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we have a massive week in the stock market with a lot of big names that are reporting as we can see on screen however today we are focusing on Canadian Pacific Kansas City that in fact reported last week and as we can see we have two buy ratings from Wall Street as well as Seeking Alpha analyst and we can also see the stock is down nearly 8% over the last month so is this a strong railroad company to add to the portfolio it is in fact one that bill Amman a very very big and important hedge fund manager does hold as we can see here around 11.48% of his portfolio and we can even see that the reported price he bought isn't too far off at $79 so in today's episode we're going to do a deep dive is this railroad undervalued should we consider adding to our portfolio we'll do the usual analysis looking at their Topline Revenue their bottom line net income growth we look at the health of the company their total cash versus their total debt and we'll also look at not just their dividend safety but some very important Financial metrics the free cash flows the net debt to ebit DAR the return on invested capital and we'll also analyze what the institutions have been doing over the more recent quarters and importantly look at exactly how good or bad their latest earnings was by looking into their own investor presentation as always we will run this through the Valu ation model getting to our own that investor margin of safety and look towards Wall Street to see what they are forecasting over the next 12 months so let's start off with a very high level review of how the earnings were and we can in fact see when we take a look at their Topline Revenue they reported 2.61 billion now yes it is up 55.8% over the same period last year but we have to bear in mind that Canadian Pacific did acquire Kansas City so we look at the investor presentation we will strip that out to see the true increase we also note that the earnings per share came in at 69 cents compared to 63 cents from the same quarter the previous year so we do see that Revenue was an increase to what analysts were projecting however they did Miss on the earnings per share so positive and essentially something just to consider they did miss their revenue is that something that they are expecting over the next few quarters we'll also look at their financial Outlook as well over the last month they may be down nearly 8% however year to date they are up although marginally 3% over the last 12 months up 5% when you bear in mind this doesn't include dividends reinvested yes you would be up slightly higher but also note the S&P is much higher than this one year of 5% over the last 10 years however it is up around 158% it is trading in the midpoint of the 52- we range with a trailing 12mth yield of 0.7% and a forward P just under 26 Which is marginally higher than the S&P 500 now in terms of looking at the Topline Revenue growth what we want to see is increases year on-ear at least 3 to 7% and what we note over the last 10 years it has gone from 5.7 billion in December 2014 to around 9.5 now that is some nice growth but when we do take a look at it over the longer term we do know it hasn't been consistent nonetheless it does move in the right direction and we will cover the topic of cyclicality shortly as as well on the bottom line what do we see well it has in fact more than doubled over the last 10 years 1.3 billion in 2014 2023 just under 3 billion so we can also see like the Top Line whilst the bottom line isn't inconsistent as well we can see over the longer term it is moving in that increasing direction as always we like to take a look at the balance sheet so their health as well total cash versus total debt we can see that their total cash 195 million in 2014 3 1883 million in their latest quarterly report so it has increased over the longer term but again their cash is very inconsistent quarter on quarter year on year when we analyze their total debt and we would expect for a railroad company to be very high we can in fact see their total debt position has increased more than three times from just under 5 billion in 2014 to 16.8 in that latest report and similar to the other bounces it is fairly inconsistent but we do know with their total debt de it has increased significantly over the period that is something that should be of concern for dividend safety and we will address that when also looking at their net debt to ebit diametric 2 on a growth rating well overall they do get a B minus as we can see here a few points just to consider Revenue growth year on year now I don't think this is essentially very fair to point out but 49% increase bear in mind they did have that acquisition and we will look at that stripped out shortly sector median 5.3% so a lot better moving forwards though this is quite nice to see they are still anticipating some very strong double digit growth 20.7% versus the sector of 6% and we can see with pretty much the other metrics the ebit D as well as the ebit growth following the same pattern we do want to point out though when looking at the earnings per share they are expecting this over the next 5 years to increase by around 14% slightly higher than the seor median of 12% but one thing that is essentially dragging their score down is their operating cash year on year is expected to be negative and when we look at it on a forward basis though it is expected to be positive so mix when looking at the operating cash flow what we can see historically has been negative moving forwards they are expecting it not just to be positive but also to beat the sector medium when we draw your attention to the profitability well gross profit margin we can see 52% which is very positive when you consider the sector median at just under 31% the same goes for the bottom line very strong A+ rating 28.26% so overall looking very positive for their profitability as we saw though when we take a look at their growth grade being minus so not as strong what we can also incorporate is their valuation grade and essentially comparing it to others in this sector now they get a pretty poor grade so it shows it doesn't look like it's value for money solely when looking at a comparison when we look at p on a non-gaap basis forward looking just under 26 sector median coming in a lot lower 18.57% with the sector median a lot lower so overall it is trading at a much higher valuation than others in this sector but we will also cover that when we look at the valuation model itself now what is always great especially in this sector the rail transportation is to compare them to others how they've performed over the longer term we have Canadian National Railway CSX and Northfolk Southern Union Pacific a lot of these we have covered not too long ago on the channel so do check them out over the last year then including dividends reinvested we in actual fact see the whole industry is up positive with CP Canadian Pacific Kansas City the worst performing up only 6% when we extend it to the last 5 years we in fact see them the second best so zooming out 5e period 92% the second best only to FIP when we go out even further over the last 10 years we can in fact see it is in the middle performance of up 186% which isn't too bad as well something just to consider though that because they have performed like this over the last 10 years over the next 10 years it doesn't mean they will follow suit so factor that in to your investment thesis now when we look at their earnings per share one thing that I would want to point out is when we take a look we can in fact see quarter on quarter it doesn't increase what we note in fact due to the cyclicality some quarters are much better than others forward looking though so for the next quarter they are expecting an increase inrease of around 16% year onye when we get to fq1 so the quarter 1 in 2025 whilst they are expecting overall increase year on-year we do note it is a drop from the previous quarter from fq4 but we also notice the same pattern when looking in 2023 to 2024 so cyclicality does show that this essential industry and this company does have better quarters year on year it is just something that comes with the naturalness of being in a cyclical industry we will shortly look at the dividend safety and supporting metrics just to point that out now in terms of looking at institutional ownership we see it just over 72% we see around 6 b with a lot more buying over the same period however what is interesting to note in the more recent quarter we see a lot more selling by these institutions so yes over a 12year period more buying than selling but in the more recent quarter we do in fact see a lot more selling so something just to consider but well as always do your own due diligence and don't copy what institutions or even insiders do now just to let you know as well if you want to gain access completely free do click on that pin comment below also just to point out this article here where we talk about how to find undervalued stocks it is one we get a lot of comments on day by day this is where we look at all the resources all the websites we use if you want to find out just click here and you can start reading so now let's interesting let's look at the latest q1 earnings investor slide deck few things that we do want to point out now on a high level when we do look at the quarter 24 versus quarter 23 we do know in fact revenue of 3.5 billion is up 55% which is very strong when you want to take a look solely at the Top Line without taking any other fact earnings per share will on a diluted basis they are in fact down -3% when we look at it just on a core adjusted basis it is up plus 3% so there are also different metrics that they use maybe these a key performance in indicators from the essential industry for example train speed as well as miles per day active cars train accidents but the main things that we're looking at from a numerical and investor basis is just their top line as well as their earnings per share the reason that we to keep mentioning that their Top Line it does need to be taken with a pinch of salt because yes it is up 55% when you compare it to Canadian Pacific in quarter 1 2023 but you have to understand that in this quarter they also have that effect of Kansas City when we look at it purely on a combined bases which I think is what you should do they are up only 2% so low single digits whilst yes it looks great in all of the earnings report and the slidex talking plus 55% do bear in mind that isn't comparing like for like and when we do it is up only 2% now something that's very good to always look at when you're doing your own analysis your own research always try and look out for the next year's guidance as well as some essential companies they do also look and discuss the longer term growth as we can see here for Canadian Pacific Kansas City they're looking over the next four to 5 years so what are the few things they expect well the first one is high single digigit Revenue growth so this quarter compared to the same quarter last year it was only up 2% moving forwards they are expecting higher single digit and with regards to their earnings per share they are expecting growth of double digit which we didn't get to see this quarter now there are other things but the one thing that I do want to strip out from all of this because we do talk about it a lot in these episodes is the royc now they want return to double digit core roic if you are someone that has watched these videos on Canadian Pacific you will note when we take a look it has dropped massively from the highs that we have seen not too long ago but lots of positives to take away from their Outlook yes bear in mind that this is something they are projecting it isn't something that is said in stone but if they are able to hit High single digit growth double digit core EPS growth as well as double digit royc this could be a very strong company to consider although at the right price now dividend safety score 76 it does look to be safe market cap 76 billion is a large cap company now we can see here their dividend safety was reaffirmed so they do believe that a dividend cut is unlikely and that does seem to be the case when taking a look at the metrics now key metric this essentially for those that believe we're heading into a recession while they maintained the dividend during the 0709 crash they didn't increase it but ultimately they didn't cut it they had average growth - 12.8% which was pretty much what the S&P had during that period but they did marginally underperform the S&P -64 when the S&P came in at- 55 now dividend growth they haven't increased that dividend since 2020 now over the Last 5 Years though on average it has increased by 9% over the last 20 years by 11% year on-year we can see zero years of consecutive increases however they have been paying a dividend for the last 21 without a reduction now as always dividend yield Theory does State a company is undervalued when they current yield sits above the 5year average right now we have a sign of overvaluation on the yield as well as on the forward P 24.7 above the 5year rolling of 22.6 but do bear in mind we don't look at any of these models in isolation and we will conclude towards the end we also note the industrial sector p is much lower at 19.4 now we can look at the free cash FL power even though they haven't been increasing this we always like to focus on free cash flow as the earnings is susceptible to manipulation by Mandarin through account counting and Below 60% is my own blanket rule just gives me faith that management can offer those double digit D increases we love to see now interestingly that isn't something that is offered by CP but what we do know it has been below 60% over the longer term and in fact 2024 at 2% expected I would like to see some increases to the dividend which is very low this is a company that has a yield below 1% free cash flows very important you do look to invest in companies that increase their free cash flow year- on-ear we do know a lot of inconsistencies but over the longer term it is increasing and 2024 is expected to be a strong year with 350 per share when we look at the sales growth now we want to see 3 to 7% as a steady moderate line what we know a lot of inconsistency some years very strong in fact two of the last 10 years negative this comes with it being in a cyclical industry some years very good with the double digits some years not as great in fact 2015 we even see 1% now 201 23 yes 42% as we just mentioned however this is a comparison or I would say not a fair comparison Canadian Pacific versus Canadian Pacific Kansas City compared now when we take a look at it well numerically we did just cover that this is another format but on these shares outstanding now as always what do we love we love when companies do those share BuyBacks returning that ex's cash through shareholder pockets and as we can see here they were doing that up to 2020 then they acquired Kansas City and we can see the shares outstanding did increase so we will would like to see them go back to the ways where it was decreasing and they were doing those Shar BuyBacks and then we move on to the roic as we highlighted we want to see double digit this gives us faith that manin now they did it up to 2020 as we saw on their Outlook they are expecting in the future over the next few years to bring this back up to double digits hopefully we do see that as that will be a very strong signal to investors and make it very attractive to potential investors as well operating margin we do want to see a minimum of 12% % and on the free cash flow a minimum of 5% they absolutely smash it however the only thing we would say is that their margin since 2020 has started to come down so some operational inefficiencies but overall it is looking very healthy just something we would like management to continue to increase as it's very strong when you have a company that increases not just their Topline Revenue but also improves on the margins free cash flows looking very healthy as well so that is a good strong signal and the net debt Tobit D the earnings before the interest tax depreciation and ammortization signals both div safety as well as balance sheet strength we want to see below three with these numbers being the number of years it would take the company to pay off all of their debt n of cash on hand what I like to see is after the acquisition it was very high it has started to come down yes it is above the three but 2024 it is expected to come down and the fact that it is moving in the right direction does Give Me Faith when looking towards management now let's jump into the valuation model as always if you enjoy don't forget to drop us your thoughts in the comments below now the first model we're using is the multiples valuation model companies in a similar sector and size with their P multiple we have the average P multiplied by the EPS of CP and we get an intrinsic value showing our first signal of undervaluation just bear in mind though we don't look at any of these models in isolation and will conclude towards the end now we have the dividend discount model we can see the yearly dividends over the period now we do see this is a negative they didn't have a dividend cut it's just that they do pay out in Canadian dollars hence this is some Central FX currency as well Incorporated now on a growth rate forward looking we have gone lower than the average growth rate just to be a bit more conservative and we get an intrinsic value whilst it has an undervaluation signal it is looking more like fair value as it isn't too far off the current price we then move on to the discount in cash flow model where we have the free cash flow year- on-ear average growth rate around 15% now we have gone for a 60 based on analy estimates with the discount rate we have also used the 2024 future free cash flows as essentially the previous year position that management are estimating this then gives us essentially o thex Value divide by shares outstanding and we get an overvaluation signal so something just to consider as we take this through to the final slide now the intrinsic value here is just the average of these three models and and it does arrive at $82 don't forget you can grab a copy of this valuation model to get to the intrinsic value as well as the acceptable Buy price of companies in your own portfolio by clicking on that pinned comment below and it can even be companies in your watch list or if you just want to run through CP based on your own numbers now typically we do use a margin of safety we do typically start with 10% and execute on that if we believe it meets our three golden criteria now if you believe that for CP then essentially you would be looking at acceptable Buy around that $73 Mark at around 15% it would be around $7 or 69 to 70 right now though we do believe it is trading at its intrinsic value but as always do let us know your thoughts a lot of people do like this company for me though when I do look at railroads I do hold a few in the portfolio the big ones are UNP Union Pacific as well as cni Canadian National Railway but again a lot of people will like this for the different reasons as well but let us know your thoughts Below in terms of Wall Street and their forecasted price over the next 12 months well they see a lot of IDE with this company of $102.2 they see 26% over the next year but as always do your own due diligence never base your investment decisions on what Wall Street say and always look towards other pieces of information as well as always though let us know your thoughts is cp1 you're looking to add maybe it's on your watch list you do believe that it is trading a little bit too high or maybe for whatever reason you do prefer other railw like us who we do prefer UNP as well as cni as always have a great day all on the next one
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