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Comparing Canadian Pacific Railway’s Valuation to Its Peers’

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May. 31 2018, Updated 11:30 a.m. ET

Forward PE multiple

Railroad companies’ (IYJ) stocks are cyclical in nature. They move alongside the swings in the US and global economies. 

In this article, we’ll consider railroad companies’ forward PE multiples. Forward PE decides the number of dollars the market is ready to pay for each dollar of a company’s expected earnings over the next 12 months.

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CP’s forward PE

The graph above shows that Canadian Pacific Railway’s (CP) trailing and forward PE multiples are among the lowest in its peer group. In fact, the forward PE multiples are higher than the trailing PE multiples for both Canadian railroad companies, unlike their US counterparts. 

CP’s forward PE stands at 18.4x, while its trailing PE is 12.3x. Note that analysts expect CP to report a 35% fall YoY (year-over-year) in its 2018 EPS. The company’s EPS are expected to fall to 13.10 Canadian dollars in 2018 from 20.14 Canadian dollars last year due to lower earnings resulting from the deduction of capex from its taxable income for its US operations.

CP’s rival Canadian National Railway’s (CNI) 2018 EPS are expected to fall 46% to 5.18 Canadian dollars from 9.57 Canadian dollars in 2017. CNI’s capex is expected to rise 24.3% YoY in 2018 to 3.3 billion Canadian. Its US operation’s related capex would be tax deductible, reducing its net earnings and thereby its EPS in 2018. CNI’s forward PE of 21.0x is the highest in the peer group.

The largest US short-line carrier, Genesee & Wyoming (GWR), has the second-highest forward PE of 20.3x. Analysts expect acquisition synergies to work in GWR’s favor, resulting in estimated earnings growth of 35%. Kansas City Southern (KSU) and Union Pacific (UNP) have forward PE multiples of 18.17x and 19.09x, respectively.

CSX is currently trading at a forward PE multiple of 19.8x, suggesting that the market has already priced in the efficiency gains implemented from its Precision Scheduled railroading model. Norfolk Southern (NSC) has the lowest forward PE multiple among all major US railroad companies at 17.7x.

CP’s dividend

The market has seen a steady fall in Canadian Pacific Railway’s dividend payout over the last several quarters, implying a sizable amount of reinvestment in its business. The railroad company’s US operations should witness higher tax savings due to the Tax Cuts and Jobs Act. This development should boost its free cash flow, and it could consider a higher dividend growth rate in the coming quarters.

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