CP Stock gets a star as Canada becomes the prize
Canadian Pacific Railway (NYSE:PC) the stock has increased since Russia invaded Ukraine. CP stock was expected to open March 11 at $77.79, down from less than $69 at the start of the month. They are now up 8% since the start of the year.
Canadian Pacific investors have been hoping for gains since the company announced its agreement to buy the Kansas City Southern line last September. This agreement ended a six-month lawsuit, which also included the rival Canadian National Railway (NYSE:CNI), whose efforts to outperform CP’s offer were rejected by a court.
Now both Canadian railways are growing, as Canadian grain and national resources are considered much more valuable following the Russian invasion.
Canadian Pacific sued Kansas City Southern believing that the American railroad would increase its profits.
William Ackman of Pershing Square saw it that way. He invested $1 billion in Canadian Pacific stock late last year.
It was Ackman’s second foray into CP stocks. Over the past decade, he has won a proxy battle and replaced CP’s CEO, stepping out in 2016. This time the buyout was friendly, supporting the Kansas City Southern merger and expressing regret that he ever sold. Over the past five years, CP’s stock has risen 163% and its dividend has doubled.
Much of that capital gain, however, was only realized last year, first as it pursued the merger and now as investors sought wartime safety. U.S. railroad stocks like South Norfolk (NYSE:NSC) beat the S&P averages over the past year as inflation has risen and railway efficiency for freight transport has looked more attractive. But it was in stock that the two Canadian routes did best.
Not everyone is happy, however.
the International Brotherhood of Teamsters in Canada voted to strike Canadian Pacific on March 16, demanding higher wages and benefits.
US regulators have yet to approve the merger. It’s still planned for later this year
But the strike added pressure on CP to sell its Kansas City Speedway line through Missouri to Canadian National to get the line agreed. Canadian National argues that obtaining the line would increase competition. US fertilizer and grain companies joined his call, with the former concerned about freight rates and the latter with CP perhaps preferring Canadian grain.
In the absence of global tensions, Canadian Pacific is not a great stock.
Revenue rose just 3.7% in 2021, though earnings rose 16% to $2.85 billion, or $4.20 per share. Going public on March 11, Canadian Pacific had a market capitalization of $72.8 billion and a price-earnings ratio of 23.7. The dividend, usually a toss for railroad stocks, now yields just 0.8%.
It is the anticipation of safe and increasing returns that counts 10 of the 13 analysts of Tipranks note CP stock a purchase. Their average price target is only 9% higher than where it is currently trading.
The basics of CP shares
Canadian Pacific sought out Kansas City Southern to diversify.
It turns out Canada was the best bet.
As the world isolates Russia, Canada is the best alternative to what Russia offers. Canadian Pacific and Canadian National are inexpensive methods of getting these goods to world markets.
Because Kansas City Southern is integrated into the Canadian Pacific system, cross-border trade should be beneficial. But these seem marginal, compared to those resulting from exposure to the Canadian economy.
The Canadian dollar, which was worth only 70 cents at the start of the pandemic, is now worth almost 80 cents. This is the trade you make when you buy CP shares.
As of the date of publication, Dana Blankenhorn does not hold (either directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.