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Canadian Pacific is a Railway stock which American billionaire hedge funer Bill Amman holds in his portfolio and in today's episode we're going to take a look and see whether or not Canadian Pacific is undervalued we're also going to run it through our own valuation model getting to our intrinsic value and our acceptable Buy price given our investor margin of safety we're going to take a look at some important Financial metrics the dividend safety the strength of the company we're going to see what the institution are doing are they buying or are they selling we'll also compare its performances to others in the industry CSX Canadian national rail NSE Union Pacific and a few others we'll also look at their balance sheet how well is this positioned what is the health their total cash versus their total debt we'll also run through their financials in terms of their Topline Revenue their bottom line net income growth now let's jump straight into it now when we do take a look at Bill amman's essential hedge fund he does hold Canadian in Pacific and it is around 10% of his portfolio it is one that a lot of people like to track and we can see that his reported Buy price was around $74 so around 5% lower than the current trading value so before we jump into it we can see a related article from a few weeks ago from the mly fall discussing Canadian Pacific Railway versus cni which is one for full transparency I do hold right now Canadian National Railway and it is one that I have discussed on the channel what I exactly like about this and why I made an investment in it now in summary in this article for those that just want to get straight into it they essentially say for the shorter term for the next few years Investments they do believe CNR Canadian National Railway is the better investment however over the longer term they do discuss the fact that Canadian Pacific is better placed for long-term future growth now one of the reasons why they do discuss this is in actual fact CNR missed out on the Kansas City deal so Canadian specific in fact managed to gain approval from the board and they did merge and therefore they have one new single line Railway which connects Canada through to the US and into Mexico lots of synergies created with this steel and they do expect over the next few years to see this essentially transition into their financial statements in terms of a lot more growth a higher probability profitability but there are a few things that come with this that we will analyze when we look at the metrics is that debt they did have to effectively keep that dividend on hold we will take a look and discuss that and we will take a look and see what other metrics have been affected for Canadian Pacific so let's jump straight into it we can start off with the institutional ownership currently sitting at around 68% we see around 5 billion worth of outflows by the institutions over the last 12 months but do note that inflows more than double that over the same period so institutions over a full do in fact particularly like this company Q3 the latest quarter we see more buying than selling with the green depicting inflows red outflows and this is also true for Q2 as well as Q4 of 2022 however we see the opposite in q1 so just some things to point out there obviously never ever take any investment advice from the institutions and always do your own due diligence and when we take a look at the company itself it is up around 5% year to date it is trading in the midpoint of the 52 we range and it does offer one of the smallest yields for Railway stock companies in general at 73% now over the last 10 years we can see it up around 161% bear in mind it doesn't include those dividends reinvested so before the merger let's take a quick look what do the numbers look like well December 2018 5.4 billion on the top line we like to see 3 to 7% growth year onye December 2022 6.5 billion so some nice growth over the last 5 years on a more Grand new level we do see some nice growth into 2019 before fairly flat into 2020 and then picking up nicely the subsequent years and do note the trading 12 months showing us some very strong growth into December 2023 and for those that are interested do subscribe and hit that Bell Button as we will analyze their full annual report when we receive it so nice G on the top line now let's take a look at the bottom line what story can we tell 1.4 billion in 2018 2.6 billion in 2022 so again their bottom line has also increased but we can also note nice increases year on year to that bottom line likewise trading 12 months showing us some nice signs for growth to the bottom line as well so very positive both Topline and bottom line for this company they are increasing and it will be nice to see how that effective deal does Propel this company in the future now quick health check total cash versus total debt 45 million in 2018 418 million in their latest report so they've nearly increased their cash position 10 times when we do compare that to their total debt numerically and directionally we see it has gone from 6.4 billion to 17.6 billion but we do understand some of the reasons for this and we did discuss that before but we will take a look and see how that does affect their dividend safety among other metrics now other quickly competitors in the essential rail Transportation CSX Canadian National Railway Northfolk Southern and a few others now year to date we do see Canadian Pacific as one of the worst performing only up 6% and when we expand that to the last 5 years we see however it is the best performing Railway company up 137% so lots to like about this company so far but as always past performance is never really an indicator for the future so do bear that in mind dividend safety score 76 it is safe market cap 72 billion it is a large cap company now accessory metrics for those that see 2024 as the recession year they maintain the dividend during that period average growth which was around -2% and they did also significantly underperform the S&P -64 versus the snp's neg 55 now dividend growth a few things to not they haven't increased that dividend since 2020 although the Last 5 Years on average they have increased it by 12% with the last 20 years at 11% considering how well they have performed on the share price return on its own that isn't too bad in my opinion now when we take a look at dividend yield theory for those of that new it states the company's undervalued and that current yield sits above the 5year average so we have a sign of overvaluation based on dividend yield Theory and on the forward PE it's slightly higher at 24.6 versus that 5-year average now when we compare it to the Industrials we do see it higher at 24.6 versus 19.2 now as always free cash flow payout over the earnings payout earnings susceptible to manipulation by management through accounting below 60% is my preference it means in my opinion management can offer those double digit increases we love to see over the last 10 years it's been pretty much below 40% even for the majority 2021 2022 in the 20s although note 2023 is expected to climb up but only slightly higher to 32% free cash flow per share well that has increased nicely 82 cents in 2013 278 in 2022 not as consistently as maybe we would like but do know over the long term it is moving in the right direction 2023 expected to drop slightly however sales growth so we can see how it does look before that merger we see a single digit increases for the majority of the period we do see a covid drop at netive 1% but do note the First full year 2023 with that Kansas discussion earlier 34% so very positive and how that translates to the business 6 billion in 2013 just under 9 in 2022 with 23 expected 11 billion now before the merger where we see those shares outstanding increase we do see from 2013 they were doing share BuyBacks returning excess cash to investor Pockets so that was a positive sign even though it has increased over the last 10e period now when we look at roic again this is something that I do essentially focus on for companies I like to invest in double digits gives me Faith management are able to effectively allocate their capital and we can see 2013 to 2020 double digits very strong it did then drop after taking on a lot more debt for this merger so it is one just to keep an eye in 2024 and Beyond to ensure that they do start going back up to the double digits that we do like to see operating margin free cash flow margin not much to say other than the fact that is consistently well above the minimums we look for on both margins they are expected to dip slightly on both margins from the prior year but still at a very healthy number finally net debt to ebit DAR signaling two things one that dividend safety and the other one that balance sheet strength ebit Dar earnings before interest tax depreciation and ammortization these numbers show us the number of years it would take the company to pay off all of their debt native cash on hand it has gone up after the merger taking on more debt but we do see 2023 it is expected to come down likewise 2024 are expecting around 3.1 so that is something I can live with given that forward guidance it does look to be coming down so that is the essential metric analysis the company analysis for CP now we can jump into the valuation and as always if you enjoy the content values being provided smash that like button hit the Subscribe and Bell button so you are continually notified of these videos as they drop and finally if you do want to grab a copy of the valuation model we're about to run through to get to the intrinsic value and acceptable Buy price of companies in your own portfolio or on your watch list click on that pinned comment below starting off with the first model graes valuation we have the stock ticket symbol CP earnings per share growth rate per analyst estimates yield on AAA corporate bonds getting an intrinsic value of just under $71 now what we can see it is essentially below the current trading price by around 10% so but above that 52- we low so we have a sign of overvaluation bearing in mind we're not looking at any of these models in isolation and we will draw conclusions towards the end of the episode we then have the multiples valuation model companies in a similar sector and size that we analyzed average P multiplied by the earnings per share to give a stock price of $90 now when we take a look that is above the current trading price around 15% upside and above that 52 we high so unlike the previous model gra valuation we have a sign here of undervaluation dividend discount model now as we saw it isn't exactly a negative but due to the fact that these payments are paid out in Canadian dollars there are the FX rate changes now average growth we have here about 11% as we discussed earlier forward looking I have gone much lower at 7.25 but as always if you grab a copy of the model you can play around with these numbers based on your own investment thesis $82 then again we can see upside to the current trading price maybe only around 5% and just lower than that 52 we High showing sometimes reasonable valuation SL undervaluation we then have the final model the DCF model with the free cash flows year on-ear we have the average growth rate pretty much forward line the same per analyst estimates with that discount rate we get the present value of future free cash flows and terminal value at together with the cash subtract total debt get to the equity value divide by shares outstanding we get a DCF price of $97 lots of upside to the current trading price and above that 52 we High the intrinsic value then for today's episod is the average of these four models for CP and as always if you enjoy the content values being provided smash that like button hit the Subscribe and Bell button so you don't miss out and these videos Drop deliberately to on your doorstep as and when they arrive margin of safety that we start off with 10% if we believe it has a wide Mo strong financial metrics good forward looking data we can see it is around a dollar or two shy from the current trading price so we do believe right now that CP is trading at around a 10% margin of safety in terms of Wall Street what we can see they do believe essentially around 10% upside so in conclusion for Canadian Pacific we believe there is around a 10% margin of safety with around 10% upside per Wall Street analyst as always let me know your thoughts whether or not this is one you are looking to buy you have bought or you are waiting for a certain price as I have mentioned on previous videos in terms of the Railway stock companies that I hold it is Union Pacific ticker symbol UNP as well as Canadian National Railway scker symbol cni I've discussed lots of reasons why I do like them a lot more than Canadian Pacific but this is one that maybe I will revisit if the price does come down to add to the portfolio but as of now for full transparency this isn't one that I do hold as always though do let me know your thoughts in the comments below if you enjoyed today's episode hit that like button hit that subscribe and Bell button and don't forget if you want to grab a copy of the valuation model to click on that pin comment below to get to the intrinsic value and acceptable bu price of companies in your own portfolio
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