Outperformed broader market
Canadian Pacific Railway (CP) stock has risen ~23.4% YTD, outperforming the broader market as of April 23. The Dow Jones, the NASDAQ, and the S&P 500 Index have risen 14.3%, 22.4%, and 17%, respectively, in comparison.
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However, the stock has underperformed the returns of the majority of its Class I railroad peers (IYT). The company’s arch-rival Canadian National Railway (CNI) has returned 27.1% in the year so far. CSX (CSX) and Union Pacific (UNP) have registered YTD gains of 27.2% and 27.9%, respectively. Norfolk Southern (NSC) is the highest gainer with YTD returns of 34.9%.
What’s driving the stock higher?
The optimism surrounding Canadian Pacific Railway stock is primarily attributable to its back-to-back quarters of strong financial results. The company has reported robust double-digit top and bottom-line growth in the third and fourth quarters of 2018.
The recently reported first-quarter results also weren’t bad. The company registered top-line and bottom-line growth despite business disruptions due to challenging winter weather and a derailment in British Columbia’s Rocky Mountains in February.
Further, investors and analysts are optimistic that the implementation of the PSR (precision scheduled railroading) system will help Canadian Pacific Railway improve its operating ratio (operating expenses as a percentage of revenue). A lower rate is considered to be good for the company.
In the first quarter of 2019, the ratio increased 180 basis points YoY to 69.3%. However, the rise is likely due to temporary business disruptions resulting from severe winter conditions during the quarter and derailment in February. Canadian Pacific Railway’s operating ratio contracted 110 basis points to 61.3% in 2018 from 62.4% in 2017.
Will the rally continue?
Analysts have a consensus “buy” recommendation on Canadian Pacific Railway stock. Approximately 83% of the 23 analysts covering Canadian Pacific Railway have a bullish stance, while the remaining 17% recommend a “hold.” The average target price of $306.29 depicts a return of ~12% in the next 12 months.