5 to 1 means, that the number of securities held by all shareholders increased five times, and their price and, respectively, dividends also decreased by five times.
Financial stability. Even in the crisis year of 2020, the company's management managed to keep the income of the Canadian Pacific Railway at the same high level., as in previous periods. The main reason is the stable demand for freight transport in Canada, who does not fall even in difficult times.
Young fleet of locomotives. Canadian Pacific Railway currently has the newest fleet of locomotives compared to major competitors. In 2023, if Kansas City Southern successfully consolidates, investors will see the fleet almost double, which will approach the values of Norfolk Southern Corporation and CSX Corporation.
Comparison with competitors
| Number of locomotives | Average age | |
|---|---|---|
| Canadian Pacific Railway | 1394 | 21 |
| CSX Corporation | 3516 | 22 |
| Union Pacific Corporation | 6377 | 23 |
| Kansas City Southern | 1007 | 23,4 |
| Norfolk Southern Corporation | 3210 | 26,7 |
Arguments against
The deal with KCS is not closed yet. Despite the fact that the deal with Kansas City Southern is nearing its logical conclusion, U.S. Surface Transportation Board Still Finds Inconsistencies: for example, 16 March 2022, the American regulator asked to correct the data on the movement of trains of the combined company.
Evaluation. Canadian Pacific Railway has the highest rating compared to North American competitors. This is mainly due to the deal with Kansas City Southern, under which a Canadian company paid $31 billion at the end of 2021, but still not consolidated KCS. Under the terms of the agreement 30% was paid in cash, and 70% — through the distribution of its new CP shares to KCS shareholders: charter capital of the Canadian Pacific Railway in the fourth quarter increased by 39% — from 666.96 million to 929.71 million shares.
What's the bottom line?
Canadian Pacific Railway is the Canadian rail operator with the youngest locomotive fleet. This issuer is ideal for investors, which use the principle of value investing: Kansas City Southern consolidation to create North American industry leader with assets in Canada, USA and Mexico.
The best time to buy Canadian Pacific Railway shares is the EV valuation. / EBITDA = 12 and below, which corresponds to values of 50–60 $, if we take into account the results of the combined company.
