Canadian Pacific (TSX:CP): Reassessing Valuation After a Modest Share Price Rebound

Canadian Pacific Kansas City (TSX:CP) has quietly edged higher over the past month, even as its year to date return remains slightly negative, leaving some long term investors wondering whether the recent momentum has staying power.

See our latest analysis for Canadian Pacific Kansas City.

That recent 1 month share price return of just over 5% looks more like a tentative rebound than a breakout, especially with the year to date share price return still in negative territory and multi year total shareholder returns modest rather than spectacular. This suggests momentum is building only gradually as investors reassess growth and cross border rail synergies in relation to valuation.

If you are weighing where else to put fresh capital to work, it is a good moment to compare CP with other transportation names using aerospace and defense stocks as a starting point.

With shares still down year to date despite steady earnings growth and a near 20 percent gap to analyst targets, does CP offer mispriced long term potential, or is the market already discounting its North American rail ambitions?

Price to Earnings of 21.6x: Is it justified?

On a price to earnings ratio of 21.6 times, Canadian Pacific Kansas City looks modestly undervalued relative to peers and its own fundamentals at the current CA$102.43 share price.

The price to earnings multiple compares what investors are paying today for each dollar of CP's earnings and is a key yardstick for established, profitable rail operators. For a network generating double digit profit growth and expanding margins, a mid 20s multiple is often seen as a reasonable benchmark for long haul infrastructure assets.

Here, the market is assigning CP a slightly lower multiple than both the Canadian Transportation peer set and the broader North American Transportation industry, despite its faster recent earnings growth and high quality profits. That discount is also small compared with the estimated fair price to earnings ratio of around 22 times. This suggests the share price could have scope to converge upward if growth and cross border integration stay on track.

Compared with the peer average multiple of 22.5 times and the industry average of 27.2 times, CP's 21.6 times ratio looks like a restrained valuation for a transcontinental franchise with accelerating earnings and above market revenue growth forecasts.

Explore the SWS fair ratio for Canadian Pacific Kansas City

Result: Price to Earnings of 21.6x (UNDERVALUED)

However, investors still face execution risks related to cross border integration, as well as potential volume softness if North American industrial demand weakens from here.

Find out about the key risks to this Canadian Pacific Kansas City narrative.

Another View on Value

Our DCF model tells a similar story, with CP trading around 16.7% below its estimated fair value of roughly CA$122.95. That still flags upside, but also raises a question: are investors being overly cautious about execution and debt, or is this discount a reasonable buffer for rail specific risk?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Canadian Pacific Kansas City for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 914 undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Canadian Pacific Kansas City Narrative

If you see the story differently or want to dig into the numbers yourself, you can easily build a custom view in minutes: Do it your way.

A great starting point for your Canadian Pacific Kansas City research is our analysis highlighting 4 key rewards and 1 important warning sign that could impact your investment decision.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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