Canadian Railroads Stocks

Canadian Pacific Railway Ltd Valuation – August 2018 $TSE-CP

Company Profile (excerpt from Reuters): Canadian Pacific Railway Limited, incorporated on October 1, 2001, together with its subsidiaries, owns and operates a transcontinental freight railway in Canada and the United States. The Company operates through rail transportation segment. The Company transports bulk commodities, merchandise freight, and intermodal traffic over a network of approximately 12,400 miles, serving the business centers of Canada from Montreal, Quebec, to Vancouver, British Columbia and the United States Northeast and Midwest regions. Its railway feeds directly into the United States heartland from the east and west coasts. Its Bulk commodities include grain, coal, potash, fertilizers and sulfur. Its Merchandise freight consists of finished vehicles and machinery, as well as forest and industrial and consumer products. Its Intermodal traffic consists of retail goods in overseas containers that can be transported by train, ship and truck and in domestic containers and trailers that can be moved by train and truck. Its subsidiaries include Canadian Pacific Railway Company, Soo Line Railroad Company, Delaware and Hudson Railway Company, Inc., Dakota, Minnesota & Eastern Railroad Corporation and Mount Stephen Properties Inc.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of TSE-CP – August 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $33,554,710,000 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.57 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 285.13% Pass
6. Moderate PEmg Ratio PEmg < 20 20.71 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 5.70 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 0.57 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -10.44 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $12.64
MG Growth Estimate 15.00%
MG Value $486.54
Opinion Undervalued
MG Grade C-
MG Value based on 3% Growth $183.24
MG Value based on 0% Growth $107.42
Market Implied Growth Rate 6.11%
Current Price $261.72
% of Intrinsic Value 53.79%

Canadian Pacific Railway Limited (USA) does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $5.4 in 2014 to an estimated $12.64 for 2018. This level of demonstrated earnings growth outpaces the market’s implied estimate of 6.11% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Canadian Pacific Railway Limited (USA) revealed the company was trading above its Graham Number of $115.43. The company pays a dividend of $2.19 per share, for a yield of 0.8% Its PEmg (price over earnings per share – ModernGraham) was 20.71, which was below the industry average of 21.35, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-91.56.

Canadian Pacific Railway Limited (USA) receives an average overall rating in the ModernGraham grading system, scoring a C-.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$91.56
Graham Number $115.43
PEmg 20.71
Current Ratio 0.57
PB Ratio 5.70
Current Dividend $2.19
Dividend Yield 0.84%
Number of Consecutive Years of Dividend Growth 2

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Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2018
Total Current Assets $1,000,000,000
Total Current Liabilities $1,760,000,000
Long-Term Debt $7,936,000,000
Total Assets $20,685,000,000
Intangible Assets $196,000,000
Total Liabilities $14,111,000,000
Shares Outstanding (Diluted Average) 143,200,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $13.33
Dec2017 $16.44
Dec2016 $10.63
Dec2015 $8.40
Dec2014 $8.46
Dec2013 $4.96
Dec2012 $2.79
Dec2011 $3.34
Dec2010 $3.85
Dec2009 $3.30
Dec2008 $3.91
Dec2007 $6.08
Dec2006 $5.02
Dec2005 $3.39
Dec2004 $2.59
Dec2003 $2.52
Dec2002 $3.06
Dec2001 $2.27
Dec2000 $3.13
Dec1999 $0.19
Dec1998 $2.29

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $12.64
Dec2017 $11.45
Dec2016 $8.32
Dec2015 $6.64
Dec2014 $5.40
Dec2013 $3.80
Dec2012 $3.29
Dec2011 $3.73
Dec2010 $4.09
Dec2009 $4.25
Dec2008 $4.55
Dec2007 $4.56
Dec2006 $3.63
Dec2005 $2.88
Dec2004 $2.66
Dec2003 $2.54
Dec2002 $2.43

Recommended Reading:

Other ModernGraham posts about the company

Canadian Pacific Railway Ltd Valuation – Initial Coverage $TSE:CP

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Canadian Pacific Railway Ltd Valuation – Initial Coverage $TSE:CP
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Kansas City Southern Valuation – December 2016 $KSU
Norfolk Southern Corp Valuation – December 2016 $NSC
Norfolk Southern Corp Valuation – August 2016 $NSC

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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